Tuesday, September 28, 2010

Pabrai Investment Funds Annual Meeting Notes

I attended the Pabrai Investment Funds annual meeting in Chicago last Saturday. Mohnish did a great job answering questions, as usual. I've been lucky enough to get to know Mohnish over the past few years. Mohnish is one of the best fund managers in the country. He is one of the most genuine people I know and like Buffett he is always enjoying his job and cracking jokes.

Here are my notes from the 2010 Pabrai Investment Funds Annual Meeting in Chicago:

Prepared Comments:

The meeting started with an overview of how the fund has performed. Since the fund was started in 2001, it has returned 15.1% annually compared to -1.5% for the S&P 500.

$100,000 invested in the fund in June of 2000 would be $408,000 today.

Mohnish’s goal is to beat the index by 3% annually.

This past summer 3 interns worked part time on the checklist 2.0. They identified mistakes by great investors that resulted in a permanent loss of capital and analyzed why the mistakes occurred. They looked for commentary by the fund managers on these mistakes. They found that these investors almost never discussed their mistakes.

The biggest mistake was an investment in AIG by the Davis Fund which resulted in a $2 billion loss for the fund.

Mohnish said that the checklist is a great weapon in the Pabrai Funds arsenal.

Mohnish then went through one winner and one loser in the portfolio.

The worst investment during the period was Ternium which was actually sold at a small gain.

The winner he discussed was Teck cominco. This is the best investment the fund has ever made. The Pabrai Funds made an 8x return in only 3 months. Mohnish invested because they have some of the lowest cost mines in the world. The reason they were so cheap was because of a liquidity mismatch on the balance sheet. It had a large amount of debt coming due in a year. Mohnish felt that if they weren’t able to refinance the debt that they could sell assets piecemeal because of their highly diversified operations. In the worse case, the company would be worth a lot even in reorganizations because its book value was so high.

Question and Answer:

How Long did you follow Teck Cominco before buying?

Mohnish said he spent less than 5 days researching Teck because there were so many bargains at this time. Teck had a very solid moat because it was the lowest cost producer. To find Teck he looked at industry cost curves and paid attention to the lowest cost producers. The most important question to figure out was the liquidity mismatch.

Thoughts on Fairfax?

He doesn’t discuss current holdings.

Why don’t you discuss current holdings?

If investors get in the habit of discussing their investments they may end up suffering from commitment bias. If they constantly talk about how great a company is, they may suffer from a bias that could impair their judgment.

What are your views on position sizing?

His allocation policy changed in 2008 to reflect slightly elevated investment risks of his investment baskets and prior mistakes. If he has 10% positions it’s very hard to recover from a mistake. He discussed his new allocation framework with Charlie Munger who disagreed at first. After Mohnish explained it further, Charlie agreed that Berkshire Hathaway has achieved success with a more diversified portfolio. Mohnish talked about basket bets. When the risk is slightly elevated he will buy a basket of companies with small weightings. For example, he said he is currently researching companies in Japan. If he ends up buying companies there, he will buy a basket of companies each with small weightings in the portfolio. He said stocks there are very cheap.

What attracts you to a business?

When he finds a company that looks interesting he starts by thinking as a skeptic. He looks for something that will prove him wrong. He looks for areas of extreme mispricing. It has to be very undervalued but he also has to be able to understand it. He thinks there may be value in Coke bottlers in Japan. The Nikkei has done nothing for 27 years.

Has the increasing size of the fund negatively affect performance?

The performance of the fund has not been affected by size or fund inflows. He said that the fund is sitting on a lot of undervalue assets.

Has the economic turmoil changed your model?

Mohnish said he has more of an appreciation for macro issues than he has in the past. He also said that some macro trends make sense to base investments on. But the majority of macros trends such as inflation and interest rates are very difficult to predict and he doesn’t make judgments on those.

What are your thoughts on the financial industry?

Understanding management is key. You want to look for competent and honest managers. Because of the high leverage, management cannot make any mistakes in reserving. Also, it’s very difficult for outsiders to understand reserving. He couldn’t understand Citibank.

How much time do you spend on the balance sheet of companies you invest in?

Before he invested in Teck Cominco he read the last 8 years of annual reports. He spends a lot of time on the balance sheet.

What’s your philosophy on timing buying and selling?

He expects to be wrong in the future on selling. He said its fine to sell to early. If a stock goes down after he buys it that’s fine as long as he is still right about intrinsic value and he has dry powder to invest.

What did you identify with the checklist project?

The mistakes were concentrated in 08-09 and included a lot of financials. A lot of the mistakes were similar so he just picked a few. He analyzed Longleaf’s investment in GM. Longleaf’s management discussed the GM thesis in its reports. The mistake they made was they missed the forest from the trees. They missed the big picture. They figured that because GM did so well in the truck market that that would carry them through. They missed the fact that gas prices would rise to $3. He also said that he greatly respects these managers but that it’s important to learn from them. Longleaf also made the mistake of looking at the wrong variables.

How do you know where the edge of your circle of competence is?

If you have to ask yourself that question when looking at a company, then it’s probably beyond your circle of competence. You have to be honest with yourself. In the case of the Japanese companies he is researching, he has no interest in American listed Japanese companies. He will use the basket approach to Japanese companies because of the unfamiliarity. He also said that these Japanese companies are extremely cheap.

A business owner in the audience said after analyzing his own mistakes he noticed many of his mistakes were repeated. He asked if Mohnish had made a mistake more than once and was susceptible to reoccurring mistakes in one area?

