BYD Building Its Dreams

Includes: BRK.A, BRK.B, BYDDF
by: SustainableBusiness

As we come to grips with China's leadership, we're hearing more about Shenzhen-based BYD Company (OTCPK:BYDDF), which stands for Build Your Dreams. It emerged from relative obscurity when Warren Buffett's Berkshire Hathaway (NYSE:BRK.A) spent $231 million for a 10% stake in September 2008.

BYD is the world's largest producer of rechargeable batteries and a major car manufacturer in China, which recently surpassed the US as the world's largest market for cars. It also makes handsets and parts for mobile phones. Its F3 sedan was the bestselling automobile in China last year.

Founder Wang Chuanfu, now China's wealthiest man, has rapidly grown the company to 130,000 employees since 1995. Revenues have risen about 45% annually over the past five years, reaching $4 billion in 2008.

Just five years after it opened its doors, BYD became one of the world's largest cell phone battery manufacturers, making batteries for iPods, iPhones and low-cost computers, and cell phone handsets and parts for majors like Nokia (NYSE:NOK) and Motorola (MOT). In 2003, BYD entered the auto-making business by buying a near defunct state-owned car company, and went public on the Hong Kong exchange in 2007.

The company believes it can become China's top automaker by 2018 and a major global player by 2025 with 8-9 million vehicle sales. Last year, BYD sold 400,000 cars and plans to double that this year through increased exports.

When it introduces the e6 EV in California this year it will be the first Chinese vehicle-maker to sell in the US. It plans to export the EV to Europe next year.

The e6 has a top speed of 87 mph, travels 205 miles on a single charge and only takes about an hour to charge. Some say the car won't sell well in the US because its design looks outmoded to Americans, and the quality of body panel fit and paint finish doesn't meet US standards. The price tag will be a steep $40,000, on par with GM's Chevy Volt.

Last year, BYD launched the world's first plug-in hybrid, the F3DM sedan, but sold fewer than 100 units in the first eight months. It goes 62 miles on a charge and sells for only $22,000.

Solar Too

BYD is also leaping into solar with a vertically integrated manufacturing model. It began building a massive $3.3 billion, 5 GW crystalline silicon plant in 2009, to be completed in 2015. The company claims its proprietary production process can cut polysilicon costs in half.

Future Village, a small complex at its corporate headquarters, runs on eight wind turbines and solar PV, all made by BYD. There's also an energy storage unit that captures excess solar and wind energy, also made by BYD.

BYD's entry into solar is supported by government subsidies, land rights to two silica mines, and the purchase of its output.

Buffet and BYD

Buffett has already made a $1 billion on his investment in BYD, while holding a stake in the world's adoption of clean energy and China's economic growth.

The purchase was viewed as atypical for Buffett, who doesn't typically invest in new, disruptive technologies like electric vehicles. He also doesn't invest in technologies he doesn't know much about. But it takes a special person to capture a leading market share in batteries and vehicles in such a short time - Buffett invested in Wang Chuanfu as much as the company.

How did Chuanfu turn BYD into a low-cost battery producer? He took advantage of China's low cost labor rather than investing in expensive robotic manufacturing.

He's spent far more on R&D than other Chinese manufacturers, improving products and modifying the manufacturing process. He's also been able to attract leading scientists because of an emphasis on great benefits: free housing, food, health insurance and access to free education for their children.

Chuanfu has been called a combination of Thomas Edison and Jack Welch. And, like Henry Ford, is a skilled engineer and scientist as well as an outstanding entrepreneur. He started BYD after raising $300,000 from relatives and set out to compete with Sony (NYSE:SNE) and Sanyo (OTC:SANYY) making rechargeable batteries.

Buffett liked the fact that Chuanfu would only sell him 10% of the company - he wanted 25%. Buffett believes that all cars will be EVs in 20 years and BYD has a legitimate shot at becoming one of the largest suppliers of EV battery technology and EVs. But the biggest advantage may be access to BYD's energy storage technology. Buffett's utility, MidAmerican Energy Holdings (MDPWK.PK), acquired the shares in BYD and has already started using BYD's energy storage system in Oregon.

BYD was a top performer on the stock market in 2009 - its shares rose 439%. The company is planning a $100 million IPO on the Shenzhen exchange this year.

Disclosure: No positions