With only two days before the unveiling of a host of Electric Cars at the Paris Auto Show, exactly one week since the watershed EDF take-over of British Energy, 3 weeks after the revised US Energy Bill, and on the eve of Congress' agreement to fund Detroit with $25bn in low-cost loans, the deity of the investment arena - Warren Buffett - buys into the Chinese conglomerate BYD. A 'future-forward', vertically integrated Auto-maker with core competencies in the high-value arenas of Electronic Equipment and critically Battery Packs. Timely indeed Mr Buffett!
His recent $5bn stake in Goldman Sachs (with accordant warrants and secured high yield dividends) could well be seen as providing the future funding access, indeed at this point "vital liquidity" for many of his recent & new acquisition ventures. Those ventures span sectors from rail-roads to nuclear energy to now finance (Goldman's investment arm able to effectively fund itself from the retail deposits pool and PE funds) and now the promise of eco-cars.
With the US caught between the jaws of economic recession and eco-ideals, and a time of temporary mass-migration from private to public transport, clean energy diktats and interbank & business lending interest-rate hikes, his latter-day spending spree is looking very very considered...even more so at today's undervalued mark-to-market enterprise prices.
Relative to BYD, Chinese stocks have been heavily depressed for some time, down typically 56% YoY, but Berkshire Hathaway's share-buys in BYD sent the stock rocketing 40% almost instantaneously - so is the confidence factor injected. Of course that is not reflective of most Chinese stock focus, ex-state utilities like Chinese Railways and other 'defensives' attracting what cautious domestic and, now foreign, money there has been of late.
The investment community has been relatively cautious of the 'promise' set out by Green Tech to date, and whilst there has been a growing band of brave PE funds directed at the Green sector they have had to digest and discern between the commercial realities of a plethora of scientifically plausible yet unproven options at varying states of development - from Algae Farms producing Bio-fuels to 'Home-brewed' hydrogen stacks to Nano-technology promising to radically alter the functionality and so investment feasibility of advanced automotive battery packs.
Of course Berkshire Hathaway's general remit is very different to the philosophies of FFF-incubators, VC start-ups and stage-2 PE developers. Buffett and his trust-worthy close cohorts seek risk-aversion as a fundamental pillar of BH's massive, highly followed and very influential funds base that serve the Average Joe & Joanne 'Buffetteers' that span the USA, from Nebraska to New Mexico to New York to Newport Beach..... the latter of these obviously being the home-towns of the sexy end of funds management. Buffetteers don't go for sexy, they go for solid...especially so now.
So why a little known, veritable minnow, Automaker over in China?
Because whilst the majority of automakers are recoiling from the mix of very depressed markets and necessary heavy capital expenditure to stay conventionally positioned in the traditional game, BYD - although tiny compared to the likes of its peers SAIC, FAW, Geely etc has from the beginning set-out to operate within the auto-arena from a better placed position.
Unlike traditional auto-companies that have grown in the Ford-esque mould embroiled in standard operating models that include a massive 'dead-weight' of crucial but low-value engineering and production activity, BYD Auto was essentially created to 'run-light' operating against the grain.
Instead, a sister division to a large Electronics and Battery concern, a conglomerate that sweats high-value industrial and consumable assets, which have synergistic transfer rationale into essentially bought-in automotive platforms and assemblies. BYD execs and their backers hope that the bringing together of bought-in 0.5 Tier access ability, bought-in styling from leading design houses and in-house competencies can create a new business-model. One that achieves greatly improved unit margins and cash-flow (a sin que non of today's large investor) via reduced fixed costs and controlled variable costs and a philosophy that seeks to merge best practice from Auto and IT sectors...almost the ideology of the Italian Carrozzeria meets Dell meets Apple!
As a high value-adding commercial structure, BYD appears to demonstrate much needed advanced thinking for the auto-sector. Whilst the West is trying to transform its near century-old industry into something that can leapfrog into the 21st century (as Carlos Ghosn would like), the Chinese have had the opportunity to start from effectively a clean slate. The 'authoritarian capitalism' of the CCP able to - since 2004 and its auto-industry review looking at 2010 - create a new multi-tiered sector that meshes with the needs and aspirations of other industrial sectors; in BYD's case IT, Electronics & Power-Packs.
Ironically for all the West's derision of 'copy-cat' cars and poor product quality, those in the know aren't focused on the product - that will improve in due course with world-class project process adoptions. Those in the know are far more focused upon today's 'technology web' and orchestration of resources to create valuable commercial enterprises. At a time when mainstream auto-producers in the US are loosing per unit, the mainstream Europeans make 3%, premium Europeans reach 6.5-8% all senior sector, banking and investment eyes look to the new industrial platforms being nurtured in China, for latter-day adoption.
That's why Warren Buffett bought into BYD. China today, the world tomorrow?!
