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BYD Revenues Up, Earnings Plunge


Parsad
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I wasn't a fan of this investment.  I'm still not.  I don't think it is a business where they can sustain a large competitive advantage over time.  Money will flow in, as it is presently, and new companies will take market share away. 

 

Personally, for Berkshire, I like something like BNSF better.  Not so much the price, but the idea.  The more capital that is deployed into capital-intensive businesses with huge moats, the better. 

 

I'm also not keen on the investment managers they are choosing.  These are gigantic shoes to fill, while handling huge sums of money.  I would be much more comfortable if someone like Klarman, Berkowitz, etc, were the ones taking over.  Ideally, they should just buy Fairfax and let Hamblin-Watsa manage all the money.  It would be cheaper in the long-run and the returns would be better!  Plus Prem is ok at insurance and leadership!  ;D  Cheers! 

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Personally, for Berkshire, I like something like BNSF better.  Not so much the price, but the idea. 

 

Well, they put $Bs into BSNF vs. $Ms in BYD. Speak volumes...

 

However there must be something more to it than what meets the eye, or else Munger would not have so signed its fate: "I think BYD will work out very well.  I think it will give pleasure to shareholders, and I think they will solve significant problems of the world"

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I think Munger is taking the longer term view, and views BYD as a company that will build a significant moat over the next decade.  But we've seen this alot in other sectors...take a look at "Search" engines for example...very few thought Google would have such a dominant moat.  Munger is also betting on the CEO, which can be pretty powerful if the bet is on the right person.  What happens, I don't know.  We'll know in a decade!  ;D  Cheers!

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For all the brk fans - I think someone like Hamblin-Watsa running BRK investment operations would be a very positive thing. Or Klarman or Berkowitz. The BNSF investment is a good one - similarly increasing stake in KO, Dr Pepper or Pepsi would also be a good thing.

 

The BYD bet, I am not sure of it but Charlie may turn out to be right. China is not UK and definitely not Germany - so it remains to be seen how this will play out. The corruption index is also interesting - while Singapore is one of the least corrupt countries on earth China is one of the most corrupt. Also, the way Chinese system is going to evolve is going to be interesting. ( hopefully it will integrate well with the community of nations )

 

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I don't think I'm being too defensive here when I say that this quarter's results don't bother me much long-term.  It does not get to whether they have a technological advantage in lithium ferrous ion batteries, or whether they will be able to maintain a cost advantage in the businesses they are in (including solar and possibly home appliances).  I don't see a reason they won't maintain that cost advantage for the long-term if they build new factories in third and fourth tier Chinese cities where labor is still cheap. 

 

To be sure, being a Chinese company adds a degree of political risk, but BYD is in a favored industry (I think the illegal land use deal is going to work out better than expected now that the authorities have saved face by issuing a "strict" punishment -- (for instance, maybe once the zoning is done they will allow BYD to buy the factories back at a reasonable price).  Beijing wants badly to lead the electric and solar industries in the world, and BYD is very well positioned there, so I suspect they will have a political tailwind rather than headwind. Also, as to corruption -- Sokol's presence on the board, and the vote of confidence by Munger and Buffett ameliorate this threat somewhat, though accounting differences remain a risk. 

 

Altogether, if you want to have exposure to Chinese growth, I think the risks from that angle are lessened somewhat with BYD.  But the risks are there, and this is a bet on the person, Chanfu, and a Fisher-type play, not a typical Buffett play.  The biggest threat is the Chiese bubble burstin, which would kill domestic demand and maybe cause commodity heavy countries' economies to plummet too (Australia, Brazil and Canada?). 

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I'm ok with BYD for the long haul too...but for a very different reason...If my memory serves me well the company has around 10,000 engineers. That's a huge number and a large number of them are working on new battery technologies. A breakthrough here could be huge...That said, my investment is in a similar proportion to BRK's.

 

 

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I'm ok with BYD for the long haul too...but for a very different reason...If my memory serves me well the company has around 10,000 engineers. That's a huge number and a large number of them are working on new battery technologies. A breakthrough here could be huge...That said, my investment is in a similar proportion to BRK's.

