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  • 4 weeks later...

Charlie Munger says something like Lollapalooza effects are what happens when you have a confluence of factors that produce simply amazing results.

 

If Charlie & Warren are right (and I think they are), BYD may be the great idea of this decade (and possibly the next).

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Successful or not...I think BYD may very well be another venture that Berkshire is stepping into that contradicts what they've said in the past...airplanes, technology, derivatives, etc.  Capital-intensive, few moats, weapons of mass destruction, etc.  Cheers!

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I don't think that it (investing in BYD) contradicts what they have said or done in the past.  They believe that they have found a truly remarkable fellow with ideas & aspirations along with the talent & gumption to get the job done.

 

Charlie once had an investment in General Motors (long, long ago), so it demonstrates that he is not adverse to auto manufacturers.  But I feel that it's more than that. Wang Chanfu is a bootstrapper whose focus on the business is borderline maniacal.

 

Chanfu's relentless progress impressed Munger, IMHO.  Couple that with a penchant for innovative development within their circle of competence while flexibly applying internally-developed technology to a manually-assembled all-electric vehicle (e.g without robots).  Charlie had also said the following: This CEO is highly ethical - when he wanted to give stock to his managers he gave them some of his stock instead of issuing new company stock. The company had a patent challenge from a Japanese company and won their case in a Japanese court! If you want to bet against this man it will be your ticket to the poor house.

 

I could be mistaken, but I intend to hold the stock for awhile. Time will tell how it plays out....... :)

 

Art

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....another venture that Berkshire is stepping into that contradicts what they've said in the past...

 

Yes. 

 

What is the durable competitive advantage BYD has? Why are they asking for government hand outs to sell cars? Can somebody explain how this newbie can compete in brutal auto market with well entrenched competitors?

 

I have done almost no homework on this one but, my guess is Berkshire is here for the battery business. The pantent would be the competitive advantage there. I think the car selling business is just a lottery ticket.

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....another venture that Berkshire is stepping into that contradicts what they've said in the past...

 

Yes. 

 

What is the durable competitive advantage BYD has? Why are they asking for government hand outs to sell cars? Can somebody explain how this newbie can compete in brutal auto market with well entrenched competitors?

 

let's see.... a hypermotivated manager like no other, an army of engineers for less than 1000 $ a month, low cost producer, battery patents, a substantial outlet and conduit in Berk (via mid american), promising new generation storage for utilities, a heads up on hybrid; oh I forgot;1 billion patriotic chinese customers in the background... Could that spell into lollapalooza? it certainly looks like it so far.

 

competitive advantage can take many combining forms...

 

This being said there is certainly no margin of safety at today's price.

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What is the durable competitive advantage BYD has? Why are they asking for government hand outs to sell cars? Can somebody explain how this newbie can compete in brutal auto market with well entrenched competitors?

 

1.  Cheap labour instead of expensive machines.  2.  Here in Ontario the auto manufacturers say give us the money or we'll leave.  BYD are asking for government to provide incentives to buyers of their battery powered line to bring the cost to consumer down to compete with carbon spewing alternatives.  They already have the top selling gas powered car in China for three months of this year - the F3 model - so that one doesn't need any incentives.  Increased volume will decrease cost.  3.  Same way the "newbie" started making batteries with $100K loan in 1995 and grew to supply 60% of global cell phone market despite well entrenched competitors.  I expect they'll apply similar technique to the gas/hybrid auto market.  There is currently no other mass produced battery only powered vehicle available for purchase - i.e. no entrenched competitors - they are it.

 

That being said, I too believe there is no margin of safety at today's price.  I revisit it often though as things move pretty quick in Shenzen!!

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There is currently no other mass produced battery only powered vehicle available for purchase - i.e. no entrenched competitors - they are it.

 

Exactly.  I recently watched a YouTube video interview with Wang Fanchu, which was very interesting.  He readily acknowledged BYD's limitations in trying to compete with a gasoline-powered vehicle, as current manufacturers have vastly superior technology to what they could conceivably develop.  However, he felt that a battery-powered all-electric offering was the compelling choice that would be brought to the USA next year.

 

With a 249-mile range on a single charge & the ability to refresh the battery to 50% strength with a short recharge "boost", I think that the Volt will be hard-pressed to compete with BYD.

