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Berkshire Stake Brings Confidence and Credibility to Top China Electric Carmaker BYD

By , Money Morning •

By Jason Simpkins
Associate Editor

In a move that underscores the potential of China's auto market - as well as the viability of so-called "green" technology - investing guru Warren Buffett's MidAmerican Energy Holding Co. will pay roughly $230 million for a 10% stake in BYD Co. Ltd., a Chinese producer of both cars and specialized batteries.

MidAmerican is 87.4% owned by Buffett's Berkshire Hathaway Inc. (BRK.A, BRK.B), which just last week paid $5 billion for a stake in Goldman Sachs Group Inc. (GS). Buffett's vote of confidence for Goldman was enough to lure skeptical investors back into the treacherous financial services sector and boosted Goldman Sachs' shares by nearly 10% over the two days following the announcement.

Similarly, shares of BYD (Build Your Dreams) shot up 42% in Hong Kong Monday following MidAmerican's decision. BYD's stock had tumbled 56% since hitting its 52-week high last October.

The purchase also marks Buffett's first large investment in China following the sale of Berkshire's stake in PetroChina Co. Ltd. (ADR: PTR) last year. After cautioning investors against the Chinese stock market at a time when it was just beginning to peak, Berkshire sold 28 million shares of PetroChina, netting a profit of about $3.5 billion from what had been a $500 million investment in 2003. PetroChina has lost roughly half its market value since Buffet divested Berkshire's stake.

Buffett now appears ready to test the fast-growing Chinese market again, and a stake in BYD opens up brand new opportunities for MidAmerican, a diversified energy-products company, and for BYD, a builder of electric cars that has some ambitious objectives.

The global auto industry is just one worldwide business sector pushing to capitalize on China's tremendous long-term promise. China's auto market is expected to advance at an 18% clip this year. The U.S. auto market is in the midst of an 11-month slump, its longest since a 14-month slump that took place in 1991. New car sales are expected to fall 17% this year, Bloomberg News reported.

The Shenzhen-based BYD is actually a battery manufacturer that plans to advance its business by selling plug-in electric cars in China by the end of this year. It intends to import those cars into the U.S. market by 2010.

BYD's lithium-iron phosphate batteries give the company's F6DM, or Dual Mode, mid-sized sedan the ability to travel 62 miles in all-electric mode before traveling an additional 205 miles on gas power. BYD's F3DM, a smaller and less expensive model, reportedly has a 100-mile range in electric-only mode. By comparison, the recently unveiled General Motors Corp. (GM) Chevrolet Volt can go only about 40 miles before it needs the gasoline engine.

MidAmerican Chairman David Sokol told The New York Times that his company was impressed by BYD's ability to produce electric cars that have a range of almost 190 miles on a single charge, and can be 80% recharged in just 15 minutes.

Sokol also pointed out that plug-in electric cars may be more adaptable to the United States market than cars that run on hydrogen or ethanol because there is already existing infrastructure to supply electricity for recharging almost anywhere, whereas hydrogen or ethanol stations and supply routes would have to be established across the country.

"We can drop these charging stations anywhere," Sokol told BusinessWeek. "If you want a rapid charging one in your garage it will cost between $2,500 and $3,000 to install."

The annual energy cost to run a BYD-made electric car, based on 12,000 miles of driving per year, would be about $400, Sokol said. That compares to $2,400 for a traditional gas-powered car with fuel priced at $4 per gallon. Also, the energy consumed by an electric car in the U.S., assuming the national average of 51% of power supplied by coal, would produce half as much carbon dioxide as a gas-powered automobile.

BYD sold 85,104 cars in the first eight months of the year, a 35% increase from 2007. The company, which is widely known as a leading producer of cell-phone batteries, estimates that auto sales will make up 30% of its 2008 revenue, up slightly from 25% in 2007. And with Buffett's help, BYD may see even faster growth, as the Berkshire name brings newfound credibility to a relatively unknown carmaker.

"Warren Buffett is very well respected globally as well as in China, so as an investor he will help us build our brand," BYD Chairman and Chief Executive Officer Wang Chuanfu told BusinessWeek. 

Wang also said that Buffett's involvement could accelerate the BYD's transition to the U.S. market, and noted that MidAmerican Energy could be a big part of his company's future plans.

"Developing our electric vehicles requires a lot of energy, which MidAmerican Energy can supply us in the future," Wang said.

Michael Dunne, managing director of J.D. Power China, recently called the tie-up the "most exciting news in China's auto history."

Berkshire is a "formidable investor, which brings confidence to the picture," Dunne said. "BYD can say ‘Yeah we can do this.'"

[Editor's note: In his newest best-seller, "A Bull in China," investing guru Jim Rogers details China's long-term profit promise and provides detailed research on dozens of China's top stocks. To find out about a Money Morning report that details the once-in-a-lifetime profit plays available in China - an offer that includes a free copy of Rogers' book, "A Bull in China" - please click here.]

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