Chinese Carmaker BYD's IPO Is All About the Warren Buffett Effect
BYD initially made a name for itself by taking the lead in the Chinese electric car industry, after having been primarily a battery maker. Things really got interesting for the company in 2009, when Warren Buffett's Berkshire Hathaway (BRK) both made and then toyed with partially exiting a roughly 10% stake that it bought for $232 million. Now BYD is making news again, issuing shares in China (it already trades in Hong Kong) just as the car business there enters a downturn.
Downturn is a relative concept
In China's booming economy, a downturn means that growth will be measured in the low double-digits -- percentages that would cause many Western auto execs to bray with happiness. In China, however, growth needs to be boffo to sustain the valuations to which companies have gotten accustomed. In BYD's case, Buffett's attention only adds pressure.
BYD wants to use the funds it raised in its China listing -- $219 million -- to develop new lithium-ion battery designs (raising obvious questions about whether the old designs are getting the job done). The company wanted to raise more capital, but in light on the slowing China market, it dialed back its expectations.
The big question is whether it's now benefitting from a Buffett Effect -- and an increasingly unjustified one, at that. Is BYD witnessing a bubble build in its shares that may cause its fortunes to collapse more rapidly than its peers? When Buffett first invested in BYD, I thought that a bubble might be developing in the Chinese high-tech battery business. What might be happening now is that BYD is trying to get the last of the dumb money out the Chinese auto investment environment.
But Warren is hanging in there -- for now
Of course, Buffett isn't an in-and-out investor. He likes what he sees in BYD and understands that China's government is generally supportive of the burgeoning EV industry there, envisioning China taking a strong lead in battery development for transportation applications.
But there are plenty of issues with the deal, not least that it was led by Buffett's disgraced former heir apparent, David Sokol. Then there's the WikiLeaks dustup (Is there nothing in the financial or political Zeitgeist that BYD hasn't intersected with?). It involved U.S. government allegations that BYD -- "Build Your Dreams" -- was engaged in widespread copying of other carmakers' designs and in dicey business practices. Reuters comprehensively summarizes the complaints here.
It's the batteries, stupid
Interestingly, Buffett's involvement still seems to be on-point: he and his partners zeroed in on the threshold technology that BYD promised: advanced lithium-ion batteries. That China would be the forge of this new energy source had to be all the more appealing. Low labor costs yield an impressive upside.
So on balance, it would be possible to argue that Buffett doesn't ultimately care if BYD becomes a thriving global automaker, as its CEO, Wang Chuanfu, says it will. And Sokol's comments back that up. Here's what he said to Reuters in 2009:
"Whether or not they can manufacture their own cars isn't relevant to us, because we see their real expertise is in the development of the batteries, the motors, the control systems for that," Sokol told Reuters in January 2009.And here's what Reuters reported in March of this year, based on WikiLeaks cables:"That's not to say that they can't make a nice car, but a lot of people can make a nice car. The breakthrough from our perspective is the battery technology."
"During a recent visit to BYD headquarters in Shenzhen, a top manager told (an embassy official) that sales of the [BYD plug-in hybrid] F3DM had been slow, with only around 100 vehicles sold to date, mostly to the municipal government," the cable said, with an added note: "Media reports speculate that slow sales may also be an indication that the F3DM's battery performance falls considerably short of expectations."Yeah, not good.
Risk without reward
Overall, China's industry should continue to grow by leaps and bounds. The recent decline in growth rates is more a matter of the market leveling off after a period of rapid and unsustainable ascent. There's also the government's plan to reduce the number of automakers by an astonishing 90 percent -- a draconian move that central planners hope will allow a more robust indigenous industry to prosper.
In this context, what looked in 2009 like a very savvy investment by Buffett, capturing the upsurge in global EV enthusiasm but concentrating on critical battery technology, may have run its course. Looking to profit from more conventional auto production in China could be the way of the future.
One thing's for sure: given BYD's poor post-IPO stock performance in China, you'd have to say that the Buffett Effect might finally be wearing off.
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