Chinese electric vehicle and battery maker BYD (OTC:BYDDY), has for years now been one of Warren Buffett's and Charlie Munger's most polarizing investments. The two uber-investors bought 10% of the company last decade on the premise that Wang Chianfu, BYD's founder and CEO, was the world's next Edison. Munger went as far as to call the engineering genius and former richest man in China a cross between Henry Ford and Jack Welch. Berkshire Hathaway's investment sparked huge gains in BYD stock, but the past few years have seen declining sales and bottomed-out profits. Now, there is new hope for BYD, but many remain skeptical on Buffett's most technologically forward investment of his career.
There is little doubt that BYD has the potential to be one of the world's revolutionary energy-centric businesses. Its electric vehicles are sold around the world (including zero emission busses in Los Angeles), it manufactures cell phone batteries for the world's leading devices and is a major supplier of solar panels to the fast-growing industry.
Still, BYD's fortunes have waxed and waned over the years, as its investors can attest. Problems came about a few years ago when increased competition and some quality control issues hit the battery and solar panel businesses. BYD electric vehicles, which include a massive taxi and bus fleet in addition to consumer vehicles, had their fair share of quality control issues as well. To add fuel to the fire, China repealed its electric vehicle tax incentives. By the fourth quarter of 2011, earnings had dropped 94% year over year.
In recently reported results, investors finally saw stabilization. 2013's sales ticked up slightly more than 12%, while the bottom line made a healthy recovery from near breakeven the year before.
Understanding the scale
The short-term results for BYD, while encouraging, tell little about the long-term story here. Take the first quarter of this year, for example. BYD sold 6,000 electric vehicles in China. While that's not a huge number in isolation, it represented half of China's electric vehicle sales, according to GuruFocus.
BYD is more than a vehicle manufacturer; it's an energy solutions business. The company has nearly turned its hometown of Shenzhen into an all-electric public transportation system. There are 15 million people living in Shenzhen. The company's blueprint for transforming metropolitan transportation systems has the potential to be scaled all over the world.
The company is China's leading electric car company, and it has barely expanded its consumer product line beyond China's borders. The company has the ability to offer low-cost electric vehicles in the U.S. (compared to our current options), and looks to do so as it already has a manufacturing base in Southern California. As mentioned above, Los Angeles already uses BYD electric busses. BYD taxis are used widely throughout China and as far as Amsterdam.
The stock has recovered greatly over the past year -- nearly 100% -- but it remains at a nascent stage in its business (and price). As usual, Buffett hasn't sold a share since his 2008 purchase. There's a very good reason. BYD appears to be back on track, and while there will undoubtedly be more potholes in the path to greatness, this company looks to be a long-term winner.