The Rational Walk
Intelligent Investing is not a "Random Walk"

BYD’s Battery Technology May Face Challenges February 1, 2011

One benefit of reading The Economist on a regular basis is the breadth of articles spanning topics ranging far from what one typically reads in the financial media.  An excellent example appears in this week’s Science and Technology section  and covers fascinating advances in solid-state rechargeable battery technology.  Planar Energy, a Florida based company, is planning to complete a pilot production line that will print lithium-ion batteries onto sheets of metal or plastic in a process similar to producing newsprint.

As the article concludes, the applicability of Planar’s technology to electric vehicles is potentially game-changing:

If the pilot production line is successful, the company hopes to begin operations in earnest in about 18 months. To start with it will make small cells for portable devices. It will then scale up to larger cells and, in around six years’ time, it hopes to be producing batteries powerful enough for carmakers. If, by then, anyone needs a replacement battery for a Chevy Volt, such technology may offer a solid-state alternative that could increase that car’s all-electric range from about 65km (40 miles) to some 200km. Lack of range is reckoned one of the main obstacles to the widespread use of electric cars. If solid-state batteries could overcome such range anxiety that would, indeed, be a revolution on a par with the silicon chip.

We have often written about BYD on The Rational Walk, primarily because of Berkshire Hathaway’s large equity investment but also because electric vehicles with a decent range could have enormous impacts on energy consumption in the decades to come.  BYD already claims a range in excess of 200 miles for the company’s e6 all-electric model.  However, the company has delayed entry into the United States several times and has faced production problems and land use controversies at home in China.

Warren Buffett recently affirmed his continued support for BYD while on a trip to China.  Mr. Buffett has characterized Berkshire’s investment in BYD as a bet on Chairman and CEO Wang Chuan-Fu.  Charlie Munger believes that Wang Chuan-Fu “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.”  It is hard to imagine higher praise for BYD or the company’s leadership.

We will not pretend to have any insight into battery technology, BYD’s capabilities in particular, or The Economist’s characterization of Planar Energy’s technology.  However, we offer the following observations:

  1. BYD is primarily a technology company and its core competitive advantage is the ground breaking battery technology that has resulted in the e6 having a range of over 200 miles, far in excess of any other electric-only vehicle on the market.
  2. The fact that Warren Buffett and Charlie Munger have made such high profile statements supporting BYD indicates that they believe BYD’s technology is superior and has durable competitive advantages.
  3. While Warren Buffett and Charlie Munger have public personas that lead people to believe they are not technologically sophisticated, Mr. Munger in particular is known to read widely on scientific topics and it is likely that he has a working understanding of the technology in question — otherwise, he would not have compared Wang Chuan-Fu to Thomas Edison.
  4. David Sokol, who is on BYD’s Board of Directors, has a long background in energy as Chairman of MidAmerican and has a scientific background with a degree in civil engineering.  It is nearly certain that he has a working understanding of BYD’s technology and the competitive threats facing the company.

The fact that Berkshire Hathaway made a large investment in a company heavily dependent on proprietary technology in a quickly changing field was surprising to many observers.  While we cannot hazard a guess regarding whether BYD’s advantage in battery technology will be enduring, it is at the very least “interesting” to see how much financial capital Berkshire has committed and even more interesting to note the strong public statements Warren Buffett, Charlie Munger, and David Sokol have made regarding the company.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.  No direct position in BYD.

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Buffett Affirms Continued Support for BYD September 27, 2010

Buffett at BYD Event, Presumably dining on Burgers and Coke...

As we suspected last week, reports that Berkshire Hathaway is planning to sell its 10 percent stake in BYD have proven unfounded.  Warren Buffett, Charlie Munger, and David Sokol are in China this week and reaffirmed Berkshire’s support for BYD.  CNBC’s Becky Quick is traveling with the Berkshire executives and reported on the events taking place today in the video below.

For RSS Feed Subscribers, please click on this link for the video.  A related report by Alex Crippen of CNBC’s Warren Buffett Watch is also available.

Mr. Buffett was quoted by Bloomberg as follows:

“BYD is a young and promising company experiencing dynamic growth,” Buffett said yesterday during his first visit to the southern Chinese city of Shenzhen, where the manufacturer is based. “BYD will play a leading role in the future.”