Chris Davis wrote about a mistake he made in 2002. He ended up making the same mistake again in 2008 with AIG. Buffett made the same mistake twice as well with the original Berkshire Hathaway purchased and later on, with the Dexter Shoe purchase. Leverage is a very important factor to consider. One item on the check list is whether or not he suffers from any personal biases. The checklist forces him to take a step back.

Do you see any bubbles today?

Bubbles are hard to spot. Real estate in certain parts of China is probably a bubble. There are many bubbles around all the time. He mentioned a book called Trendwatching.

What’s your philosophy on investing in foreign markets?

He said that investing in US and Canadian companies that are driven by Chinese factors would be of interest to him. It’s important to understand foreign growth. You have to watch out for bubbles. China and India have good prospects but there may be an overall bubble. He’s very reluctant to invest in China but he’s interested in benefiting from Chinese growth. He skips Chinese companies because of accounting.

What does he think about natural gas companies?

The industry may be subject to a disruptive shift because of technological changes. The low prices may be permanent but he has no idea. The only good way to invest would be at the bottom of the cost curve and he can’t find one. There is no choke point in natural gas unlike iron ore. Natural gas also has substitutes. Mohnish recommended the book, Rational Optimist. He talked about how cheap energy allows countries to create more fresh water which will allow more agriculture.

How do you prevent macro issues from blinding investments?

He’s learned to appreciate macro issues more than in the past. As an investor you can’t get a handle on all factors. So it makes sense to spread ideas out more. The micro factors trump the macro factors. The company has to be able to control its destiny. He looks for staying power so the company can withstand shocks.

This question came from an investor who has to pull out money for living expenses. He asked how he can get more visibility on what taxes will be?

Mohnish practices tax planning in the funds. He sells holdings between the funds to cancel capital gains. The statements sent to shareholders should give them a good idea what the expected tax rate will be. Mohnish is a big tax payer so he is very sensitive to tax issues.

Is your philosophy on portfolio allocation shifting more towards preserving wealth instead of growing it?

The Kelly Formula is only correct when making many bets. He always under bet the Kelly Formula. Since Mohnish is making few bets, the Kelly Formula doesn’t work. He never fully used the Kelly Formula because it would have told him to bet more heavily. Return of capital is more important than return on capital. If people redeem their money during down times that is permanently lost capital for those people.

Can you name some great companies that you’d love to own at the right price?

Ikea, In and Out Burger, Costco, the low cost mines owned by BHP and Rio Tinto. Great companies are all over the place across the world. There are great companies in India and China but and ownership issues exists over there. Pricing is also an issue. Ben Graham’s approach was to go to the store and buy what was on sale and Charlie Munger’s approach is to go to the store and wait for quality items to go on sale. He likes Charlie’s framework.

What extra work do you do to analyze financials?

He’s reluctant to own most financials. They do own Goldman Sachs. He’s read two books on Goldman. It’s a great business. He doesn’t have a problem with management ethos but it’s improving. It’s a very complex business. They have the potential to grow huge overseas because they have few offices overseas right now. Since it has opaque parts to its business he made it a basket bet.

Does checklist address good portfolio strategies?

No. The checklist deals with analyzing companies. Mohnish recommended that this person read the fundamental value investing books. Mohnish always tries to learn from others.

Would you be more interested in a more certain intrinsic value or a cheaper price?

Currently the fund holds a lot of cash as there is less cash in the fund he demands higher discounts for new investments. I wasn’t able to too write down most of his answer.

What’s your average cash level since 1999?

In a crisis, cash plus courage is priceless. Next times a crisis strikes, he wants more cash. Instead of jumping from his second best to his best idea he instead lets investments play out and clings to ideas instead of jumping around.

How does Mohnish spend his free time?

He does plenty of other things. He has a daily nap, plays racquetball and plays bridge.

Monday, July 12, 2010

The BYD Story

I invested in BYD about a year and a half ago. Since then, I've been trying to learn everything I can about the company and it's founder Wang Chuanfu. Here is my investment write up of BYD:

Wang Chuanfu has been called the Thomas Edison of our time combined with the Bill Gates of China by Warren Buffett. Charlie Munger said it’s the best company in the world and the most amazing company he’s ever seen.

At the same time BYD is trading for $17 billion and should earn around $1 billion in earnings this year. It’s trading for around 12 times next year’s earnings. BYD already produces the number one car in China. All the upside of their electric cars and solar panels are priced in for free.

“It’s our company’s long-term target, to be China’s No. 1 automaker by 2015 and to be the world’s leading car maker by 2025,” - Wang Chuanfu

1. History:

Wang Chuan-Fu started BYD (the letters are the initials of the company's Chinese name) in 1995 in Shenzhen, China. A chemist and government researcher, Wang raised some $300,000 from relatives, rented about 2,000 square meters of space, and set out to manufacture rechargeable batteries to compete with imports from Sony and Sanyo. By about 2000, BYD had become one of the world's largest manufacturers of cellphone batteries. The company went on to design and manufacture mobile-phone handsets and parts for Motorola (MOT, Fortune 500), Nokia (NOK), Sony Ericsson, and Samsung.

Wang entered the automobile business in 2003 by buying a Chinese state-owned car company that was all but defunct. He knew very little about making cars but proved to be a quick study. In October a BYD sedan called the F3 became the bestselling sedan in China, topping well-known brands like the Volkswagen Jetta and Toyota (TM) Corolla.

Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

Wang Chuanfu has been called the Thomas Edison of our time combined with the Bill Gates of China:

"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." But Buffett and Munger and Sokol think it is a very big deal indeed. They think BYD has a shot at becoming the world's largest automaker, primarily by selling electric cars, as well as a leader in the fast-growing solar power industry.

One more thing reassured him. Berkshire Hathaway first tried to buy 25% of BYD, but Wang turned down the offer. He wanted to be in business with Buffett - to enhance his brand and open doors in the U.S., he says - but he would not let go of more than 10% of BYD's stock. "This was a man who didn't want to sell his company," Buffett says. "That was a good sign."

Wang typically works until 11 p.m. or midnight, five or six days a week. "In China, people of my generation put work first and life second," says the CEO, whose wife takes responsibility for raising their two children.

As for accumulating wealth? "I'm not interested in it," he claims. He certainly doesn't live a very lavish lifestyle. He was paid about $265,000 in 2008, and he lives in a BYD-owned apartment complex with other engineers. His only indulgences are a Mercedes and a Lexus, and they have a practical purpose: He takes their engines apart to see how they work. On a trip to the U.S., he once tried to disassemble the seat of a Toyota owned by Fred Ni, an executive who was driving him around. Shortly after BYD went public, Wang did something extraordinary: He took approximately 15% of his holdings in BYD and distributed the shares to about 20 other executives and engineers at the company. He still owns roughly 28% of the shares, worth about $1 billion.

The company itself is frugal. Until recently, executives always flew coach. One told me he was appalled when he learned that Ford, which lost billions last year, had staged a gala at the Hotel George V during the Paris auto show. By contrast, the last time BYD executives traveled to the Detroit auto show they rented a suburban house to save the cost of hotel rooms.

Sokol, author of a slim volume on management principles called Pleased but Not Satisfied, sized up Wang during that visit and decided he was an unusually purposeful executive. Sokol says, "Many good entrepreneurs can go from zero to a couple of million in revenues and a couple of hundred people. He's got over 100,000 people. Few can do that." When he got back to the U.S., Sokol told Buffett, "This guy's amazing. You want to meet him."

Even before visiting BYD, Sokol believed in electric cars. His people at MidAmerican have studied clean technologies like batteries and wind power for years because of the threat of climate change. One way or another, Sokol says, energy companies will need to produce more energy while emitting less carbon dioxide.

Electric cars will be one answer. They generate fewer greenhouse gas emissions than cars that burn gasoline, and they have lower fuel costs, even when oil is cheap. That's because electric engines are more efficient than internal-combustion engines, and because generating energy on a large scale (in coal or nuclear plants) is less wasteful than doing it on a small scale (by burning gasoline in an internal-combustion engine).

The numbers look something like this: Assume you drive 12,000 miles a year, gas costs $2 a gallon, and electricity is priced at 12 cents per kilowatt, about what most Americans pay. A gasoline-powered car that gets 20 miles to the gallon - say, a Chevy Impala or a BMW X3 - will have annual fuel costs of $1,200 and generate about 6.6 tons of carbon dioxide. Equip those cars with electric motors, and fuel costs drop to $400 a year and emissions are reduced to about 1.5 tons.
Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

Wang Chuanfu is the richest man in China with a net worth of $5.8 billion. He was also named one of the 40 most powerful people in China by business Week.

3. Competitive Advantages:

Cost advantage and quest to be the lowest cost producer:

“The big challenge now is to bring down the initial cost,” Li Lu told me. Eventually, BYD would like to sell the car for about the same price as conventional vehicles, and win over auto buyers by offering them lower operating costs and higher performance. “The only way to conquer this market is to provide a product that is comparable at the beginning and superior in the end,” he said “There are not many in the world that have comparable experience and expertise,” Li Lu says. “They seem to have a commanding lead right now.” The BYD technology is super safe, its batteries will last a long time and they will cost less than competitors”, he said.

Link: http://theenergycollective.com/TheEnergyCollective/65811

BYD’s electric Cars will be much cheaper than competitors:

BYD has also begun selling a plug-in electric car with a backup gasoline engine, a move putting it ahead of GM, Nissan, and Toyota. BYD's plug-in, called the F3DM (for "dual mode"), goes farther on a single charge - 62 miles - than other electric vehicles and sells for about $22,000, less than the plug-in Prius and much-hyped Chevy Volt are expected to cost when they hit the market in late 2010. Put simply, this little-known upstart has accelerated ahead of its much bigger rivals in the race to build an affordable electric car. Today BYD employs 130,000 people in 11 factories, eight in China and one each in India, Hungary, and Romania.

He started BYD with a modest goal: to edge in on the Japanese-dominated battery business. "Importing batteries from Japan was very expensive," Wang says. "There were import duties, and delivery times were long." He studied Sony and Sanyo patents and took apart batteries to understand how they were made, a "process that involved much trial and error," he says. (Sony and Sanyo later sued BYD, unsuccessfully, for infringing on their patents.)

BYD's breakthrough came when Wang decided to substitute migrant workers for machines. In place of the robotic arms used on Japanese assembly lines, which cost $100,000 or more apiece, BYD actually cut costs by hiring hundreds, then thousands, of people.

Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

BYD’s battery technology is around 5 years ahead of the nearest competitors such as Toyota, Nissan and GM. The F3DM is technologically superior top the Chevy Volt. The F3DM is priced at $22,000 and goes 50% farther than the Volt which is priced at $40,000. In addition the F3Dm is already being sold to retail customers but the Volt will be released near the end of the year.


