What’s up with BYD?

November 8th, 2011
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Contributed by: The Mad Hedge Fund Trader
When I first bought shares in the Chinese electric car manufacturer, BYD (BYDDF) (or Build Your Dreams) in 2009 on the heels of Warren Buffet’s 10% investment, it looked like a total home run. The stock soared from $1.50 to $11, given me a paper return of 730%.

Last year, the stock started to roll over, retracing all the way back to my cost. I called the company’s Los Angeles office, but the line was disconnected. I tried the New York office, but my call was never returned. An email I sent their headquarters in Shenzhen, China went unanswered. I even had a friend in the Chinese government make some inquires, and he told me the company wasn’t seeing anyone.

That’s it! Off with the gloves. No more Mr. nice guy. I did what I usually do when a company I follow won’t talk to me. I fly to their headquarters and break into the facility.

It was easier than you think. I simply pulled up to the main gate in Northern Shenzhen and told security that I was a friend of Mr. Buffet and was there to see Mr. Li. They waved me through and went scurrying to find the appropriate Mr. Li. I knew full well that in a company of 100,000, at least 10,000 had to be named Mr. Li, and by the time they figured out that there was no Mr. Li, I would be long gone. It worked like a charm.

At this point, my editor is saying, “You did what!?” Indeed, my staff worries about my antics from time to time, fearing the dole if I fail to return from one of my adventures. But the nine life limitation that cats face doesn’t seem to apply to me, so I just keep on going.

I then set off and roamed the factory floors freely, stopping workers wherever I could and asking about conditions. The great thing about this approach is that the man on the assembly line, in R&D, and the girl in accounting are totally unfamiliar with management’s sanitized view for public consumption, and haven’t been professionally trained to lie. As a result, I was able to get a first class read on the state of the company.

When I met with the Shenzhen venture capital community in the days before, the rumors were rampant. When founder and CEO, Wang Chuanfu, launched his assault on the global car market three years ago, expectations were high. He promised investors, like Berkshire Hathaway’s Charlie Munger, that BYD would soon become the world’s largest car manufacturer. He ramped up production from 500,000 vehicles to 800,000 in 2010, anticipating a huge demand for the company’s conventional cars and hybrids.

But quality issues persisted, and the resale rate to past BYD car owners fell to zero. Sales peaked at just over 500,000, leaving the company with a huge inventory of unsold vehicles. Profits collapsed. Mercedes was brought in to provide technical assistance, but has so far been unable to improve sales. Was BYD going under? Was Warren Buffet pulling his investment? Speculation was rife.

One salesman told me that the information blackout was ordered not due to any financial problems, but because the company was releasing its new, all electric Model E6 the following week. This car is much larger than other electric cars, gets an amazing 186 miles per charge, and will be offered for sale for $39,000 after government incentives.

If true, this would be a revolutionary, highly disruptive advance. BYD plan to export the car to the US as soon as possible. It has already been test driving a fleet of “E-Taxis” on the streets of Shenzhen for the past 18 months, with much success. If the company cans delivery on the vehicle, Wang Chuanfu might realize his ambitious goals after all.

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Berkshire Hathaway (Warren Buffett)
Related People: Charles T. Munger; Todd Combs; Warren E. Buffett
Related Entities: Berkshire Hathaway Finance Corp; Berkshire Hathaway Life Insurance; Berkshire Hathaway Reinsurance Group; Bill & Melinda Gates Foundation; GEICO; General Re; MidAmerican Energy Holdings
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