Can Buffett's Boondoggle Save Itself?

BYD, a leading Chinese maker of rechargeable batteries that pushed into the auto business several years ago, moved into the global spotlight when it was announced in 2008 that no less than Warren Buffett's Berkshire Hathaway (NYS: BRK.A) (NYS: BRK.B) had made a significant investment in the company.

That investment, driven by Berkshire Vice Chairman Charlie Munger, was out of character for the Omaha firm, which famously focuses on basic industries and has long eschewed technology-based bets. Alas, that investment hasn't worked out quite the way the old masters planned, with BYD's shares in Hong Kong falling from a peak over HK$80 to a recent low near HK$10.

Berkshire's investment is still in the black -- it paid HK$8 for its shares -- but it's not a promising trend. But BYD's share price has moved up a bit in recent days to around HK$15, with news that the company had opened its long-promised North American headquarters in Los Angeles -- and suggestions that the company's focus may be shifting.

A difficult ride in the Chinese auto market
After BYD'S F3 compact became China's best-selling car in 2009, BYD was hailed as the rising star of China's still-emerging domestic auto industry. But sales began falling in 2010, and the slide has continued, with profits down 89% through the first half of 2011. Sales are down 15% so far this year, and BYD is now ranked eighth among Chinese automakers in terms of sales volume. That's far behind heavyweights like Shanghai's SAIC, which boasts vast joint ventures with General Motors (NYS: GM) and Volkswagen as well as a sizeable market presence with its own brand, Roewe.

At first, BYD's cars had some advantages over both domestic and global competitors - they were inexpensive, widely-available, and well-marketed. But they were also low-quality products, cheaply-made and based on designs crudely copied from those of global giants like Toyota (NYS: TM) . A Wikileaks document dump brought some of these problems to light earlier this year, with U.S. officials expressing concern about likely (and blatant) patent infringements, shoddy assembly quality, and potentially misleading advertising claims about safety.

Worse for BYD's reputation in the West, its much-touted plans to sell an all-electric car -- the E6 -- in the U.S. suffered a long series of delays and setbacks. Originally set to debut in 2010, BYD now says that sales of the E6 to consumers won't start for at least 18 more months -- a delay the company blames on the U.S.'s lack of a recharging infrastructure for electric cars.

But intriguingly, BYD appears to be shifting gears.

Is a successful reinvention possible?
For now, BYD's new Los Angeles office will focus its automotive activities on fleet sales -- the Los Angeles Housing Authority has already leased 10 of BYD's F3DM hybrids, and housing inspectors reportedly like the vehicles. BYD also offers a 40-passenger electric bus, one of which has already gone into service at Los Angeles International Airport as part of a partnership between BYD and Hertz Global Holdings (NYS: HTZ) .

So far, though, fleet sales are an insignificant source of revenue for BYD in the United States. Most of its sales here have come from non-automotive lines of business, especially its solar panels. The company has signed deals to provide "private label" solar panels to several American firms, including Berkshire-owned building-products maker Johns Manville, and recently announced a major deal to provide a New York firm with solar panels under the BYD brand, a first for the company here.

Those kinds of deals will keep the lights on in the company's shiny new L.A. headquarters, but they're a long way from the massive push into the American auto market that BYD promised a couple of years ago, one phase of its plan to be the world's largest automaker by 2025. BYD's electric cars were going to spearhead that push, and they still might -- but with everyone from Tesla Motors (NAS: TSLA) to Ford (NYS: F) bringing strong new entries into the electric-car space, the company's prospects for success here now look decidedly muted.

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At the time thisarticle was published Fool contributorJohn Rosevearowns shares of Ford and General Motors. You can follow his auto-related musings on Twitter, where he goes by@jrosevear. The Motley Fool owns shares of Ford, Hertz Global Holdings, and Berkshire Hathaway.Motley Fool newsletter serviceshave recommended buying shares of General Motors, Ford, and Berkshire Hathaway. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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