BYD takes apart the leading car modules of their competitors and copies them - but they don’t infringe on patents:

BYD's success as a revolutionary copyist has drawn mixed reactions, but of course business champions seldom pay heed to grumblings from those they defeat. When carmaking, for example, BYD found that reverse engineering can cut the cost of a new vehicle by more than one-third.

To develop good cars in the shortest time possible, BYD spends tens of millions of yuan every year buying and then dismantling the newest models built by manufacturers around the world. That's also how Wang set up the company's first battery production line. In those early years, a fully automated Ni-Cd battery production line from Sanyo cost tens of millions of yuan, so Wang decided to make one himself. He reverse-engineered the setup for an identical production line that cost only about 1 million yuan.

Auto stamping offers a good example of BYD's strategy. The company obtained a complete stamping plant when it bought Qinchuan, eliminating the need for expensive outsource production of new car body parts, which can take two years and cost 200 million yuan. As a result, BYD started making new stamps in eight months for 80 million yuan, and now it's building a third stamping plant near Shenzhen. "Why are our cars so cheap?" retorted a mid-level staffer at BYD. "Money is saved on every part, from engine to dashboard."

In hopes of skirting patent issues, BYD has a team with hundreds of people who study global patent intricacies. At the same time, BYD has begun applying for large numbers of patents; it was the biggest applicant after Huawei and ZTC in Shenzhen last year. BYD Sales Vice President Wang Jianjun says every automaker has to find its own path slowly. He notes that BYD is coming out with six, new models in 2010, all mid-range cars costing more than 100,000 yuan. "You'll discover that these new makes don't resemble anyone else's models," he said. "We made them ourselves."


BYD’s manufacturing process is much cheaper than their competitors

In terms of the sequence of steps, the manufacturing process at competing firms in Japan was similar to that at BYD. Nevertheless, the typical Japanese plant differed from BYD in several respects. First, most of the process in Japanese plants was automated. For example, the movement of material and work in process between production steps was performed by robotic arms rather than workers. Though robots were highly reliable—defects during assembly were estimated to be slightly lower than the 1.0% defect rate for the similar steps in BYD’s process—they were expensive. Wang estimated that each robotic arm cost approximately RMB 800,0001 and was depreciated over five years. Equipping a line to do final assembly would have required several robotic arms. BYD’s Shenzhen plant had more than 25 lines dedicated to battery production.

Second, Japanese factories contained significantly more dry-room space than BYD’s production facility. At these firms, nearly all assembly steps had to be performed in a dry-room environment.

At BYD, only the steps from the final formation of the cylindrical shell to the electrolyte-filling process required a dry room. Further, the BYD dry room was designed such that operators sat around its perimeter and worked on parts by putting their hands through airtight sleeves that extended into the humidity-controlled environment. Though not certain, Wang suspected that the amount of dry-room space in a Japanese factory was 10 times greater than that at BYD. Ironically, the smaller amount of dry-room space at BYD’s facility may have been the result of BYD not having access to information about the process used by its Japanese competitors. Wang noted, “Early in the design of our lithium-ion process, the Japanese plants were off limits to us, so we had to rely on our imagination to research and develop the battery technology and production process from other sources.”

Buying an auto company, however, was not for the faint of heart. The purchase price of roughly RMB 250 million seemed to be a bargain given the land that came along with it. But the existing equipment and lines at Qinchuan were in a poor state of repair and had no capacity for expansion. Wang estimated that building a new facility with a capacity of 100,000 vehicles per year and production lines for two additional vehicle models would require a further investment of between RMB 400 million and RMB 500 million. Furthermore, developing new vehicles would cost approximately RMB 100 million per product

According to a chart on page 21 of the Harvard report, BYD produces batteries at least 20% cheaper than Sanyo.

Harvard BYD Case Study

Access to rare earth minerals:

The 17 metals which are known as rare earths are a vital component in most of the world's new technologies.

As Newsnight's Economics Editor Paul Mason now reports these metals, 97% of which are mined in China, have the potential to shift the world's power away from the West.

Link: http://news.bbc.co.uk/2/hi/programmes/newsnight/8366603.stm

BYD is opening factories in resource rich areas to gain access to the rare earth minerals

BYD Co. Ltd. (SEHK: 1211), an indigenous manufacturer of rechargeable batteries and vehicles in China, will spend CNY 22.5 billion building a 5,000MW solar cell production base in the northwestern province of Shaanxi from 2009 to 2015, citing the local government's latest circular economy development strategy.

Link: http://www.tradingmarkets.com/news/stock-alert/byddf_byd-said-to-create-china-biggest-solar-cell-base-in-shaanxi-720577.html

Southern Shaanxi's mines are rich, while the province's northern region shares vast, sunlight-bathed deserts with Inner Mongolia. These geographic factors prompted government officials to look at applying resources from southern mines in solar energy projects, giving birth to a local photovoltaic industry.

The government plans perfectly meshed with BYD's development goals. So in 2008, the company signed an agreement with the government in the southern provincial city of Shangluo to build a 1 gigawatt solar battery production facility.

In the future, said an insider at the Shaanxi Development and Reform Commission, BYD plans to set up alternative energy facilities in Shangluo and the northern city of Yulin, including silicon smelting plants, solar battery production plants, and solar power stations. BYD's Shenzhen operation has been put in charge of researching the conversion and application of this new energy venture.

According to the southern Shaanxi scheme, BYD plans to invest 22.5 billion yuan in the province by 2015 and develop 5 GW worth of solar battery projects.

But the plans rely on government financing. Several official documents reveal that BYD's investment estimate is based on predictions of extremely low resource costs, as well as subsidies that nearly match BYD's outlays.