 

Isn't it more likely that a breaktrough would come from the academic side? Companies usually direct their energies toward applied research as opposed to universities. A few exceptions come to mind like the White LED by Nichia in the 90s, but even then the inventor was a rogue scientist that continued it's research even when it's boss told him to stop. Batteries have been under INTENSE researches for the last 20 years but so far no breakthrough, just good advances each year.

 

BeerBaron

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I wasn't a fan of this investment.  I'm still not.  I don't think it is a business where they can sustain a large competitive advantage over time.  Money will flow in, as it is presently, and new companies will take market share away.  

 

Personally, for Berkshire, I like something like BNSF better.  Not so much the price, but the idea.  The more capital that is deployed into capital-intensive businesses with huge moats, the better.  

 

I'm also not keen on the investment managers they are choosing.  These are gigantic shoes to fill, while handling huge sums of money.  I would be much more comfortable if someone like Klarman, Berkowitz, etc, were the ones taking over.  Ideally, they should just buy Fairfax and let Hamblin-Watsa manage all the money.  It would be cheaper in the long-run and the returns would be better!  Plus Prem is ok at insurance and leadership!   ;D  Cheers!  

 

Parsad you are rubbing off (is that a good thing or a bad thing  :)). I agree with just about everything you wrote plus Prem would not likely have an issue with the salary. I think Klarman and Berkowitz would.

 

I doubt Munger has significant insights into BYD. I think its similar to me and FUR or Loews or something. Its just a bet on Management and Technology working out. I also think BYD may be another Coke (another investment they cant really sell), due to all the media attention. POSCO seemed like a better deal because they can get out when they want.

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Baron,

 

I appreciate what you are saying about ivory tower vs industry innovation, but it appears BYD has developed some interesting battery technology in-house and likely have more ideas coming...At least I hope so...A few tid-bits...

 

Parent company BYD, which is the No. 1 supplier of lithium-ion batteries for cell phones, is now able to produce a high-performance ferrous-based lithium-ion battery on an industrial scale, company Vice President Lian Yubo said. Yubo said that with this battery, BYD has overcome three of the major drawbacks of lithium-ion batteries: high cost, low capacity and danger of explosion. The battery pack in the F3DM is low cost, high capacity and won't explode when exposed to fire, he said. The battery pack can be recharged using a home power plug in nine hours, the company claims. But with a special industrial charging equipment, it takes only 15 minutes to bring the capacity up to 80 percent. BYD claims that the battery pack has a life of more than 2,000 cycles, a range exceeding 320,000 miles or a life of up to 10 years, whichever comes first

 

----

 

Mr. Wang says BYD's batteries use a new technology that makes them safer than other lithium-ion models. He also says cheap abundant labor helps keeps his costs down, another factor that could sway consumers. In China, the F3DM is priced at 150,000 yuan, or $22,000, and BYD expects it to sell for a similar amount in the U.S. The Chevrolet Volt, by contrast, may be priced at $40,000 or more when it hits the market in late 2010.

 

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. The technology is similar in design to that developed by A123 Systems, a U.S. start-up battery maker led by a group of scientists from the Massachusetts Institute of Technology. GM is using their technology to power the Volt. Individuals close to A123 say the company plans to take apart BYD's battery cell to see if BYD has infringed on any of its technology. Officials at A123 declined to comment.

 

The Chinese company says it has spent more than 10 years developing its own iron-phosphate-based lithium-ion technology without infringing on others' intellectual property. "Sometimes foreigners think every Chinese company is stealing technology and design," says Luo Hongbin, a senior BYD engineer. But, he says, "we have been researching electric vehicles for so many years."

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Baron,

 

I appreciate what you are saying about ivory tower vs industry innovation, but it appears BYD has developed some interesting battery technology in-house and likely have more ideas coming...At least I hope so...A few tid-bits...

