An ordinary American investor would probably not put money into a foreign electric car start-up suspected of openly copying competitors, let alone one whose franchised dealers occasionally put other companies’ logos on its own vehicles.
At the depths of the financial crisis, Buffett put USD 232 million into BYD Co. Ltd., taking a 9.9% stake in the nascent Chinese auto business. Lest there be any doubt of the relationship, BYD showrooms are adorned with giant pictures of Buffett shaking hands with Chairman Wang Chuanfu.
More than any winning presentation at the Detroit Auto Show, more than any statistics or innovations, Buffett’s imprimatur put BYD on the map, instantly making it the most serious Chinese contender among those seeking to sell an all-electric car in the US market.
But diplomatic cables revealed by WikiLeaks and provided to Reuters by a third party, as well as interviews with industry consultants and executives who have examined the company’s operations, raise a number of questions about the fledgling carmaker. Among other things, they describe a record of stealing designs from rivals, using those savings to undercut competitors on price and scrimping on safety.
“While BYD has certainly achieved a measure of success based on a business approach of copying and then modifying car designs just enough to convince Chinese courts that the company has not infringed on patents, it is far less certain that foreign courts will be as sympathetic,” Guangzhou Consul-General Brian Goldbeck wrote in an October 30, 2009 cable that was unclassified but marked for US government eyes only. It was submitted just days after BYD shares hit a new peak, driven by Buffett’s backing.
BYD’s questionable behavior went beyond copying designs, though. According to the consulate, the company also sold some vehicles almost at cost to boost its market share and may have advertised safety ratings for one model it did not have.
The scorching assessment of BYD by US officials carried the title, “BYD seeks to ‘Build Your Dreams‘ — based on Someone Else’s Designs.” Nothing in the consulate’s cable describes the motivation for the secret review of the Chinese upstart, although it notes that Buffett’s bet had put BYD in the spotlight and allowed it to be seen as “one of the most promising carmakers of the future.” The State Department did not respond to request for comment on the cables.
It is true that analysts view some of BYD’s behavior as broadly typical of the Chinese auto industry, particularly the meticulous copying of better-known international cars. Yet analysts and industry experts in the United States say even in that context, BYD stands out, and there are questions about whether the company’s much-ballyhooed — and oft-delayed — e6 all-electric car will ever make it to the US market.
Micheal Austin, the vice president of BYD America, defended the company, its track record and the promise of its battery technology that made Buffett a believer.
He said in an email: “So where is the true technology and intellectual property? — is it in wrapping of piece of sheet-metal around a car? or is the genius in creating a vehicle with ZERO emissions? Zero, Nada, Zip — no noise, no smell, no smog. A vehicle that does no harm to the environment and can sell in Shenzhen China for USD 10,800 (after Chinese National and local incentives) — that is genius!”
“No one can match the technology in that. Should ‘they’ be worried, yes. Will ‘they’ complain that ‘Chinese’ cars follow World design trends and follow design best practices? Yes,” Austin said in the email.
“BYD’s business and intellectual property practices in China, as well all places of the World, are compliant with local and international requirements and regulations. If there are factual complaints from (other automakers), we work hard to resolve them,” he said.
Buffett did not respond to a request for comment made via his assistant, who handles his press inquiries. A spokeswoman for Buffett’s MidAmerican Energy unit, which controls the investment, said “we do not speak or comment on behalf of BYD.”
Buffett owns 225 million shares of BYD, which were worth USD 1.18 billion on December 31, 2010, according to his late-February annual letter to shareholders.
On paper that looks good, as it would mean his initial investment appreciated five-fold in just over two years. The reality, however, is far different. BYD’s value on Berkshire’s books was just under USD 2 billion at the end of 2009, meaning he’d lost 40 percent on his stake in what was a very strong year for markets otherwise.
Buffett made no serious mention of BYD in this year’s letter, other than to note the company would have a chance to show off at the April annual meeting of his holding company Berkshire Hathaway. The 2009 letter gives only passing mention of the “amazing Chinese company” and its products.