Nevertheless, the Shangluo government's land authority has already started working with BYD. A 27-hectare BYD New Energy Base is currently under construction on the city's eastern outskirts, and is expected to provide 1 GW generation capacity this year. The initial 450 million yuan investment includes a 50 million subsidy from the local government, and a 250 million loan from the Bank of China.

Moreover, Shangluo's government has spent tens of millions of yuan on resource extraction, discovering three silica mines and a vanadium mine. Development rights for two silica mines were awarded to BYD. On the provincial level, the Shaanxi government has set aside 800 million yuan for developing alternative energy, mostly for upstream solar energy production. Government sources said some of this money is earmarked for BYD.

In the future, BYD may tap into another government bank account tied to a 10 billion yuan fund for alternative energy investment at a Xi'an national civil aviation base.

In early 2009, BYD and Shaanxi's Information and Technology Department signed a batch of agreements linked to the alternative energy and auto industries. The provincial government promised to secure direct power supplies to BYD and other major companies at a polysilicon industrial park, offering preferential power prices.

Link: http://english.caing.com/englishNews.jsp?id=100117633&time=2010-02-12&cl=111&page=all

Chinas leading battery producer BYD Co., Ltd. starts building a solar cell project in Shangluo, Shaanxi Province. The company plans to invest CNY 450 million in the first phase of the project, which is expected to be able to turn out solar cells of 100 mega watts per year and create sales revenue of CNY 1.024 billion.

The first phase, covering a plot of land of 270,000 square meters large, will be built up one year later. The total investment in the project is expected to reach CNY 2.5 billion, local media said. It is the largest project in terms of investment in Shangluo City.

Shangluo has rich mineral resources, especially the high-purity silicon ore, which is the main raw material for solar cell production. Wang Chuanfu, chairman and president of BYD, had led a team to survey Shangluo at the end of this November and inked development contract of a solar cell plant with the local government.

Link: http://www.yourrenewablenews.com/news_item.php?newsID=18550

Massive R & D and 19,000 engineers:

GM or Toyota could not hire the amount of engineers working on electric cars that BYD has because the same engineers cost 10x more in industrialized countries.

Deploying the armies of laborers at BYD is an officer corps of managers and engineers who invent and design the products. Today the company employs about 10,000 engineers who have graduated from the company's training programs - some 40% of those who enter either drop out or are dismissed - and another 7,000 new college graduates are being trained. Wang says the engineers come from China's best schools. "They are the top of the top," he says. "They are very hard-working, and they can compete with anyone." BYD can afford to hire lots of them because their salaries are only about $600 to $700 a month; they also get subsidized housing in company-owned apartment complexes and low-cost meals in BYD canteens. "They're basically breathing, eating, thinking, and working at the company 24/7," says a U.S. executive who has studied BYD.

Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

Wang stresses that BYD, unlike Sony and Sanyo, has never faced a recall of its batteries.

Yet Wang felt that BYD differed from its Chinese competitors along at least one critical dimension—investment in R&D. Whereas other Chinese firms focused solely on production, BYD devoted substantial resources—roughly 2% of revenues—to both product and process R&D. Wang observed, “There are two types of Chinese companies in our industry. The first group focuses on the sales channel and does not care about the technology or the development of new components. Companies in the second group, including BYD, emphasize technology, and their competitive edge comes from the products they develop.”

Harvard Case Study

Chinese battery and car maker BYD Co. said Monday it plans to boost capital spending 59% in 2010 to expand its automobile production amid robust domestic demand.

Clear leader in electric cars:

Leading car makers are partnering with BYD to develop electric cars because BYD is so far ahead and the costs of developing their own technologies would be so expensive.

In March, the company announced a joint venture to develop electric cars in China with Mercedes. The idea is to combine Mercedes’ design excellence with BYD’s technological savvy, particularly with respect to batteries, and the Chinese firm’s access to its home market. “Daimler’s know-how in electric vehicle architecture and BYD’s excellence in battery technology and e-drive systems are a perfect match,” Mercedes chief Dieter Zetsche said at the time.

Link: http://theenergycollective.com/TheEnergyCollective/65811

The company more than doubled its sales to 450,000 cars in 2009. The car maker reiterated Monday its target of selling 800,000 autos this year.

BYD said it will launch the L3, I6, G6, S6, M6 all-new car models next year. The five new vehicle products include the sedan, SUV and MPV, of which only the M6 has been displayed to the public. All these new models will be priced between 100,000 yuan ($14,700) and 200,000 yuan.

The BYD F3 is the number one selling car in China and BYD as a whole is the 4th largest car company in China.

Link: http://online.wsj.com/article/SB10001424052748703909804575123261784247090

BYD was the first company to get subsidies for its car buyers

In 2010, the Chinese government has expanded the trial cities for promoting energy-saving and new energy vehicles from 13 to 20. Five cities have be chosen as the pilot cities for the trial program, where private buyers purchase energy-saving and new energy vehicles can get incentives and subsidies, including Beijing, Shanghai, and Shenzhen etc.. As the first and only sedan chosen by National New Energy Vehicle Recommendation List, the E6 has been available to government agencies and corporations since Dec.15, 2008. The first private sales location is in Shenzhen as selected and will expand to other new energy car trial cities in China.

