As headline numbers go, this one was remarkably ugly: On Tuesday, Chinese battery-and-auto-maker BYD (OTC: BYDDF.PK) reported a 99% decline in third-quarter profits as sales faltered.

BYD, of course, is partly owned by Berkshire Hathaway (NYSE: BRK-B) (NYSE: BRK-A), and received a great deal of fanfare when Warren Buffett (and Bill Gates) visited the company in China last month. Buffett praised one of BYD's models after test-driving it, and Gates proclaimed the scale of BYD's manufacturing operations "incredible."

But when I saw that quote from Gates, I remember thinking: I wonder how many other auto factories he's toured. Context is everything, and most auto factories look huge and complex to the uninitiated. How impressive would BYD's operation look to Gates when compared to a high-volume Ford (NYSE: F) or Toyota (NYSE: TM) plant, for instance?

Bill Gates and Warren Buffett are obviously brilliant men. But they wouldn't be the first brilliant men to learn that succeeding in the auto business isn't as easy as it looks.

A setback? Or a decline?
BYD's problems aren't hard to understand. The major problem is pretty simple: The company's sales have declined as its products have lost ground in the hyper-competitive Chinese market. Sales were down 25% in September despite an industrywide 19% sales increase, this after the company saw a 19% decline in August.

Part of the problem is product. BYD's cars have a reputation for being cheaply made. They tend to lack the high-tech features that Chinese customers are coming to expect, and their styling is imitative of models from the big global automakers. The BYD that Buffett test-drove is a dead ringer for a Toyota Previa, as Automotive News China editor Yang Jian pointed out recently.

There's more to worry about. BYD's dealer network is convoluted and was expanded much too quickly. Audacious plans to enter the European and U.S. markets have been postponed, amid considerable skepticism. A much-touted hybrid model has only sold in tiny numbers. And the company lost a zoning battle with the Chinese government and was forced to surrender seven facilities, including a new factory under construction.

Still reason for hope
On the bright side, BYD, which started out as a battery maker, is expanding into other energy-related businesses. The company recently announced a two-year deal with LDK Solar (NYSE: LDK), which will supply BYD with polysilicon wafers for solar cells. BYD, which entered the solar business this year, said its goal is to produce 5,000 megawatts' worth of solar cells by 2015.

Even on the car front, there are reasons for optimism. A joint venture with Mercedes-Benz parent Daimler, announced earlier this year, brought some credibility to BYD's stumbling electric-car efforts. According to reports, the partners have moved rapidly to jointly develop an all-new electric car, expected to hit the market by early 2013. That car is expected to be the first model for a new electric-car brand for the Chinese market.

And more to the point, while sales are down, the company is still expected to sell some 600,000 vehicles in China this year. Its F3 small car (a dead ringer for a 2005-ish Toyota Corolla) is still the best-selling model in China. And while I've been rather skeptical of the company's electric-car efforts in the past, the joint venture with Daimler is likely to produce a decent car.

Finally, it's probably a mistake to count out a Berkshire-portfolio company too soon. It's possible that we'll look back on this week's 10% decline in BYD's stock price as a buying opportunity. But at the same time, it's increasingly clear that BYD will need to change its approach to stay competitive in the fast-maturing Chinese auto market.

What do you think? Can they do it? Or do you share my skepticism? Scroll down to leave a comment and let me know.

Fool contributor John Rosevear owns shares of Ford. Berkshire Hathaway is a Motley Fool Inside Value choice. BYD is a Motley Fool Rule Breakers recommendation. Berkshire Hathaway and Ford are Motley Fool Stock Advisor picks. The Fool owns shares of Berkshire Hathaway. You can try any (or all!) of our Foolish newsletter services free for 30 days, with absolutely no obligation.

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