Friday, May 28, 2010

When Warren Buffett invests in a technology innovation: story of BYD, China’s innovative car company

I got interested in BYD when I read about Reva promoter & CEO Chetan Maini mentioning about Warren Buffett’s investment in an EV company. Maini recently sold Reva to M&M because he sees market is getting ready for electric cars and Reva needed a father with deeper pockets and farther reach. I thought, “Why would Buffett, who is so averse to investing in technology innovation, invest in an electric car company? What is so special about this company that it has managed to do to Buffett what Intel, Microsoft and Google couldn’t do?” As I started browsing through the Net, a few answers started presenting themselves. Let’s start with the company: BYD.

Interestingly, BYD was started around the same time as Reva Motors, in 1995. Reva has put around 3500 cars on the road so far since 2001. In contrast, BYD’s F3, a 4-door compact car that retails for about $9300, has sold 448,397 units in 2009 alone (just for comparison Nano has put 35000 cars on the road since July 2009). But BYD didn’t start as a car maker. Wang Chuan-Fu, a chemist and a government researcher, started BYD in Shenzhen to manufacture rechargeable batteries to compete with imports from Sony and Sanyo. He raised $300,000 from relatives and rented 2000 square meters of space. By 2000, BYD had become one of the world’s largest makers of cellphone batteries. BYD’s customers included Nokia, Motorola, Sony Ericosson and Samsung (was anyone else there?). Today BYD makes about 80% of Motorola's RAZR handsets, as well as batteries for iPods and iPhones and low-cost computers. Revenue, which has grown by about 45% annually during the past five years, has reached $4 billion in 2008.

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 2009 BYD’s F3 became the bestselling sedan in China, topping well-known brands like the Volkswagen Jetta and Toyota Corolla. Today BYD employs 130,000 people in 11 factories, eight in China and one each in India, Hungary, and Romania. Essentially Wang is doing to electric vehicles what Henry Ford did to automobiles – making it a product affordable to mass market.

Let’s come back to Buffett. Well, it turns out that the investment idea didn’t originate with Buffett. So it’s not as though Buffett suddenly started understanding technology at the ripe age of 78. The idea came from Buffett’s friend and longtime partner 85-year old Charlie Munger. Apparently Munger seems to have sold the man behind technology harder. Munger says, “This guy [Wang] is a combination of Thomas Edison and Jack Welch”. A master problem solver and a master executor – a deadly combination. Buffett sent another trusted partner David Sokol, chairman of a Berkshire-owned utility company called MidAmerican Energy, to travel to China and take a closer look at BYD.

“I don't know a thing about cellphones or batteries," Buffett admits. "And I don't know how cars work." But, he adds, "Charlie Munger and Dave Sokol are smart guys, and they do understand it. And there's no question that what's been accomplished since 1995 at BYD is extraordinary." BYD investment has already given Buffett’s Berkshire a 500% returns in less than 1 year. Yesterday Daimler announced its partnership with BYD and an investment of $88 million for product development. In 2010, BusinessWeek ranked BYD the 8th most innovative company in the world, ahead of Ford; Volkswagen and BMW.

I guess Bill Gates didn’t sell hard enough when he suggested Buffett to invest in Microsoft and Intel back in 1991. Did I mention that Buffett is planning to visit India next March?

Sources: Warren Buffett takes charge from, Buffett’s BYD soars by Lauren Cooper, BYD CEO Wang’s interview on YouTube.

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