Everyone is feverishly awaiting the future of the auto industry. Will electric vehicles take off? Or are we looking at another 25 years of the internal-combustion engine? There is a sea change coming for the auto industry, but today's popular names might not be the best way to drive your portfolio. One Buffett-backed company calls itself an automaker, but it's quietly becoming a major energy producer.
Rocky Road, anyone?
BYD (OTC: BYDDY.PK), the once superhyped stock that was the darling of Buffett's Berkshire Hathaway (NYS: BRK.B) portfolio in 2009, fell victim to a series of misfires and setbacks, sending the company's profit cascading down more than 60% for 2011. When WikiLeaks released documents suggesting the automaker was stealing competitors' technology and Reuters followed up with a scathing article about the company's integrity, things seemed doomed for the company that once graced the cover of Fortune.
Similar to legendary hedge fund manager John Paulson, my portfolio was once duped by fraud-laden Chinese companies, but this happens to be one of the few Chinese firms I still trust.
Not a new flavor of Honest Tea
"A Chinese blend of Jack Welch and Thomas Edison." That's how Charlie Munger describes Wang Chuan-Fu, the CEO of BYD.
Chuan-Fu is one of the core reasons I'm still behind the beleaguered and badgered BYD. The man is a brilliant engineer, a frugal spender, and a dedicated employee of BYD. During a visit to BYD's California operations, the CEO tried to disassemble the seat of a Toyota he was being driven around in. Of course, that cute story doesn't mean he will lead the company out of troubled waters, but it says something to his character as a true scientist. Chuan-Fu is also known to live in employee-owned engineers' housing, take a salary that's modest for the head of a multibillion-dollar company, and redistribute his stock options to employees.
Humility is a rare quality in today's billionaire executives, but BYD's leader is not afraid to recognize failures. Chuan-Fu admitted BYD had its shortcomings over the past two years. He agreed that its quality suffered, it was outpaced by the competition, and its sales network was not operating optimally. But being the supreme leader he is, Chuan-Fu has spent the past year implementing structural changes such as a reduction in dealer count and sales personnel to help streamline operations.
One of the biggest reasons I like Chuan-Fu is that he rejected Warren Buffett. When Buffett first approached BYD to take a 25% stake in the company, Wang said "no, thanks." While he would love to be in business with the King of Capitalism, Chuan-Fu would not consider selling more than a 10% stake. Like Buffett, I want to be in business with someone who doesn't want to give me the keys to the shop.
BYD's appeal goes beyond Chuan-Fu, though. The company does not confine itself to one line of business. It's part automaker, part tech company, and part energy producer.
Wanted: energy company moonlighting as an auto manufacturer
BYD gets most of its attention from the media-friendly auto business. The company has just signed a deal with city of Shenzhen to supply 1,500 electric buses and taxis -- a feat it's trying to replicate with Hong Kong in the near future.
But as we all know, the EV space is a tricky one to invest in. Tesla (NAS: TSLA) , for example, is currently taking dump-truck loads of cash and David Copperfield-ing it into oblivion. Ever-eccentric Elon Musk and his company have partnerships with Toyota and Daimler as alternative revenue streams, but not enough to keep up with its efficient cash-burning core business. General Motors' (NYS: GM) Chevy Volt has been out for just a little while now, and it's already frozen production.
Everyone seems to want EVs to make it, but these pure auto companies are stumbling harder than the Charlotte Bobcats. BYD, on the other hand, has a more stable element to it that has the potential to smooth out the rough ride. In short, BYD is an energy producer -- and the market is failing to price this in.
BYD is a battery maker -- a cheap, effective, environmentally friendly battery maker. In fact, Chuan-Fu once drank the battery fluid in front of Buffett minion David Sokol to prove its 100% recyclable, nontoxic nature. The company began by reverse-engineering competitors' batteries and then improving on their design. The result is a unique lithium ion battery that does not use cobalt -- the cause for the Chevy Volt's incendiary tendencies -- and has a greater tolerance for manufacturing errors, which reduces the cost of production and allows for a more flexible product.
The company has been making electric batteries for much longer than GM or Tesla and arguably has one of the best products out there to use in its own vehicles and sell to competitors, such as Daimler.
BYD is also heavily involved in the solar business. The company produced around 1 gigawatt of solar panels last year and is looking to increase that number fivefold. It differentiates itself from the hordes of other solar companies with a focus on energy storage. Recently, BYD finished the world's largest battery energy storage station -- a $500 million wind and solar facility. The giant plant, built in conjunction with the State Grid Corporation of China, is one of a kind. It creates and stores renewable energy, which can efficiently transfer energy as needed to the city power grid.
A long road ahead to a pot of gold
BYD, like many high-tech companies, has made mistakes -- which are reflected in the stock price. If it were just another EV maker, I would run in the other direction. But Chuan-Fu and his company have a much wider range of vision. They see the EV's as the tip of the iceberg, with an energy powerhouse lurking beneath the surface.
Over the next few years, watch for that original growth to resume and for this company to become a major international energy producer and automaker.
The company is in a rebuilding period, and the market isn't too interested. And that is precisely why I am interested. If you like the idea of investing in emerging markets but aren't sold on BYD, there are other U.S.-based companies you should consider. You can learn all about 3 American Companies Set to Dominate the World. Enjoy, and Fool on!
At the time thisarticle was published Fool contributorMichael Lewisowns none of the stocks mentioned in the story above. The Motley Fool owns shares of Ford and Berkshire Hathaway. Motley Fool newsletter services have recommended buying shares of General Motors, Tesla Motors, Ford, and Berkshire Hathaway and have recommended creating a synthetic long position in Ford. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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