 

Parent company BYD, which is the No. 1 supplier of lithium-ion batteries for cell phones, is now able to produce a high-performance ferrous-based lithium-ion battery on an industrial scale, company Vice President Lian Yubo said. Yubo said that with this battery, BYD has overcome three of the major drawbacks of lithium-ion batteries: high cost, low capacity and danger of explosion. The battery pack in the F3DM is low cost, high capacity and won't explode when exposed to fire, he said. The battery pack can be recharged using a home power plug in nine hours, the company claims. But with a special industrial charging equipment, it takes only 15 minutes to bring the capacity up to 80 percent. BYD claims that the battery pack has a life of more than 2,000 cycles, a range exceeding 320,000 miles or a life of up to 10 years, whichever comes first

 

----

 

Mr. Wang says BYD's batteries use a new technology that makes them safer than other lithium-ion models. He also says cheap abundant labor helps keeps his costs down, another factor that could sway consumers. In China, the F3DM is priced at 150,000 yuan, or $22,000, and BYD expects it to sell for a similar amount in the U.S. The Chevrolet Volt, by contrast, may be priced at $40,000 or more when it hits the market in late 2010.

 

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. The technology is similar in design to that developed by A123 Systems, a U.S. start-up battery maker led by a group of scientists from the Massachusetts Institute of Technology. GM is using their technology to power the Volt. Individuals close to A123 say the company plans to take apart BYD's battery cell to see if BYD has infringed on any of its technology. Officials at A123 declined to comment.

 

The Chinese company says it has spent more than 10 years developing its own iron-phosphate-based lithium-ion technology without infringing on others' intellectual property. "Sometimes foreigners think every Chinese company is stealing technology and design," says Luo Hongbin, a senior BYD engineer. But, he says, "we have been researching electric vehicles for so many years."

 

I love Lithium-Ferrite batteries, even used them in one of our retails products. They are everything BYD or A123 says and will be a perfect fit for cars . I'm affraid the capacity won't be there for a 500km car tough. What I expect by breakthrough is something to bring the electric car up to par with gasoline/diesel engine.

 

BYD is an interesting growth story, no moat, but great tailwinds.

 

BeerBaron

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BYD's moat is being built right now.  This makes it less than real at the moment, but does not mean it will not have one.  If they are successful, and there are positive signs in this direction, the moat will consist of:  (1) a technological advantage, which is probably ephemeral, (2) a brand presence, which is currently weak, but should grow stronger if they can become known for quality in the way Korean car manufacturers have recently done, and the way Japanese manufacturers did in the 1980s, and, perhaps most importantly, and most lasting, (3) by being a low cost provider of critical technologies such as batteries and solar and appliances and computers.  The low cost provider advantage, achieved through more or less complete vertical integration and flexible manufacturing processes that rely on cheap labor, is already present in cell phones and traditional gas-powered cars, and should be easy to translate into appliances, notebook computers, and home appliances, and eventually to electric car batteries, vehicles and industrial and home-based solar batteries and perhaps panels. 

 

The cheap labor will get more expensive, but I suspect that's a matter of moving to third and fourth tier Chinese cities to maintain the advantage.  And opening up new factories in Brazil, Eastern Europe, Africa, and other parts of Asia (all already in process or in planning stages).  Whether they can maintain this cost advantage for the long-term is more difficult to tell.  Mediocre moat right now, but it's relevant to note that the unreliability of moats in technology companies that Buffett talks about is one reason they can make inroads into other car companies' moats quickly.  When you are the insurgent, lack of moats can be a good thing.  Google got into an industry with no moat, but has one now--- wide as hell, but shallow and can still be overcome with ever-changing technology.  If they take advantage of that and can build a brand themselves, then that is something pretty incredible.  They've done it once in cell phone components.  It's not a traditional investment, but a bet on the entrepreneur.  Like trying to catch Sam Walton in the 70s or Buffett in the 60s.  The only person I know that is good at identifying that sort of person is -- Charlie Munger.  But he might just be lucky.  Like he was with seeing what he say so early in Buffett, and the many managers they've chosen over the years.  Tough call though, no doubt.

