When Berkshire Hathaway (NYSE: BRK-B ) chairman Warren Buffett visits one of his company's most intriguing investments next week, I suspect that he will have a lot to say to its management.
And not necessarily in a good way.
BYD (OTC: BYDDF.PK), the Chinese battery-and-auto-maker, has been one of Berkshire's most electrifying investments since Buffett and company invested $232 million to buy 10% of the company back in 2008. The value of that stake grew by about a factor of 10 in the first year, to about $2.5 billion as of last October -- but has since fallen significantly as BYD has encountered a host of troubles.
Troubles that show no sign of abating any time soon.
"I am betting on the man."
BYD was started on a shoestring in the mid-1990s and, at the time of Berkshire's investment, had grown to be the second-largest maker of cell phone batteries in the world. In 2003, BYD launched a car-making subsidiary, and in recent years BYD Auto has been thought to hold promise as a future electric-vehicle leader.
BYD, of course, is hardly a typical Berkshire portfolio company. It's a high-growth, technology-focused firm, exactly the sort of thing that Buffett normally avoids. But this investment was a bet on BYD's chairman, Wang Chuan-Fu, more than on the company itself. As Buffett said earlier this year, "I don't understand the product, so I am betting on the man."
Wang Chuan-Fu was brought to Buffett's attention by hard-to-impress Berkshire vice chairman Charlie Munger, who after meeting Wang described him as "a combination of Thomas Edison and Jack Welch." At the time, the partners thought BYD had a legitimate shot at becoming the world's largest automaker, mostly on the back of their battery technology.
That was an ambitious statement. BYD isn't even China's biggest automaker -- it's not even in the top five. It was, however, the country's fastest-growing automaker in 2009, with great things expected as recently as 10 months ago -- and a stock price that reflected those expectations.
Then things got sticky.
Getting a bit ahead of themselves
BYD, somewhat cheekily, predicted in 2009 that it would be the world's No. 1 automaker by 2025. Ambitious goals were announced, involving exports to Europe and the U.S. Regional offices were established in Los Angeles and Germany. A new hybrid model, the F3DM sedan, was unveiled with high hopes, and the company announced plans to begin selling an electric car in the U.S. before the end of 2010.
And now? Nearly all of that has been dialed back in the face of falling sales and other troubles. While BYD was touting its U.S. market plans as recently as May, many (including yours truly) were skeptical of the company's ability to sell a $40,000 electric car in any quantity in the U.S. It's now thought likely that the electric E6 won't appear on these shores any earlier than the second half of 2011, if then.
There's more bad news: That much-touted F3DM hybrid sold all of 18 (not a typo) units in the first half of 2010. Overall sales have been falling well short of goals, with sales down 19% in August even as up-and-coming competitors like Ford (NYSE: F ) and Toyota (NYSE: TM ) saw solid year-over-year gains.
There's more to BYD's troubles than declining sales: The company is in hot water with the Chinese government over factories that may have been built illegally on farmland, and dealers in key markets like Beijing and Chengdu (the capital of Sichuan Province, in southwest China) have ended their ties to the automaker, citing concerns over high inventory levels.
A cloudy future
Where does BYD go from here? While the company is still moving the metal in its home market -- management now expects, probably realistically, to sell 600,000 vehicles this year -- its sales are well behind the local heavy hitters like Dongfeng and SAIC, as well as global giants like General Motors and Volkswagen, each of which has a huge presence in the Chinese market.
Meanwhile, the company's plans to bring an electric car, the E6, to the U.S. seem almost laughable at this point. Would you buy a $40,000 electric car from an unknown-to-most Chinese brand over upcoming offerings from companies like Ford and Nissan (OTC: NSANY.PK), both of which are likely to be significantly cheaper? Or over a Chevy Volt? Or for that matter, over a (more expensive, but larger) car from domestic upstart Tesla Motors (Nasdaq: TSLA ) , which can at least boast somewhat proven long-range technology and ties with Toyota and Mercedes-maker Daimler (OTC: DDAIF.PK)?
Still, BYD has a few ties of its own, including a recently announced joint venture with Daimler that may yield an enhanced version of BYD's electric E6 sedan. And it's probably a mistake to count out a Berkshire-portfolio company too soon. But there's no doubt that the company has a challenging road ahead -- even if Buffett, the master investor, has already, despite the company's troubles, seen a huge return on his investment.
Check out more of the Fool's coverage of the upcoming (maybe!) electric-car boom:
Fool contributor John Rosevear owns shares of Ford. Berkshire Hathaway is a Motley Fool Inside Value recommendation. Berkshire Hathaway and Ford Motor are Motley Fool Stock Advisor selections. The Fool owns shares of Berkshire Hathaway.
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