 

The future is interesting, indeed......... :)

 

Art

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BYD has a vertical integration that no other companies have. The most expensive component of any electric car will be the batteries. BYD has lots of experience with Lithium batteries and it is a main producer of LiFe batteries. I'm an electrical engineer and did extensive research about those batteries and let me tell you that those batteries are well suited for the automotive industry (much better then other Lithium batteries).

 

Cost will be the main entry point of the electric car, without affordability, the electric car will stay on the drawing boards and showroom. So, from my point of view, BYD is in good position to be a serious player with it's low labor cost and battery business.

 

Still, I will not invest a penny in this stock until I drive one of their car for a test ride... It took 25 for Honda to make descent cars. Guys, don't worry, if you keep an eye on the stock you'll get it cheap at a much better valuation then current stock prices. I would say, let's wait another 3-7 years until the first recall comes in (and there will be one) and then buy.

 

BeerBaron

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Let us put in the shoes of Munger and Buffett.

 

What are they seeing in BYD.

(imagine this is in mid 2008, before the investment is made)..

 

What is the advantage BYD has or the moat it has, which made them willing to buy 25% of the company.

 

Is it a totally new business model ? which competitors cannot quickly replicate ?

or by the time competitors replicate it, BYD will achieve a critical mass ?

Does the turmoil in auto industry, starve the existing players for the capital  to transfrom themselves?

 

 

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Here's what I think Buffett and Munger saw in BYD:

 

-Wang Chuanfu is a chemical engineering/process engineering genius (Thomas Edison/Jack Welch/Henry Ford of China, according to Munger); he's also highly ethical

 

-Process engineering capabilities of BYD are particularly important due to access to cheap but skilled labor; they were able to substitute labor for machines when no one thought that was possible

 

-Vertically integrated manufacturing capabilities is key

 

-Price paid by BRK was very reasonable at the time given existing business; let’s not forget that BYD is also an IT manufacturing company with a low cost provider moat

 

-BYD is likely to be a battery supplier to other automakers (see beerbaron comment)

 

-Access to China market; being largest automaker in China is more likely than being largest automaker in world given quality control issues, but still lots of optionality involved with just the former coming true

 

-Tech transfer will occur and Chinese industry will improve in quality over the years like Japan and Korea

 

-Patents; nice but not necessarily meaningful if emerging markets don’t focus more on enforcing IP rights

 

-Government subsidies to support DV industry; the Chinese will want to cut pollution/climate problems off at the pass given inevitable growth of personal transport in China

 

-BYD company culture and benefits attracts cream of the crop engineering talent (similar to, say, Google)

 

-Currency effects (revenues and costs primarily in Yuan)

 

-Strategic considerations – MidAm has access to battery technology for electricity storage; potential entry point into Chinese electricity market, particularly with respect to renewable generation

 

-BRK gets an in with entrepreneurial/scientific community in China

 

-Opportunity to learn more about doing biz in China

 

----------

 

IMO, the BYD investment is one of the best investments Berkshire has ever made.  Charlie Munger is the man!

 

Incidentally, the BYD investment is a perfect example of how Buffett/Munger are some of the best macro investors out there.  They understand long term macro trends and apply this knowledge when making their hold forever investments.

 

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Speaking of electric cars you should watch the move "Who killed the electric car?"

 

http://www.sonyclassics.com/whokilledtheelectriccar

 

Very interesting movie (although obviously a bit biased).  Basically there was a huge surge of electric cars, then all of a sudden they were pulled off the road and crushed, literally.  GM never allowed people to own them, only lease them, and never promoted them to a high degree.  Then California pulled their no emission vehicle standards because one of the top guys was involved in hydrogen fuel cells (which by the way is supposed to be a complete pipe dream). Oil companies spent money advertising to create FUD about electric cars, and the rest is history.  Many many people/companies/industries have a huge interest in seeing the electric car NOT hit the road.  Now it'll be interesting to see BYD and maybe others which do have an interest in having electric cars hit the road.  Plus back then people hadn't yet suffered the latest peak oil scare, so the public wasn't as interested.

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"Beijing is promoting electric car development to curb surging demand for imported oil, which communist leaders see as a strategic weakness, and in hopes of taking a leading role in a promising industry."

 

Here's the article:

 

http://www.bydit.com/doce/news/20091013105316.shtml

 

P.S.  Mid-American investment now officially a ten-bagger!  Currently trading at 83.00 HKD.

