Manufacturing News

Billionaire Warren Buffett visits embattled BYD Co.

When Warren Buffett visits Chinese carmaker BYD Co. next week, he'll find a company facing sliding sales and legal disputes with the government and Foxconn International Holdings Ltd.

Berkshire Hathaway Inc.'s $232 million (1.6 billion yuan) investment in Shenzhen-based BYD grew more than 10-fold in little over a year and was worth about $2.5 billion by October. That stake is now valued at about $1.6 billion after BYD's shares plunged 21 percent this year.

Sales at the company, the fastest-growing carmaker in China last year, fell 19 percent in August, while rivals Dongfeng Motor Group Co., General Motors Co. and Shanghai Automotive Industry Corp. each gained at least 19 percent.

BYD Chairman Wang Chuanfu also may not deliver electric cars to California this year as promised.

"No company can live up to the hype BYD's received" after Buffett's investment, said John Casesa, managing partner at Casesa & Co in New York. "It would have to do everything absolutely perfectly to live up to the expectations of the market at the peak stock price, and no company does everything perfectly."

Buffett, 80, makes his first trip to BYD next week to inspect a plant in Changsha. He will be accompanied by Microsoft Corp. founder Bill Gates to promote philanthropy among China's wealthy.

The company posted a second-quarter profit of 717 million yuan, less than the 962 million-yuan average estimate of four analysts surveyed by Bloomberg.

The company also slashed its 2010 unit sales target by 25 percent to 600,000 vehicles from 800,000 on Aug. 4. Paul Lin, a BYD spokesman, said last month's weak sales to dealers stemmed from the company reducing its inventory of unsold cars.

BYD relied too much on the compact-car segment and set overly optimistic sales targets, said Bill Russo, a Beijing- based senior adviser at Booz & Co. The government also raised taxes on cars with small engines, partially reversing incentives that made BYD's F3 sedan China's best-selling car in 2009.

"They sold a lot of F3s last year, but at some point, you reach diminishing returns in a hypercompetitive market," Russo said. "Over-promise based on your ambitions and under-deliver on your actual performance, eventually you get humbled."

Buffett's stake is still worth more than six times his original investment. Buffett didn't respond to a request for comment.

MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway, bought 9.9 percent of BYD in 2008. The Chinese company was founded in 1995 and made lithium-ion batteries for handsets. Wang bought troubled carmaker Xi'an Tsinchuan Auto Co. in 2003.

The company will show a new electric bus during Buffett's visit, after introducing the M6 minivan and L3 coupe this year.

"We plan to roll out new models in the second half," Wang, 44, said in Hong Kong last month. "With them, we hope to gain a bigger market share and improve profitability."

However, China's falling car prices may further weaken profitability. At a BYD dealership on Shanghai's Hunan Road, boards advertise cash discounts of up to 12,000 yuan ($1,800) and free gifts for the F3 with a 70,800-yuan sticker price.

The company's third-quarter earnings are "going to look ugly" because of weak sales, said Charles Guo, an analyst at JPMorgan Chase & Co. in Hong Kong. He expects company profit to recover in the fourth quarter as overall car buying picks up.

Legal disputes also weigh on BYD. China's Ministry of Land and Resources is investigating BYD over the illegal use of farmland it agreed to buy in Xi'an from a local economic development agency.

The carmaker built factories even though 92 percent of the land it occupied was still zoned for agriculture, the ministry said in July.

The government will decide by September 30, the final day of Buffett's visit, whether to punish the automaker. Lin wouldn't discuss the potential implications.

Analysts also are re-evaluating BYD's electric-vehicle strategy. The carmaker likely won't deliver its E6 model to the United States before the second half of 2011, said Scott Laprise, a Beijing-based analyst at CLSA Asia Pacific.

Lin says BYD still plans to ship the cars to California this year.

Last year, BYD sold 48 of its F3DM plug-in hybrid cars for 149,800 yuan each. The company declined to give 2010 sales figures.

Still, BYD's strength in batteries may pay off for investors, Casesa said. China, the world's biggest polluter, offers subsidies for cars powered by electricity.

China is paying up to 50,000 yuan toward the purchase of plug-in hybrid models and as much as 60,000 yuan for vehicles running only on batteries in Shanghai, Changchun, Shenzhen, Hangzhou and Hefei.

"They've been in the batteries business a lot longer than car companies," Casesa said. "That's why most industry observers are reluctant to dismiss the company despite a lot of skepticism about their claims."

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