Amid hard times, Chinese automaker BYD gets visit from billionaire backer Buffett

By Elaine Kurtenbach, AP
Monday, September 27, 2010

China automaker BYD gets visit from backer Buffett

SHENZHEN, China — 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.

Beginning Monday, Wang’s BYD Autos is launching a series of events in three Chinese cities meant to showcase the company’s electric vehicles and energy strategy, and perhaps to reassure the billionaire investor from Omaha.

The visit by Buffett, who BYD staff say will attend the events here at BYD’s home base in the southern boomtown of Shenzhen, in Beijing and then in the central Chinese city of Changsha, comes at a difficult time for the aspiring automaker.

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 company 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 was a bestseller for much of 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, which is 10 percent owned by Buffett’s Berkshire Hathaway Inc., 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.”

Still, BYD has been moving resolutely ahead with its work on electric vehicles.

The company, China’s largest maker of batteries for cell phones and other electronics, 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 Co., 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 Holdings Co. 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 Corp. 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.

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