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This article illustrates the sort of price-to-book-value and price to sales ratios at the time of MidAmerican's purchase decision, and the fact that while automotive sales have doubled since (denoted in declining US Dollars, I guess), the USD share price has shot up ten-fold:

http://seekingalpha.com/article/168656-a123-vs-byd-and-other-irrational-battery-investments

 

So the final element of attractive price provided good downside protection and improved upside potential just as with any Buffet/Munger purchase.

 

But it also looks like it has on of Charlie's lollapolooza effects of numerous favourable factors to encourage growth.

great technology with potential to sell/licence to others or force them to use more expensive alternatives while patents endure.

• a low-cost high quality R&D pipeline, an impression probably reinforced by Philip Fisher style scuttlebutt in both the mobile phone market and the automotive R&D departments looking at hybrids/EVs.

• a nascent & somewhat patriotic native market for cars with a need for low cost and utility above style and fuzzy warm feelings, with few competitors entrenched there (though some will doubtless have great mindshare among those who aspire to "western" luxury)

honest and capable management with, we're told, the technical & business acumen of a great industrialist. That implies great scope for economies of scale later, and until then there's plenty of talented manpower available cheap.

• a need worldwide to reduce tailpipe emissions in cities and overall energy usage everywhere, including subsidies and tax-advantages for electric vehicles.

no large existing capital base to hinder the adoption of better techniques (such as aluminium chassis for example - something Audi could only really justify on lower volume luxury models and few carmakers have adopted for any models thanks to their existing plant and machinery).

no significant lobby of vested interests within the Chinese market who wish to protect their petroleum or diesel filling stations and service networks or oil revenues, in fact there's a government keen to reduce reliance on foreign oil imports.

• Then there's a currency that could very well increase substantially relative to USD in years to come. A bonus, but small potatoes against the growth potential.

• I'm sure that most carmakers from India and China recognise (from Japan's experiences for one) that they must achieve a very high standard in handling, comfort/NVH, economy/emissions, standard equipment, safety features, styling and build-quality to make good inroads into today's European and North American markets, and indeed to tailor the set-up to each market (e.g. softer suspension in USA, tauter handling in Europe is typical). Fortunately once the handling and Noise-Vibration-Harshness is tuned, a lot of the active safety systems (airbags, electronic stability control systems) are mature and readily available from many Tier-1 suppliers as are the entertainment and comfort systems. They can keep the core business vertically integrated and outsource these other items.

Diminishing cost, greater simplicity. While high capacity automotive batteries are a huge cost now, that will surely diminish rapidly as the market expands, and the overall complexity of the vehicle should be far less than for internal combusion engine drivetrains with so many components in engine, transmission and emissions-control. The simplicity potentially enables higher production levels for the same sized plant, i.e. better capital utilisation, possibly better labour utilisation and simpler automation and the option to take larger profits or to seriously undercut internal-combustion competitors and grow market share, and make cars affordable to far more of the people on the planet (just the sort of thing that mobile telecommunications has done).

• A disruptive technology that is highly likely to see the decline of a century-old internal combustion industry or force it to change to EVs if it can change its ways fast enough to survive.

• Lack of union problems that still blight many large car manufacturers today and may hinder them from making the changes necessary to compete with BYD and other Chinese/Indian competitors.

 

Get one or two of these effects and it might not be enough, but together they could reinforce each other and different advanages could help in different environments/markets and against different competitor decisions.

 

I'm happy that the downside is minimal at the purchase price and BYD can safely continue to supply batteries profitably for the mobile technology market.

 

The almost "free" upside at BRK's buying price, while far from certain to the best of my knowledge, is of a skilled company with the right ambition at the right time in the right part of the world to take advantage of a major demographic change in China, and quite possibly of the even greater change that India may provide shortly afterwards, as its population overtakes that of China and similar personal mobility and prosperity improvements take hold there (and possibly the price - or man-hour cost - of making each vehicle decreases). If it does outstrip Toyota and does so profitably (even if equivalent cars are half their current price in real terms in 2025) it could be an astonishingly successful investment. Even if it doesn't, there's such a massive upside until that point that it could still be enormously profitable.

 

In addition, MidAmerican/Sokol can possibly see the potential for future improvements in battery performance and cost to impact in energy-storage applications in the power supply industry, especially as wind power is somewhat variable in its availability (though it can be forecast a few days in advance). Equally, it's plausible to plan/control the charge cycle for millions of parked electric vehicles (capital investment that's owned by the public, not the supply companies) to take advantage of excess electricity supply, smooth demand spikes (even brief ones, such as commercial breaks during popular TV shows as well as those caused by higher winds) and reduce demand during peak hours, which could be an additional incentive for those bodies/governments with an imperative to reduce global emissions to encourage EV ownership and encourage the provision of EV charging points.

