Is Buffett's Electric-Car Company Toast?
Aug 13th 2011 5:07PM
Updated Aug 13th 2011 5:10PM
Is Berkshire Hathaway's (NYS: BRK.B) favorite electric-car company on the skids?
Chinese automaker BYD (OTC BB: BYDDY.PK) has attracted a lot of attention in the West -- not only because of Berkshire's $232 million investment back in 2008, but because of the company's grandiose global expansion plans. Those plans included a highly touted electric car, the E6, said to be destined for the U.S. market, and a series of electric and plug-in hybrid models.
But troubles at BYD have cast doubt on the company's ambitious plans -- and, increasingly, on its continued existence.
A big mess, exposed
Last March, a WikiLeaks document dump brought to light several State Department cables that cast BYD's business in a troubling light. Shoddy manufacturing practices, cheap materials, models that looked suspiciously like Toyota (NYS: TM) clones, concerns about the actual quality of BYD's battery technology, and sharp declines in sales at home in China were among the concerns raised by the local U.S. consulate in Guangzhou.
BYD clearly wasn't ready for prime time. Its low-cost models found a foothold at home for a while, but the company seemed far from being ready for direct competition with industry giants like Toyota, General Motors (NYS: GM) , Ford (NYS: F) , or Volkswagen (OTC BB: VLKAY.PK) in markets outside China.
The mess is getting messier
Things have gone from bad to worse since then. BYD's sales in China have now fallen for 11 straight months. The company's first-half numbers were a major disappointment, with earnings down 85% versus the first half of 2010 -- and sales down 20%, even as competitors saw gains.
The company's vice president of sales, Xia Zhibing, resigned last week, a move that may signal a larger shakeup. But just like nearly every other struggling car company ever, the root of BYD's problems is product. The company's bread-and-butter F3 and F6 sedans were popular for a while but have been left behind as Chinese consumers have embraced fresher (and better-quality) alternatives.
BYD wants to be known as a maker of electric cars and has invested huge sums in an effort to develop advanced battery technology. But these huge investments have led to only a tiny handful of sales. The problem is simple but daunting: China, like the U.S., doesn't yet have the infrastructure to embrace electric autos on a wide scale.
That might change eventually, but not soon.
Retrenching, but too late?
BYD raised $219 million in a secondary offering in June, a sum that it says it will devote almost entirely to production and R&D of new gasoline-fueled cars. That's a huge change of emphasis from the electric models that caught the attention of Warren Buffett and Charlie Munger a few years back. But it's clearly what BYD needs to do to survive as an automaker right now.
BYD says it's on track to introduce the E6 in the United States next year, at a price of $35,000 -- a few thousand lower than had been anticipated. The company claims that the E6 has a range of almost 200 miles, about double that of the Nissan Leaf and more than Tesla Motors (NAS: TSLA) expects from the base version of its more expensive Model S sedan, also due in 2012.
The claimed range for the E6 is enough to make it a viable everyday car for many. Assuming it holds up in independent testing, it'll be a strong selling point for the car -- though whether it will be enough to overcome concerns about quality and finish is very much an open question.
Still, BYD may find a few thousand sales here over the next couple of years. But that'll be just a drop in the bucket of what the company needs to keep going -- and to keep its most prominent investor, a certain Mr. Buffett, from bailing.
Assuming, that is, that he hasn't bailed already.
- Add BYD to My Watchlist.
- Add Berkshire Hathaway to My Watchlist.
- Add Tesla Motors to My Watchlist.
- Add Ford to My Watchlist.
- Add General Motors to My Watchlist.
- Add Toyota to My Watchlist.
- Add Volkswagen to My Watchlist.
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At the time this article was published Fool contributor John Rosevear owns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by @jrosevear. The Motley Fool owns shares of Berkshire Hathaway and Ford. Motley Fool newsletter services have recommended buying shares of General Motors, Berkshire Hathaway, and Ford. Motley Fool newsletter services formerly recommended BYD. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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