China Automaker BYD Gets Visit From Buffett

Warren Buffett's backing gave Chinese battery and automaking tycoon Wang Chuanfu a huge boost, and on paper represents at least a six-fold return on the investment.

Buffett and four other members of the board of Berkshire Hathaway, which owns 10 percent in Wang's BYD, turned out Monday to give the struggling automaker another big show of support, as the company kicked off a series of events meant to showcase the company's progress and its clean energy strategy.

Warren Buffett
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Warren Buffett

BYD, which stands for Build Your Dreams—though Wang has also been cited as saying it means "brings you dollars"—has scaled back its sales forecasts for this year by 25 percent. Its sales have slumped, while it fends off legal challenges over its technology and factory construction.

The celebration Monday in the southern China boomtown of Shenzhen, BYD's home turf, was a colorful melange of capitalism—Chinese-style and western.

Hundreds of managers from BYD's 1,200 dealerships patiently waited for over an hour for Buffett to arrive, standing to applaud and snap pictures as he walked in with Wang while bevies of ladies clad in red and gilt gowns stood alongside.

As BYD signed a deal with China Southern Power Grid to cooperate on battery energy storage systems, Buffett and other members of the Berkshire Hathaway board of directors stood behind them—a strong symbolic show of support.

"Our joint strength is based on high tech cooperation, and BYD has a bright future," Buffett told a rapt audience. "BYD is the right choice for me. ... Like the name, let us 'build our dreams' together," he said.

Buffett shook hands and posed for photos with dozens of award-winning BYD dealers, and helped BYD mark its millionth car sale by handing over an out-sized key to the beaming new owner and pouring wine into an ice sculpture of the number 1 million.

"It's my first trip to Shenzhen, but I promise you it won't be my last," he said.

Buffett is also due to attend BYD events in Beijing and then in the central Chinese city of Changsha.

Despite the strong show of support for the battery manufacturer turned automaker, BYD looks hard-pressed to meet its goal of exporting electric vehicles to the U.S. before the year's end.

"Even assuming they have the battery technology, they have to integrate that into a car. It's not easy at all," said Lin Huaibin, senior market analyst for IHS Global Insight in Shanghai.

BYD, which launched China's first homegrown hybrid vehicle, the F3DM, for the retail market in late 2008, has gotten the most fanfare for its electric vehicles, although they are not widely sold.

Its bread-and-butter has been selling inexpensive conventional cars to families buying their first cars. The BYD F3 compact became a bestseller in 2009—when auto sales spurred by subsidies and tax breaks for small, fuel-efficient vehicles soared 46 percent to make China the world's biggest vehicle market by number of vehicles sold.

But China's tastes in cars seem to change just as fast as its appetite grows.

Recent sales figures showing a surge in purchases of imported and foreign-brand vehicles suggest that auto buyers are upgrading to higher quality. So while some automakers are still struggling to keep up with back orders, others are watching their lots fill with unsold cars.

BYD saw sales drop 19 percent in August from a year earlier, to 31,069, down 6 percent from the month before.

"Many Chinese automakers are facing similar problems of high inventory and low profits," said Zhang Xin, an auto analyst at Guotai Junan Securities in Beijing.

"BYD has expanded really fast, and it is running the risk that people may not need that many of its cars," Zhang said. "Small, cheap cars, boosted by government policy, can beat the heavy, costly vehicles in terms of sales, but what about profits?"

A top official at China's main planning agency, the National Development and Reform Commission, recently sounded the alarm over excess capacity, warning that with output forecast to rise to 31 million units by 2015, or almost double expected sales this year, the industry faces a potential glut.

BYD managed to raise its market share in China to 5.1 percent by last year, up from 1.4 percent in 2006, according to the consultancy AlixPartners. But domestic automakers still account for only 32 percent of overall market share in China.

That reflects their struggle to close a decades-old gap in technology, sales and marketing. Though BYD has won praise for its success in developing lean, efficient production techniques, it is still struggling to match its battery know-how with core auto technology.

"They haven't demonstrated an independent research and development capacity," said Lin. "They were going to hit the wall sometime."

BYD, China's largest maker of batteries for cell phones and other electronics, has begun branching into energy storage systems that can be used to help power utilities balance supply and demand for solar and wind energy.

Meanwhile, it is maneuvering to gain the automotive prowess it needs to put all the pieces of the puzzle together in a competitive product for world markets.

In May, it joined with Daimler AG to form a 50-50, 600 million yuan ($88 million) electric car joint venture that will combine the German automaker's know-how with BYD's experience in battery technology.

The company says it is still hoping to make its five-seat e6, an all-electric minivan, the first Chinese-made car to hit the U.S. market, with sales beginning before the year's end. It also intends to become the first Chinese firm to sell electric and hybrid vehicles in Europe, by next year.

BYD recently announced plans to pay 201.2 million yuan ($30 million) for a stake in Tibet Shigatse Zhabuye Lithium High-Tech, as the company moves to secure the raw materials for advanced batteries.

It was that future promise, presumably, that attracted Buffett when Berkshire Hathaway's MidAmerican Energy invested $231 million in the little-known automaker. That stake's value rose to a peak of $2.5 billion a year ago and is now worth about $1.6 billion.

While in China, Buffett is joining with Microsoft co-founder Bill Gates in a campaign to persuade the country's nouveau super-rich to give more to charity. Wang, whose wealth was estimated by Shanghai-based researcher Rupert Hoogewerf to be the country's largest at $5.1 billion last year, has not said if he will participate.

He may be too tied up with ensuring that Buffett gets his money's worth.