The author of this article owns shares of Berkshire Hathaway.

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Reports of Buffett Dumping Stake in BYD Lack Credibility September 24, 2010

Several media reports have appeared today suggesting that Warren Buffett’s visit to China next week may be due to concerns regarding Berkshire Hathaway’s investment in BYD.  Most of the reports cite a Reuters article which seems quite unconvincing.  While BYD has experienced some difficulties recently related to alleged violation of government regulations and weaker than expected automobile sales, there have been no public statements by Berkshire regarding dissatisfaction with the investment or any plans to sell.  In fact, all recent comments by Berkshire executives have been very positive.

BYD has been a very successful investment for Berkshire Hathaway over the past two years with the original investment of $225 million rising to nearly $2 billion at the end of 2009.  However, BYD shares have fallen over 17 percent so far in 2010 amid well publicized problems that have alarmed some analysts.

Munger’s Idea

BYD does not necessarily fit the typical profile of an investment Warren Buffett would make.  However, most reports fail to mention that the idea came from Berkshire Hathaway Vice Chairman Charlie Munger who has sounded as enthusiastic as ever about BYD’s prospects in recent appearances.  Berkshire holds its investment in BYD through MidAmerican and is represented on BYD’s Board of Directors by David Sokol.

A Bet on Wang Chuanfu

Warren Buffett has characterized the BYD investment as a bet on BYD Founder Wang Chuanfu.  Mr. Buffett has also said that all cars will be electric within two decades.  BYD is particularly strong in battery technology which also has applications far beyond automobiles.  For example, MidAmerican and BYD announced an initiative last year to use BYD battery technology to store energy created by renewable sources such as wind and solar.  The ability to store renewable energy is critical because energy generation may not always occur at times when energy demand exists.

In his appearance at the University of Michigan last week, Charlie Munger did not specifically discuss BYD but he did comment on the prospect for solar energy to radically change the economy in the future.  The ability to store energy from solar production will involve battery technology of the type pioneered by BYD.  Mr. Munger has also indicated that Li Lu, who introduced him to BYD in the first place, will likely serve in a key role at Berkshire Hathaway at some point in the future.

Sale is Unlikely

Given Mr. Munger’s obvious enthusiasm for BYD’s prospects, the fact that Li Lu has been named as a key candidate for a top level job at Berkshire in the future, and the existing business ties between the two companies, it seems highly unlikely that Mr. Buffett is visiting BYD’s facilities in China in order to explore whether he should dump Berkshire’s investment.  Even if Mr. Buffett does not believe that BYD is attractively valued, he would almost certainly defer to Mr. Munger on this key investment. Anything is possible, but current media reports making the case for a BYD sale seem very weak and based entirely on speculation rather than reliable sources.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.

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Better Place Rolls Out Electric Car Battery Switching Concept in Israel September 18, 2010

One of the major obstacles standing in the way of widespread adoption of electric vehicles is the limited range offered by current battery technology.  While battery capabilities have improved in recent years, those who need to drive very long distances still have “range anxiety” concerns due to the prospect of being stranded with a dead battery.  BYD will introduce the all-electric e6 model with a 200 mile range in the United States in the near future, although exact timing is uncertain.  The Chevrolet Volt, to be introduced later this year, uses a gasoline powered generator to supplement the electric motor’s meager 40 mile range, but the car is likely to be a niche product due to its high cost.

Renault Fluence ZE

Shai Agassi, CEO of Better Place, has a different approach that may be gaining some traction.  Better Place is promoting the concept of automated battery swapping where drivers will pull into a service station and exchange their depleted battery for a fully charged unit.  The concept is similar to conventional refueling and reportedly takes less than one minute.  However, the capital required to build this infrastructure will be massive and battery ranges must still improve in order to make the process viable for long road trips.

According to an article in today’s Financial Times, Better Place is planning to aggressively roll out the battery exchange concept in Israel.  Better Place has partnered with Renault to build vehicles that are equipped with swappable battery units.  The Renault Fluence ZE is capable of a 160 km (100 mile) range.