For Buffett it was an unusual investment. In an April 2009 interview with Fortune magazine, Buffett said his partner Charlie Munger talked him into the deal on the strength of his impression of BYD Chairman Wang, whom Munger described as a combination of Thomas Edison and Jack Welch.
Sokol is generally held to be one of the four candidates to succeed Buffett as Berkshire’s chief executive, and most consider him the frontrunner. And Sokol has also put his face prominently on the BYD deal, meeting with the industry and the press at the 2009 Detroit Auto Show to tout BYD’s electric cars as the wave of the future.
The company’s appearance on the main floor of the Detroit auto show was the first by a Chinese automaker and came at a time when Detroit automakers GM and Chrysler were sputtering on government life support.
“Right now, we’re just limited by resources,” Wang said in January 2009 as he stood outside BYD’s red-and-white themed booth illuminated with the company’s ambitious motto: “Build Your Dreams.”
Wang has certainly built his. A former government researcher, he founded BYD in 1995 with USD 300,000 of money borrowed from a family friend, and within five years was the world’s largest maker of cell phone batteries. Once China’s richest man, Wang’s goal is no less than becoming the world’s largest automaker.
With that angle in mind, Wang courted Sokol, knowing that he had Buffett’s trust.
“I don’t know a thing about cellphones or batteries,” Buffett admitted to Fortune in the 2009 interview. “And I don’t know how cars work. Charlie Munger and Dave Sokol are smart guys, and they do understand it.”
Sokol’s attachment to the deal makes sense, given MidAmerican’s commitments to renewable energy and the touted promise of BYD’s battery technology, as first seen in its F3DM plug-in hybrid with range-extending gas engine.
BYD’s pitch for its battery technology was so strong that the consulate, despite its concerns about the company’s behavior, was willing to consider the possibility the battery itself was the real deal.
“The answer to climate change may be as simple as the chemical formula of a lithium iron phosphate battery, according to one ambitious south China company,” consular section chief Michael Jacobsen said in a Jan. 2010 note to the State Department.
The only catch is that the batteries have to work.
“During a recent visit to BYD headquarters in Shenzhen, a top manager told (an embassy official) that sales of the F3DM had been slow, with only around 100 vehicles sold to date, mostly to the municipal government,” the cable said, with an added note: “Media reports speculate that slow sales may also be an indication that the F3DM’s battery performance falls considerably short of expectations.”
If the batteries are not all they are cracked up to be, it raises a question about the fundamental point of Buffett’s investment.
“Whether or not they can manufacture their own cars isn’t relevant to us, because we see their real expertise is in the development of the batteries, the motors, the control systems for that,” Sokol told Reuters in January 2009.
“That’s not to say that they can’t make a nice car, but a lot of people can make a nice car. The breakthrough from our perspective is the battery technology.”
Americans curious to see for themselves have only one option at the moment: a fleet of 10 F3DMs the Housing Authority of the City of Los Angeles signed a deal for last year. The arrangement is not a formal lease, but a cost-sharing program that BYD’s Austin estimated cost the authority somewhere between USD 300 and USD 400 per car per month.
The housing authority did not return multiple calls for comment over a period of days. But early reviews were less than positive.
“It would be easy to chuckle at the F3DM’s minor flaws — the wobbly storage compartment between the front seats, subpar floor mats, squishy handling. But the build quality and materials seem perfectly adequate for utility-oriented Americans,” the New York Times wrote on February 20 after a test drive.
The paper’s assessment of the F3DM’s dual-mode engine, and particularly the process of switching from electric power to gas, was even tougher.
“The steering wheel vibrates. The dashboard hums. You feel the vibration in your molars.”
BYD’s Austin told Reuters in a follow-up interview the Times story was actually useful, in that it helped him make the case to engineers in China that BYD needed to do a better job of dampening noise for the US market.