Link: http://www.byd.com/press.php?id=87

BYD could never compete with GM or Toyota in petroleum based cars, but electric cars are much simpler to engineer and BYD leads everyone in technology

Mr. Wang's strategy: capitalizing on the electric car's low barriers to entry. Few products are as complex to develop and produce as gasoline-powered automobiles, which are assembled with thousands of precisely engineered parts. But electric cars use only basic motors and gearboxes, and have relatively few parts. Aside from perfecting the battery itself, they're far easier and cheaper to build -- and that makes for a level playing field.

"It's almost hopeless for a latecomer like us to compete with GM and other established auto makers with a century of experience in gasoline engines," said Mr. Wang in an interview, pacing and juggling calls in BYD's headquarters on the outskirts of Shenzhen. "With electric vehicles, we're all at the same starting line."

Mr. Wang says BYD's lithium-ion battery uses an iron-phosphate technology that is chemically stable and thus "inherently safe." He says it doesn't overheat to the point where it can catch fire.

Mr. Wang, the 42-year-old Chinese entrepreneur, compares the simplicity of building electric cars to the simplicity of a digital watch. "Anyone can design and produce digital watches, but it's virtually impossible for a newcomer to match the precision of a Swiss wristwatch," Mr. Wang says.

Indeed, BYD's all-electric e6, has just two motors (45 parts each), one powering the front axle and the other the rear, and two gearboxes (60 parts each) to go with each of the motors. That means the whole system has 210 primary parts, excluding nuts and bolts. In comparison, BYD's F6, a gasoline-fueled vehicle, has a total of 1,400 powertrain parts: a V6 engine composed of 840 parts and a transmission with 560 parts.

Link: http://online.wsj.com/article/SB123172034731572313.html

BYD becomes the supplier of electric car batteries to other car companies:

Volkswagen and Mercedes Benz have announced they are partnering with BYD

The Lavida electric model is likely to have most of its parts sourced from Chinese producers, including the battery expert Build Your Dreams (BYD). VW’s German rival Daimler announced two weeks ago it was also partnering with BYD to build electric cars in China.

Link: http://webcache.googleusercontent.com/search?q=cache:JixZXU4kEUQJ:www.thelocal.de/sci-tech/20100312-25839.html+VW+e-Lavida&cd=2&hl=en&ct=clnk&gl=us

(Hongkong /Stuttgart) –BYD Company Limited (1211.HK) yesterday signed a Memorandum of Understanding (MoU) with Daimler AG (stock ticker symbol: DAI) to enter into a comprehensive technology partnership for the development of electric vehicles for China.

Link: http://www.byd.com/press.php?id=86

In a shockingly forthright appraisal of the Chinese auto market, Daimler CEO Dieter Zetsche laid out the harsh reality for the Chinese auto market, stating that petroleum-powered vehicles are not sustainable due to the massive demand, and that electric vehicles are imperative.

Speaking at an event in Beijing, Zetsche remarked “If you look at the population and the growth here, you quickly reach the conclusion that it would be unthinkable to provide these people with traditional gasoline- and diesel-powered vehicles. There just isn’t enough oil for that. So there has to be personal transportation that is not dependent on oil and is CO2-free to the greatest possible extent. In this regard, BYD is clearly a front runner.


The company hasn't yet decided whether it will enter the U.S. market, where the economics of electric cars are not as compelling. Sokol, who now sits on BYD's board, says BYD could instead become a battery supplier to global automakers.

Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

BYD’s batteries become connected to the grid to store solar and wind generated power:

BYD built a 2-MW demonstration energy storage system in a 40-foot mobile container for PacifiCorp, in Portland. It also has a 1-MW stationary demonstration storage project in its factory in Shenzhen, that is connected to the grid, and a 200-kW storage unit in a 40-foot container, that features four-hour discharge, as well as a 600-kW 40-foot storage container for 1.5-hour discharge.

Link: http://www.distributedenergy.com/forms/print-29196.aspx

"We've never really had storage capability on utility systems," Sokol told me recently, by phone. "Given the progress BYD has made on the technology of batteries for electric vehicles, the question is, how do we ramp that technology up so that we can use it for multiple purposes in the utility world? "Probably the most obvious is the ability to store intermittent renewable resources, such as wind or solar," Sokol said.

Put simply, cheap battery storage at scale would address one of the biggest drawbacks to wind and solar energy, which is that, unlike coal or nuclear power, they are unpredictable -- you can only make electricity when the wind is blowing or the sun is shining. "If you can store electricity when the wind blows, and have it available when you need it, that argument goes away," Sokol says.

Link: http://www.greenbiz.com/blog/2009/05/26/warren-buffets-big-battery-play

Eventually BYD will be the lowest cost producer of solar panels:

Wang said the company has a goal of reducing the cost of solar panels by 10 percent a year to make them more affordable to the general public.


BYD was first to the game. Started 10 years before everyone else:

Chinese battery and electric automaker BYD Co. has set up a plant to mass produce lithium batteries for its electric cars in Huizhou, south China’s Guangdong Province, according to the China Securities Journal.

BYD, partly owned by Warren Buffet, has injected around five billion yuan (about 731.5 million U.S. dollars) into the operation of the Huizhou plant, which produces rechargeable batteries, automobile parts and handset components, the newspaper Xinhua reported.

Facilities for the production of batteries for the company’s electric cars are almost ready now, since construction began in September last year.

The Huizhou plant, the first eligible for mass production of lithium-ion batteries that are core technologies of BYD’s electric cars, is seen as a key step in the company’s electric car manufacturing

Link: http://www.cleancartalk.com/clean-car-talk-daily-snapshots/chinas-byd-aggressive-lithium-battery-hybrid-bus-production/

According to the distributor of BYD in Shenzhen, since F3DM low-carbon dual-model electric vehicle going on market, 14 have been sold on the terminal market with total orders of more than 500.

