Buffett's BYD Visit Comes as Sales Slide, Disputes Hurt Profits

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 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 during 2009, fell 19 percent in August, while rivals Dongfeng Motor Group Co., General Motors Co. and SAIC Motor Corp. each gained at least 19 percent.

BYD Chairman Wang Chuanfu also may not deliver electric cars to California this year as promised. The company’s 2010 share decline compares with a 0.8 percent increase in Hong Kong’s benchmark Hang Seng Index.

“No company can live up to the hype BYD’s received” after Buffett’s investment, said John Casesa, managing partner at New York-based Casesa & Co. “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, Gates Visit

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 ($107 million), less than the 962 million-yuan average estimate of four analysts surveyed by Bloomberg. At least nine analysts lowered stock ratings on BYD.

The company also slashed its 2010 sales outlook 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.

‘Hypercompetitive Market’

“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.”

BYD surged more than 900 percent after Buffett’s investment and reached a record HK$88.40 on Oct. 23. The stock fell 3.6 percent, the most in almost a month, to HK$54.20 today. Buffett’s stake is still worth more than six times his original investment.

Buffett didn’t respond to a request for comment left with his assistant, Debbie Bosanek.

MidAmerican Energy Holdings Co., a unit of Berkshire Hathaway, bought 9.9 percent of BYD in September 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.”

Government Investigation

Falling prices may further weaken profitability. At a BYD dealership on Shanghai’s Hunan Road, boards advertise cash discounts of up to 12,000 yuan ($1,793) 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.

Two 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 they occupied was still zoned for agriculture, the ministry said July 15.

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

Foxconn Lawsuit

Foxconn, the maker of Apple Inc. iPhones, accuses BYD of stealing trade secrets. That helped BYD, China’s biggest rechargeable-battery maker, double revenue from its handset business from 2005 through 2007, Foxconn said in court documents.

BYD countersued, claiming Foxconn gathered false evidence and conspired to injure its business.

Terry Gou, chairman of Foxconn Technology Group, criticized Buffett’s purchase of BYD shares in a Bloomberg Businessweek interview.

“He doesn’t know the technology,” Gou said, referring to the batteries used in electric vehicles and plug-in hybrids. “He just used his name to speculate on the stock.”

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

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

BYD last year delivered 48 of its F3DM plug-in hybrid cars selling 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 as much as 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.”

--Liza Lin. With assistance from Andrew Frye in New York and Tim Culpan in Taipei. Editors: Ian Rowley, Michael Tighe

To contact Bloomberg News staff for this story: Liza Lin in Shanghai at +86-21-6104-7010 or Llin15@bloomberg.net

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net

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