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This contribution is about "Build your Dreams" - BYD (OTCPK:BYDDF), Warren Buffett's most famous investment in China. It's aimed at analyzing this company's possibilities of success in the introduction of Li-ion starter batteries into the micro-hybrid car market.

BYD is currently betting on a "re-birth" plan to reverse a series of setbacks it confronted over the last 3-4 years. According to a recent Reuters report, BYD's business "sprawls across batteries, cell-phone assembly, solar panels, LED light bulbs, and electric and gasoline-powered cars and buses." The firm now wants to focus on what it does best: "advanced but affordable iron-phosphate lithium-ion batteries".

In this connection, at the Shanghai Auto Show 2013 BYD "unveiled several exciting technologies to improve fuel efficiencies by greater than 20% in all their 2014 vehicle line-up". One of these technologies constitutes a higher-efficiency 48 VDC vehicle voltage platform which uses Li-ion batteries instead of 12VDC lead-acid batteries. The new technology discards starter-battery replacements while extending the battery life to the expected life of the car. In addition, it allows vehicle transition "to all-LED lighting, Electronic Parking Systems, Hybrid and regenerative braking, idle start-stop energy management, automatic engine starts, low rolling resistance and advanced aero-dynamic designs." Lastly, also as part of this advancement, "a purification technology is integrated into the vehicle's air conditioning system and detects the inside and outside particulate matter levels, triggering auto-air-filtering equipment."

In an article published in 2011, I concluded:

"No doubt A123 has a lot of potential in the energy storage sector as a whole, particularly as we head toward a new lithium era in the world. It is perhaps the only company capable of leading the emerging advanced lithium battery industry in the US. But this may take at least another two or three years. Meanwhile, A123 urgently needs to show clear, concrete and immediate results to its shareholders. Lithium-ion battery massification in the ICE car industry may then be a way out of the financial crisis that has put this company at serious risk of survival."

I was then referring to A123's (OTC:AONEQ) intention to substitute lead acid batteries for 12 V Lithium-ion batteries particularly in micro-hybrid cars. About one year later, A123 announced "production contracts for the company's 12V Engine Start Battery with three leading European automakers, including McLaren Automotive for the MP4-12C and a major German OEM that will use the battery in a 2013 model year passenger vehicle." In retrospect, this progress appears to have been "too little, too late". Why? Well, because it wasn't part of the kind of business strategy I suggested in my above mentioned contribution.

In addition, in a matter of weeks A123 had to face a major frustration: Consumer Reports' finding that A123's lithium iron phosphate batteries cause massive malfunctions in the Fisker Karma range-extended electric car "that rendered the car undriveable" which forced the battery company to replace defective battery modules and packs at a total cost of $55 million. As a result, A123 shares dropped 29%. True the company struggled as much as it could to stay in the market. In August 2012 it struck a deal with the Wanxiang Group, a big Chinese auto supplier, to obtain emergency capital. For undisclosed reasons, however, the agreement never materialized leading A123 to file for bankruptcy in October 2012.

The rest is history. The Wanxiang Group showed up a couple of months later and in January 2013, after beating Johnson Controls' bid, acquired the devalued A123 assets. Let's now turn back to BYD. This company's approach differs from that proposed by A123 Systems Inc. more than two years ago in the following points:

  • First, BYD talks about 48 VDC Li-ion batteries, not 12 VDC batteries. This seems to be a more realistic approach considering all the features included in the new advanced energy storage system.
  • Second, BYD includes all LED-lighting and Electronic Parking Systems as two new applications of the technology which are clearly innovative as compared to A123's original proposition.
  • Third, BYD says it will use the new batteries for air conditioning as well, a possibility not mentioned by A123 in 2011.

Of course the previous comparison is not completely devoid of caveats since A123 and BYD are indeed very different companies. In fact, while the former was/is nothing more than a battery manufacturer, the latter is an automotive firm which has over the years been able to vertically integrate its different lines of production both for internal combustion engine (ICE) cars as well as for electric ones. Vertical integration can be seen as a major advantage of BYD over A123 (and in fact over most other major car makers nowadays) particularly in electric vehicles. Why? Well, because as everyone knows, batteries are most important in such kind of means of transportation. Hence if BYD manages to manufacture competitively Li-ion batteries for a specific type of electric cars that could also produce and commercialize, then it would be able to control that segment of the market.

This takes us to another consideration insofar as BYD's "re-birth" plan, namely its new medium/long-term vision as an automotive company because now BYD is talking about specializing in mild hybrids which, according to Bill Moore, evWorld's editor, is "clearly a dramatic shift in strategy away from the all-electric or none approach to date." What happened? My perception is that BYD was forced to change its medium/long-run perspective for two reasons.

One, because it learned the lesson that to be successful one needs to know not only where to sell but essentially what to sell, something many advanced battery companies (including A123) that went bankrupt in recent times essentially failed to understand.

Two, because it has probably realized that to become competitive in the all-electric car market it needs significant improvements in quality, a result that, following the above mentioned Reuters report, could take BYD at least another five years.

To my astonishment, in recent weeks a somewhat similar approach has been put forward by Johnson Controls Inc. (NYSE:JCI) which consists of using its Absorbent Glass Mat 12-volt advanced lead-acid battery technology together with a 48-volt Li-ion battery in a micro-hybrid battery system. While the former continues "to provide power to the vehicle starter, interior and exterior lights, and entertainment systems such as radios and DVD players", the latter supports "higher power loads such as air-conditioning, active chassis technologies and the capture of direct regenerative power energy braking." In this context, according to a JCI executive micro-hybrids are the next big thing for fuel efficient vehicles.

What strikes me the most is that A123 Systems Inc. intended to accomplish essentially the same functions with a 12-volt Li-ion battery. Does this mean A123's batteries were 4 times more efficient than JCI's ones or that A123 overestimated its capacity to develop such advanced Li-ion batteries? Perhaps we will never know that for sure. However, JCI's interest in acquiring A123's assets last year may be an indication of the real value of A123's technology.

So now we need to enquire as to why BYD requires a 48-volt platform only for the upcoming micro-hybrid revolution. And here once more we have two possibilities. One, that BYD's Li-ion batteries are more efficient than those of JCI. Two, that BYD may be overestimating its capacity to fulfill its promises. Based on BYD's record as a long-time Li-ion battery producer, I incline more to endorsing the first possibility.

Next, we should see how the stock market has reacted to both BYD and JCI's announcements. This is depicted in Figure 1 where it is clear that the growth of BYD's shares over the last month was much higher than that of JCI which again provides additional support to my contention that the market rewards innovativeness. Finally, as limited as it might be, my general suggestion to investors is that perhaps time has arrived to begin investing in BYD.

Figure 1

BYD vs. Johnson Controls Inc. (April - May 2013)


(Click to enlarge)

Source: Nasdaq.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Lithium Ion Starter Batteries: Will BYD Take The Place Of A123 Systems?