How does turning 230 million, 30 times, into 7.4 billion sounds to you? What if I tell you it takes 13 years to do that, and most of the gain comes in the past year (2020)? Does it sound good still? I think it depends on a person’s investing timeframe?
Here is the story of BYD,https://fortune.com/2021/03/02/warren-buffett-investments-berkshire-hathaway-byd/. During Berkshire’s 2021 AGM report recently, BYD (BYDDY) was one of the outperforming holdings in an otherwise lacklustre performance.
Why did Berkshire buy BYD in 2008?
Berkshire’s vice-chairman, Charlie Munger, first brought BYD and its founder Wang Chuanfu to Buffett’s attention.” Charlie called me one day and said, ‘We’ve got to buy BYD, this guy that runs it is better than Thomas Edison,'” Buffett told CNBC in 2018.
“This guy is a combination of Thomas Edison and Jack Welch – something like Edison in solving technical problems, and something like Welch in getting done what he needs to do,” he said. “I have never seen anything like it.”
Adequately impressed, Buffett and his team struck up talks with BYD and initially offered to buy 25% of the business. Wang wanted the American billionaire’s backing, as he knew it would supercharge the automaker’s public profile and help it make inroads into the US market. However, he turned Buffett down because he didn’t want to part with more than 10% of BYD’s stock.
“This was a man who didn’t want to sell his company,” Buffett told Fortune. “That was a good sign.”
Berkshire eventually settled for a 9.9% stake, purchased by its MidAmerican Energy subsidiary. The holding represented about 25% of BYD’s Hong Kong-listed shares and 8.25% of its total outstanding shares.
How BYD copy and innovate processes
Wang ChuanFu started BYD in 1995 in Shenzhen, China. A chemist and government researcher, Wang raised some $300,000 from relatives, rented about 2,000 square meters of space, and set out to manufacture rechargeable batteries to compete with imports from Sony and Sanyo. By about 2000, BYD had become one of the world’s largest manufacturers of cellphone batteries. The company also design and manufacture mobile-phone handsets and parts for Motorola (MOT, Fortune 500), Nokia (NOK), Sony Ericsson, and Samsung.
In 5 years, they have dominated the cellphone batteries industry. How did they achieve this? The company began making rechargeable batteries in 1995 and has always done things frugally to compete. When the company wanted to migrate from making NiCad batteries to Lithium-Ion ones, which charged faster and lasted longer, it simply couldn’t afford the kind of kit that the big Japanese companies could. To get scale, it had to think small. The “clean rooms” which provided the essential dust and humidity-free environment for safe manufacturing could cost around US$5 million in 1995 when BYD’s registered capital was only RMB2.5 million. So it created the “clean box”, which a single worker could insert their hands into through rubber gloves to work on the batteries. This enabled the company to quickly scale up or down production or reconfigure production lines, maximising productivity and value.
Wang entered the automobile business in 2003 by buying a Chinese state-owned car company that lack scale and business capabilities. He knew very little about making cars but proved to be a quick study, and it was not easy, Wang started off by reaching out to start building a supplier network in 2003, but its small size became an impediment. Vendors didn’t want to negotiate competitive prices if they didn’t see high volume possibilities. So it turned once again to restructuring the processes. It designed machines for painting vehicles that were a fraction of the cost of buying in. BYD also designed its own car mould machinery and eventually manufactured moulds for other carmakers. BYD had proven its muscle at doing what others did, but in-house and cheaper. To establish itself in the competitive auto market, it followed this approach: using the Toyota Corolla, a fast-selling Japanese car, as a template, and the company provided it for less than half the price (look how similar the F3 is to the Corolla?). Despite criticism of being a copycat, BYD is actually proud of its “reverse engineering” skills. In October 2005, a BYD sedan called the F3 was launched.
In 2009, the BYD F3 was crowned as the top-selling car in China, topping well-known models like the Volkswagen Jetta and Toyota (TM) Corolla. Never a car had sold so many units in a single year in China. The BYD F3 is also the first car to sell more than 30,000 units in a month in the country.
BYD Electric Dreams
In Dec 2008, BYD unveiled the F3DM, the first plug-in hybrid to be produced at a commercial scale anywhere. Technologically novel, with a claimed 60-plus miles of pure-electric range, the car had approximately zero sex appeal, contrary to Tesla Inc.’s Roadster, which made its debut the same year. “We drive faster in our driveways,” Car and Driver said, sniffing at the F3DM’s 93 mph top speed. As a result, it was a flop in China and abroad; BYD has barely exported passenger cars since.
Yet as Tesla focused on the midlife crisis market, BYD was electrifying less glamorous vehicles and building a business supplying solar panels and other infrastructure. The company began mass-producing electric buses in 2009 and won a 1,000-vehicle order from Hunan the following year. Similarly sized contracts followed, along with smaller deals in Amsterdam, Frankfurt, and Los Angeles. By the end of 2020, BYD is the 2nd largest new energy buses manufacturer in China, taking a 15% market share.
The logic of focusing on big, lumbering vehicles operated by cost-conscious public transport authorities was obvious. Typical car-buyer concerns such as acceleration and top speed are less of an issue for a vehicle designed to stop every few blocks. Nor is range anxiety a factor on fixed routes. By putting commuters on electric buses, the thinking goes. This also helps build brand awareness and acceptance of EVs. And the possible upsells are manifold:
- BYD solar generators
- BYD energy storage installations
- BYD fast chargers
- Perhaps even a few BYD electric forklifts to shuttle parts around
The BYD e6 is an all-electric compact crossover/compact MPV manufactured by BYD from 2009. In many countries like Hongkong and Singapore, this model is tested as Electric Taxis with limited success. For example, Singapore’s 7th Taxi operator HDT started operation in 2018 with around 100 Taxis but was forced to close down in late 2020 due to COVID-19 impact on the taxi business.
BYD spent around 12 years working on Electric vehicles but managed to capture the public transport sector, but never the private car sector. Although they are good at producing cheap and efficient vehicles, they lack the appeal of what many private vehicles owners are looking for: Good Looking Cars!
Fast Forward to 2021
But all is not lost as in the 12 years of relentless effort in building Electric Vehicles; they are also improving the battery technologies. In March 2020, BYD announced the launch of the blade battery that addresses safety concerns and lowers the production cost.
The blade battery is a significant development for BYD and has since sent the stock price surging 400+% in 2020 to a high in Jan 2021. However, prices have retreated since then.
In the next instalment, let us look into how impactful the blade battery is for BYD and what future developments have opened up for BYD in the next few years?
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Ultimate Investing writer Paul Chen own shares in BYD Company Limited. Disclaimer: What is shared and written here is solely the views and opinions. The article does not consider your risk or financial portfolio, nor does it constitute any financial advice or recommendation. Should you take any action or trade any of the stocks mentioned, you are solely and entirely responsible for any outcome. It is your responsibility to do your due diligence at all times.