Viable Concept for Israel …

It is easy to see why Mr. Agassi has picked Israel as a pilot market for the battery exchange concept.  The country is relatively small and most trips are likely to be less than 100 miles to begin with making it possible for many customers to recharge using conventional electric outlets.  On the occasions where recharging is not practical, battery swap infrastructure could be strategically placed in locations within the small country.  Presumably few drivers within Israel venture on road trips beyond the country’s borders due to the unstable political climate in the region.  Israel seems tailor made for Mr. Agassi’s battery swap concept.

But Probably Not Elsewhere …

Whether the concept is scalable for larger countries is an open question.  Better Place has a business model that is capital intensive and relies on establishing a recurring revenue stream from customers who lease batteries and pay a service fee when battery units are swapped.  In order to achieve scale in a country such as the United States, Better Place would have to invest in a massive infrastructure and rely on standardization that would allow exchange units to work with a variety of vehicles.  Furthermore, a 100 mile range between exchanges is far less desirable than a typical 300 t0 400 mile range for a conventional gasoline powered vehicle.

Battery Improvements May Sink Business Model

The Better Place concept also relies on establishing price parity between electric and conventional vehicles by having customers lease battery units rather than having them bundled into the cost of the car.  High costs for batteries is one reason vehicles like the Volt are not competitive without massive subsidies (and even then, they are priced far higher than conventional vehicles of similar size).  The problem with the Better Place model is that  eventually battery technology may advance to the point where range is more competitive with conventional gasoline technology and unit prices decline due to the efficiencies gained through mass production.

In a hypothetical scenario where an electric car in the year 2020 can deliver a 250 to 300 mile range and can be coupled with a Volt-like range extender, the economics of the Better Place business model could quickly erode.  Since it is foreseeable that battery technology will improve and prices will decline over time, Better Place may have trouble attracting sufficient capital to invest in a massive network of battery exchange stations that may become obsolete in the not-so-distant future.

Disclosure: The author of this article owns shares of Berkshire Hathaway, a 10% owner of BYD.

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BYD Faces Trouble Over China Land-Use Violation August 25, 2010

BYD has encountered a few rough patches lately with cuts to its sales target for 2010 and second quarter profits that were significantly below consensus estimates.  These developments have resulted in a sharp drop in BYD’s share price with the ADRs falling close to 52 week lows.  Adding to the negative news, Bloomberg reports that China’s Ministry of Land and Resources has accused BYD of illegally building seven factories on 112 acres of farmland that was zoned for agricultural use. The government will make a decision regarding the punishment for the company prior to the end of September.

According to Bloomberg, China is struggling with striking an appropriate balance between further growth in the manufacturing sector and preserving enough arable farmland to achieve the government’s goal of self sufficiency in grain production:

China, which consumes one-fourth of the world’s grain, needs at least 297 million acres of arable land to grow enough food to feed its people, the land ministry said.

Economic and social development from 1997 to 2007 reduced farmland by 83 billion square meters to about 1.22 trillion square meters. That is about 1.4 percent above the minimum requirement for arable land, according to the ministry.

“We are facing a grim situation on enforcing laws regarding land-resources protection,” Li Jianqin, head of the ministry’s law enforcement and supervision division, said July 15. “The ministry will severely punish violators of land- safeguarding laws and regulations, and we should dare to tackle tough cases.”

BYD built its factories even though 92 percent of the land they occupied in Shaanxi province was still zoned for agriculture, the ministry said. The province grows corn, wheat and rice, according to the China Statistical Yearbook 2009. It produced 4.84 million tons of corn and 3.92 million tons of wheat in 2008.

The potential penalties are unclear at this time but the worst case scenario would be a government order for BYD to tear down factories that have been built on agriculturally zoned land.  This would further impact BYD’s struggle to build enough manufacturing capacity to fulfill the company’s ambitious growth plans over the next several years.

Berkshire Hathaway owns 10 percent of BYD through its MidAmerican Energy Holdings subsidiary.  The company was brought to the attention of Berkshire Hathaway Vice Chairman Charlie Munger several years ago through discussions with Li Lu, a hedge fund manager who handles a significant portion of Mr. Munger’s personal investments.  Recently, Mr. Munger identified Li Lu as a future investment manager for Berkshire Hathaway and speculation regarding the timing has only increased with the recent retirement announcement of Lou Simpson, GEICO’s investment chief.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.

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