Electric Car Initiatives Heat Up: Implications for Investors

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Includes: BRK.A, BRK.B, GE, GM
by: The Rational Walk

Despite gasoline prices that have fallen precipitously since the record high levels of mid 2008, it appears that interest in electric cars is still alive and well. In fact, efforts to come up with viable technologies could be accelerating. This goes far beyond GM’s initiative to develop the Chevrolet Volt in 2010. With all of the financial and political problems facing the domestic automakers in the United States, it is possible that less distracted and more agile competitors could bring a viable product to market in a more timely manner. This has major implications for the auto and energy industries.

A Combination of Thomas Edison and Jack Welch

I read a very interesting article from Fortune Magazine regarding BYD, a relatively unknown Chinese company engaged in the development of electric cars, batteries, mobile phones, and other products. Berkshire Hathaway (NYSE:BRK.A) purchased 10% of BYD for $230 million in 2008. Apparently, the idea of investing in BYD was first suggested by Charlie Munger, Berkshire Hathaway’s Vice Chairman. Munger had this to say about Wang Chuan-Fu, BYD’s founder:

“This guy,” Munger tells Fortune, “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. I have never seen anything like it.”

As the Fortune article pointed out, this type of sentiment is rare for Munger who is typically more of a skeptic when it comes to potential investments. However, knowing that Munger is a prominent advocate for taking a broad, multi-disciplinary approach to business and investing, it comes as no surprise to learn that he had mastered enough of the details regarding BYD’s technologically advanced business model to make the recommendation to Warren Buffett last year. Buffett subsequently sent David Sokol who runs Berkshire’s MidAmerican Energy subsidiary to China to conduct due diligence on BYD. I found the following story both amusing and a confirmation of the type of manager that Berkshire Hathaway looks for in acquisitions:

When David Sokol toured BYD’s operations last summer, Wang took him to a battery factory and explained that BYD wants to make its batteries 100% recyclable. To that end, the company has developed a nontoxic electrolyte fluid. To underscore the point, Wang poured battery fluid into a glass and drank it. “Doesn’t taste good,” he said, making a face and offering a sip to Sokol.

Sokol declined politely. But he got the message. “His focus there was that if we’re going to help solve environmental problems, we can’t create new environmental problems with our technology,” Sokol says.

Humorous anecdotes aside, this highlights the fact that environmental side effects such as battery disposal are the forefront of thinking about the implications of wider use of electric vehicles.

Implications for Energy Producers

It is no accident that Warren Buffett sent David Sokol to inspect BYD’s technology and facilities. As Chairman of MidAmerican Energy, Sokol is well aware of the implications that would result from a widespread adoption of electric vehicles. All electric vehicles, in contrast to hybrids on the road today, produce no greenhouse gas emissions whatsoever, but obviously the energy used to charge the batteries must be produced by the energy utilities.

If the cap and trade regime proposed by the Obama Administration becomes law, utilities that can produce energy with low emissions will have a major financial advantage since they will be able to sell pollution credits to others. According to the Fortune article, MidAmerican has been studying wind power and other alternatives for years. Warren Buffett describes MidAmerican’s wind efforts at some length in his latest annual letter to shareholders. Here is a brief excerpt:

In 2008 alone, MidAmerican spent $1.8 billion on wind generation at our two operations, and today the company is number one in the nation among regulated utilities in ownership of wind capacity. By the way, compare that $1.8 billion to the $1.1 billion of pre-tax earnings of PacifiCorp (shown in the table as “Western”) and Iowa. In our utility business, we spend all we earn, and then some, in order to fulfill the needs of our service areas. Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000.

From a shareholder perspective, it looks like Berkshire Hathaway is looking at the electric car opportunity both from the perspective of producing the battery and vehicle technologies (via BYD) and producing the energy required to power these vehicles in a way that is likely to be highly profitable under the cap and trade regime.

Other Developments

According to an article in the Wall Street Journal, General Electric (NYSE:GE) was expected to announce an investment of $69 million in A123 Systems. A123 develops battery technology and is planning to build manufacturing facilities in Michigan to produce their latest lithium-ion battery packs. Assuming that Chrysler survives as a going concern, there are plans in place to use A123 technology in electric versions of Jeep and Chrysler vehicles for the 2013 model year.

Former SAP executive Shai Agassi founded Better Place, a company that is pursuing a very innovative model that addresses one of the main concerns related to electric cars: limited driving range. Agassi’s concept of battery switching stations would allow consumers to swap out depleted batteries in exchange for batteries that are already topped off and ready to go. This would eliminate the need to wait for batteries to charge during longer road trips.

Passing Fad or Reality?

There have been many false starts in the past related to electric vehicles and it is possible that this is another passing fad that will fade if gasoline prices remain at current levels. However, the political realities related to curbs on greenhouse gas emissions combined with the need to reduce dependence on foreign sources of oil from a national security standpoint seems to favor the view that electric vehicles will be a reality in five or ten years.

Putting aside the politics of global warming and the wisdom (or lack thereof) of cap and trade regimes, it seems logical to attempt to profit from this development. It will also be interesting to see whether the “legacy” automakers are beaten to market by small upstarts like BYD. Given that leapfrogging technologies are often introduced by small and agile new players, this seems quite likely. I would not be surprised to see BYD vehicles on the road soon. In fact, a model will be displayed at the upcoming Berkshire Hathaway annual meeting in Omaha for shareholders to inspect.

Disclosure: Author is long on Berkshire Hathaway.