According to relevant information, the actual price of F3DM has been raised by 50,000 Yuan from 169,800 Yuan for relieving the current contradiction of demand and supply. Comparing with other types of vehicle of BYD, the ordering time for F3DM low carbon vehicle will be longer. It’s said that some of the customers calling for consultation are from Hong Kong, Beijing and even oversea.

Currently, the basic condition for promotion of electric vehicle in Shenzhen has been increasingly mature. The first batch of electric vehicles firstly built by China Southern Power Grid in Shenzhen has been put into operation with two charging stations and 134 charging cords started. The two charging stations are designed to have 9 charging cabinets which could accommodate 18 vehicles at the same time.

On a conference call, Mr. Wang disclosed that in 1998 he had instructed 20 of his top engineers to quietly scale up BYD's cellphone-battery technology so that it could be used to power cars some day. They developed an all-electric car, a clunky vehicle called the Flyer that was just a step above a golf cart.

Link: http://online.wsj.com/article/SB123172034731572313.html

China is spending far more money and allocating way more resources than any of country for clean technology:

U.S. leaders want China's clean energy boom to drive technology exports and are sending a sales mission to Beijing this week. But Beijing wants to create its own suppliers of wind, solar and other equipment and is limiting access to its market, setting up a new trade clash with Washington and Europe.

The potential Chinese market is huge: Total investment in China in renewable energy by the government and private sector last year was $34.6 billion, nearly double U.S. spending of $18.6 billion, according to a report by the Pew Charitable Trusts.

Link: http://finance.yahoo.com/news/US-Europe-look-to-China-for-apf-2207328030.html?x=0&sec=topStories&pos=main&asset=&ccode=

Zhen Zijian, deputy director of 863 major projects for energy-saving and new energy vehicles in the Ministry of Science and Technology, said the projected number of electric cars sold will reach to 2.66 million units, which leads to some 21.2 billion kWh of electricity needed throughout the year. The electric mini car can be driven at the highest speed of 80 kilometers per hour and run 100 kilometers without charging.

He added that electric city buses and plug-in electric buses will also be produced by 2015. At that time, the output of electric vehicles will make up 10 percent of the total number of electric passenger vehicles. China National Offshore Oil Corp. is considering building battery-changing stations for electric vehicles, part of a broader push by the state-owned oil giant that could give a boost to electric cars in China's huge market.

China's intention, in addition to creating a world-leading industry that will produce jobs and exports, is to reduce urban pollution and decrease its dependence on oil. China wants to raise its annual production capacity to 500,000 hybrid or all-electric cars and buses by the end of 2011, from 2,100 last year. Electric cars have several practical advantages in China. Intercity driving is rare. Commutes are fairly short and frequently at low speeds because of traffic jams. So the limitations of all-electric cars are less of a problem.

Link: http://autonews.gasgoo.com/auto-news/1012912/China-to-sell-2-66-million-electric-vehicles-by-2015.html

The United States is poised to invest $172 billion over the next five years, which compares to investments of $397 billion in China alone, a more than four-to-one ratio on a per-GDP basis.

Link: http://thebreakthrough.org/blog/Rising_Tigers.pdf or http://thebreakthrough.org/blog/2009/11/rising_tigers_sleeping_giant_o.shtml

Charlie Munger said it’s the best company in the world and the most amazing company he’s ever seen. The partnership with Berkshire Hathaway will give BYD a huge amount of clout in the USA and around the world:

For the first time, BYD, the Chinese maker of cars, batteries, electronics, and solar power equipment, earns the No. 1 spot on Bloomberg Businessweek's annual Tech 100 ranking of tech's top performing companies. BYD (which stands for Build Your Dreams) has more than flourished: It even outperformed perhaps the hottest tech outfit around, No. 2 Apple. Apple and Tencent Holdings (No. 3) round out the top three.

Link: http://autonews.gasgoo.com/auto-news/1015283/BYD-Tops-Bloomberg-Businessweek-s-12th-Annual-Tech-100-List.html

Mr. Sokol also said MidAmerican hopes to boost its BYD stake if the chance arises. "If in the future there is an opportunity for us to continue to invest in BYD, we will be happy to increase our stake over time, but we will do it in cooperation with BYD," he said. Mr. Wang said an increase is "negotiable."

Link: http://online.wsj.com/article/SB125085247014949083.html

"How did BYD get so far ahead?" Warren Buffett asked Wang, speaking through a translator. "Our company is built on technological know-how," Wang answered. Wary as always of a technology play, Buffett asked how BYD would sustain its lead. "We'll never, never rest," Wang replied.

Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

Warren Buffett's MidAmerican Energy Holdings Co. named Chairman David Sokol to the board of BYD Co., after the U.S. company agreed to buy a stake of about 10 percent in China's biggest rechargeable batteries maker.

Link: http://www.bloomberg.com/apps/news?pid=20601080&sid=a4RH6K5uUB70&refer=asia

Bill gates gets a royalty on Computers, BYD will be a complete energy producer, thus getting a royalty on energy usage in China:

However, the company's first goal isn't making a mark with its cars. Right now it is focused on solar panels, aiming to make them popular enough that they cost less for consumers. Paraphrasing Bill Gates' ideas about the PC, BYD Chairman Chuan-Fu said he wants solar panels on every home.