 

P.S. I've re-presented some of the excellent comments from previous posters who clearly know more of the details than me, but I thought it was worth pulling together the ideas I see as relevant in one place.

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Sanj,

 

Now that you stirred the pot in response #2, we have not heard much from you.

 

Dynamic, a very well-compiled summary of all the thoughts presented & a very good interpretation of the big ideas. Well done!

 

Can anyone provide any other compelling insights/ideas?

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How about the shit the need to make the batteries - these rare earth metals - apparently they are all in China, a bit in Canada, and a bit in US.

 

I would be interested in board member views on this area if any have followed it.

 

The technology that all manufacturers are looking to right now are LiFe batteries. That is, lithium and ferrite, lithium is a metal that is quite common but currently mainly harvested in Bolivia (30% of world production). It seems lithium is not concentrated in many places on earth. Ferrite is obviously very common and easily harvested.

 

Now, here is the kicker on the story... there is ways to make LiFe batteries charge at a crazy rate like 3 hours for a full charge or so but so far that requires Platinium. You might want to look for IREQ lithium battery on Google, I remember reading an article about it.

 

Here is how I see that the electric car will penetrate the market. Since the batteries will represent a huge part of the overall cost a solid recycling program will need to be in place. At first, the car manufacturers will need to amortize the cost of those batteries over the lifetime of the vehicle. Then, when the materials get recycled, the price will be maintained to a somewhat lower level then their real costs if they were made from new materials.

 

BeerBaron

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Here's another thought. 

 

There is no way to tell what company will have the best battery technology for EVs taking into account both performance (storage capacity, charge time, etc.) and cost.  A company that comes up with the best technology might make money by licensing this technology out or by partnering with a low cost manufacturer in order to sell the entire battery.  This is where the labor plus process engineering skill of BYD comes into play.  BYD doesn't necessarily have to come up with its own technology to benefit from the switch to battery-powered vehicles.

 

Note that if we take a switchable battery approach as proposed by companies like Better Place, who want to put in infrastructure for switching out batteries in a short time, then being a low cost provider of miles may matter even more.

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Mungerville, the best rare-earth investment opportunity I have found is a large mine being reopened in California. Unfortunately it is privately owned by Goldman Sachs!

 

There are a few small companies that own large deposite, but none are close to production or have funded projects. China has a stranglehold on world supply, and this is potentially a serious problem. Some have speculated that large consumers (like Toyota for their hybrid batteries and motors/dynamos) will buy up these deposits for insurance, as a hundred million isn't much to spend for a company that size.

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I've done some research on rare earth metals mining, but certainly not an expert. I've found that typically rare earth metals are produced in the process of mining much larger deposits of other metals (copper, gold, etc.). There are only a few, very small rare earth mining companies.

 

I'd like to invest in a pure rare earth miner, but I think the industry is a lot like bio-tech in that you don't know which metal (drug) is the one to invest in. That means a basket approach is probably the best investment, which would likely produce industry average returns.

 

Lithium (if it becomes the staple for batteries) has a couple of primary miners. The largest is SQM. Here's a list of other lithium mining companies...

 

http://www.tischendorf.com/2009/07/03/lithium-mining-stocks-list-sector-overview-chart/

 

If others have any ideas on how to invest in the rare earth mining niche I'd be interested in your thoughts.

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The car sells because (1) it costs less to run (2) it is easy to fill (3) it is cheap, & (4) it is green. You could easily do (1), (2), & (3) by simply putting a windmill up in a rural village - & charging something akin to a more robust version of todays 'tik-tik'. Same principle in the city, just different delivery systems.   

 

But you could ALSO get (3) & (4) if you saw the battery the same way that we see gold recycling, & the ONLY place you could recycle at was a state facillity. The battery 'cost' would now just be the cost of financing/re-processng, and the strategic metal in those batteries would effectively be the equivalent of the states 'gold' reserve. .... whole new meaning to 'store of value'. 

 

Most would expect the state to monopolize the battery technology, & continually try for as much charge as possible (charge more for the same amount of strategic metal). An arms race that you cannot win.

 

Look at the strategic metal miners.

 

SD

   

 

 

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