 

In Poor Charlie's Almanack, Munger talks about a very valid investment approach that Berkshire had never done -- that of "catching the best ones when they're just getting started."  He says something to the effect that this is a promising approach if done well, and that if he were a younger man, he might try to invest this way.  Fisher-like.  I think that's all BYD is.  His $250 million, small shot at that.  High risk/ high reward, with a lot of satisfaction to two very wealthy guys trying to help someone solve some pretty incredible problems for humanity that could change things significantly within a generation.  This is trying to pick a winner, which is anathema.  Nevertheless, they've placed a bet and are supporting the guy.  That, along with the Chinese government drooling to lead in the solar and electric car industries, ameliorates a lot of the Chinese corruption and political risk to me.  So, if bought right, it's a decent, intelligent speculation type of bet with high upside and minimal downside.  After all, this company has two successful businesses and has the leading car in China right now, and three other high-growth prospect industries, and is trading at around 18 P/E right now with 25% or more growth (recent quarter notwithstanding).  Could be cheap, like Motorola when Fisher bought in early.     

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Baron,

 

I appreciate what you are saying about ivory tower vs industry innovation, but it appears BYD has developed some interesting battery technology in-house and likely have more ideas coming...At least I hope so...A few tid-bits...

 

Parent company BYD, which is the No. 1 supplier of lithium-ion batteries for cell phones, is now able to produce a high-performance ferrous-based lithium-ion battery on an industrial scale, company Vice President Lian Yubo said. Yubo said that with this battery, BYD has overcome three of the major drawbacks of lithium-ion batteries: high cost, low capacity and danger of explosion. The battery pack in the F3DM is low cost, high capacity and won't explode when exposed to fire, he said. The battery pack can be recharged using a home power plug in nine hours, the company claims. But with a special industrial charging equipment, it takes only 15 minutes to bring the capacity up to 80 percent. BYD claims that the battery pack has a life of more than 2,000 cycles, a range exceeding 320,000 miles or a life of up to 10 years, whichever comes first

 

----

 

Mr. Wang says BYD's batteries use a new technology that makes them safer than other lithium-ion models. He also says cheap abundant labor helps keeps his costs down, another factor that could sway consumers. In China, the F3DM is priced at 150,000 yuan, or $22,000, and BYD expects it to sell for a similar amount in the U.S. The Chevrolet Volt, by contrast, may be priced at $40,000 or more when it hits the market in late 2010.

 

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. The technology is similar in design to that developed by A123 Systems, a U.S. start-up battery maker led by a group of scientists from the Massachusetts Institute of Technology. GM is using their technology to power the Volt. Individuals close to A123 say the company plans to take apart BYD's battery cell to see if BYD has infringed on any of its technology. Officials at A123 declined to comment.

 

The Chinese company says it has spent more than 10 years developing its own iron-phosphate-based lithium-ion technology without infringing on others' intellectual property. "Sometimes foreigners think every Chinese company is stealing technology and design," says Luo Hongbin, a senior BYD engineer. But, he says, "we have been researching electric vehicles for so many years."

 

I love Lithium-Ferrite batteries, even used them in one of our retails products. They are everything BYD or A123 says and will be a perfect fit for cars . I'm affraid the capacity won't be there for a 500km car tough. What I expect by breakthrough is something to bring the electric car up to par with gasoline/diesel engine.

 

BYD is an interesting growth story, no moat, but great tailwinds.

 

BeerBaron

 

 

Is the lithium-ferrite battery not different than the lithium-ion iron phosphate technology?  Can lithium-ferrite batteries be recharged?

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The batteries Mr. Wang is referring could be called by the following names:

 

LiFe

Lithium Ferrite

LiFePO4

Lithium Ferrite Phosphate

Lithium-Ion Ferrite

 

The thing you need to remember is that they are all talking about Ferrite/Iron electrodes. There a huge number of players in the LiFe batteries, I can find 20 Chinese manufacturers of those batteries. For some reasons the patents seem to be easily bypassed, it's probably because a small change in the formulation does constitute a patent infringing.

 

There are 3 general types of rechargeable lithium on the market:

Li-Ion

Li-Polymer

LiFe

 

LiFe is the way to go for the consumer product market unless size is critical. LiFe batteries do not explode making product manufacturer more inclined to use them. They have more charge cycles then the other 2 technologies. They are a bit cheaper then the other two. They can sustain a heavier electrical load then their counterparts.

 

BeerBaron

 

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