After that, the company's next goal is to expand throughout the States, and only after that is done will it turn to building hybrid and fully electric cars here. BYD's new operations are expected to add several hundred jobs to the LA's employment rolls.


BYD insiders revealed to Autocar that the E6 was part of the company's ambitious plans to be a 'total provider of power' in China, meaning that it wants to control electricity generation, battery manufacture and the vehicles to use them.

Link: http://www.autocar.co.uk/News/NewsArticle/AllCars/239616/

BYD’s cars and solar panels are made with complete vertical integration:

Everything in the cars is made and developed by BYD except for the tires and windshield

This "human resource advantage" is "the most important part" of BYD's strategy, Wang says. His engineers investigate a wide array of technologies, from automobile air-conditioning systems that can run on batteries to the design of solar-powered streetlights. Unlike most automakers, BYD manufactures nearly all its cars by itself - not just the engines and body but air conditioning, lamps, seatbelts, airbags, and electronics. "It is difficult for others to compete," Wang says. "If we put our staff in Japan or the U.S., we could not afford to do anything like this."

Link: http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

Wang observed, “Our goal is the vertical integration of the whole supply chain. Even for the design of tooling and molds required to make components, we do 95% of the work internally. This puts more processes under our control and allows us to get benefits in terms of both cost and quality.”

Harvard Case Study

The Number of automobiles per capita in China is a fraction of the USA’s. Motor Vehicles per 1000 people:

USA: 764
China: 30

Link: http://www.nationmaster.com/red/graph/tra_mot_veh-transportation-motor-vehicles&b_map=1

Expanding globally and opened headquarters in the USA.

"Like California, BYD is a company of firsts. They are leading China and the rest of the world into a cleaner, more sustainable future with their automobiles and renewable energy products while creating jobs and saving consumers money. I welcome BYD with open arms and look forward to growing California's relationship with China to mutually benefit the environment and economy."

BYD's Los Angeles headquarters will be responsible for sales, marketing, and research and development for its automobiles and energy products, which include solar panels, LED lighting systems and home and grid level energy storage units through BYD's unique iron-phosphate batteries, Schwarzenegger's office said in a statement.

Link: http://news.xinhuanet.com/english2010/china/2010-05/01/c_13274586_2.htm

MidAmerican Chairman David Sokol, who was also interviewed in Xian, said MidAmerican is ready to assist BYD's foray into the U.S. auto market in "any way we could be helpful." MidAmerican also might invest in BYD's new initiatives in the U.S., which, in addition to automobiles, could involve solar panels and battery technology for power utilities.

Link: http://online.wsj.com/article/SB125085247014949083.html

BYD has recently announced plans to distribute cars in the USA, South Africa, Ghana, Germany and all over Europe, Australia, South America

BYD has backing from the Chinese Government:

BYD is receiving subsidies, land and low cost resources from the Chinese government

"The cooperation could involve the establishment of industrial standard for electric cars as well as joint investment and production," he told reporters at an auto forum in Shanghai yesterday without providing details.

China is aggressively pushing forward a plan to speed up the development of new energy vehicles, which include financial subsidies as well as 10 billion yuan (US$1.5 billion) investment to help car makers upgrade technologies.

Several car makers, including SAIC Motor Corp, Chang'an Auto Group and BYD Auto Co Ltd, have poured a huge amount of funds into investment and offered various new models of green cars to meet demand.


Electric vehicles may get discount at harbor: The Port of Los Angeles may become the first port to offer reduced tariffs for zero-emission vehicles imported into the United States, under a proposal expected to come before the Board of Harbor Commissioners this summer.

Plans call for offering a 15 percent discount on the wharfage rate for battery electric vehicles passing through the port. The reduced rates could go into effect by September, pending final approval by the harbor commission, the California Ports Authority and the Los Angeles City Council.

The proposal was introduced last week, when Chinese manufacturer BYD Auto Co. announced plans to move the company's North American headquarters to Los Angeles.

"BYD is a truly visionary company and the zero-emission tariff our port will offer is another great example of our strong desire to work with and attract global alternative energy companies to Los Angeles," Mayor Antonio Villaraigosa said. "By pursuing 21st century clean technology enterprises, we are building a foundation for our future, both economically and environmentally."


5. How did Buffett Find BYD:

This past weekend was the Berkshire Hathaway (NYSE:BRK.A / BRK.B) annual shareholder meeting. At one point during the Q&A, a questioner asked Warren Buffett about the status of Berkshire’s CIO candidates. Charlie Munger remarked that one candidate who he is particular close with was up 200% in 2009 with 0 leverage. Some people think that the person Munger is referring to is Li Lu, a fund manager who turned Munger and Buffett onto BYD.

Lu personally owns at least 2% of BYD, which rose 400% in 2009. I don’t know anything about his investments beyond that one position, but I know he is a huge believer in taking concentrated, high conviction positions. If that is the case here, BYD’s spectacular results must have contributed a lot to his returns for 2009 which may make a 200% for the year possible.

Link: http://streetcapitalist.com/2010/05/04/li-lu-berkshire-hathaway-cio-candidate/

Mr. Li is 32 years old. He wears Armani suits that he buys at a factory outlet; he lives in one of those bland modern towers on the East Side. While other Wall Street hotshots his age may have endured the trauma of not getting into the business schools or investment banks of their choice, Mr. Li has survived poverty, separation from his family (his parents were forced into labor camps) and a devastating earthquake. When he escaped to America after hundreds of his fellow protesters were killed in Beijing, he was one of the most wanted dissidents in China.

Link: http://www.gurufocus.com/news.php?id=92544