If you think the American auto industry is in trouble now, just wait until the Chinese learn how to make great cars. And if you doubt that they will learn, check out my cover story about BYD in the new issue of FORTUNE, headed to subscribers and newsstands this week.


BYD is an amazing company. It was started by a chemist and government researcher named Wang Chuan-Fu in 1995 (same year as Yahoo) to make rechargeable batteries, which it learned to do very well. Within a few years, BYD's batteries were cheaper and just as reliable as those made by industry giants Sony and Sanyo. Then Mr. Wang, as he’s known, got into the automobile business by buying a failing state-owned carmaker. BYD's conventional gas-powered cars are selling well these days in China, and his electric plug-in electric model looks like it will come to market with a longer range and a lower sticker price than the new Toyota Prius much-hyped Chevy Volt. As if that were not enough, I'm hearing now that BYD is on the verge of a breakthrough in the solar power business and that the company has big plans to make rechargeable batteries at a utility scale to store energy from intermittent, renewable sources like wind and solar. Today, BYD employes 130,000 people in 11 factories, either in China and one each in India, Hungary and Rumania.

That track record -- and that potential -- is what persuaded Warren Buffett's company, Berkshire Hathaway, to buy 10 percent of BYD last fall for $230 million. This could turn out to be one of Buffett's very best deals. Here's what Charlie Munger, Buffett’s longtime friend and the vice chairman of Berkshire, told me about Mr. Wang:
"This guy is a combination of Thomas Edison and Jack Welch -- something like Edison in solving technical problems, and something like Welch in getting done what he needs to do. I’ve never seen anything like it."
Munger, by the way, is a famous curmudgeon, who usually comes up with all kinds of reasons why Buffett's latest investment idea won't pan out. Not so this time around.

The other key player in the Berkshire-BYD deal is David Sokol, the chairman of MidAmerican Energy, a utility company owned by Berkshire and an interesting guy in his own right. (I'm going to blog about Sokol later this week -- he is a big believer in renewable energy.) Sokol did most of the due diligence on BYD for Berkshire, and he now sits on the BYD board. He, too, was very impressed with Mr. Wang.

Here are three reasons why I think BYD will become an important company in the not too distant future.
1. BYD’s engineering prowess. Depending on whether or not you count trainees, BYD employs between 10,000 and 17,000 engineers and it's constantly recruiting the best graduates from China's engineering and technical schools. The Shenzhen manufacturing region, where the company is headquartered, is known for cheap unskilled labor, but BYD's competitive advantage derives from its cheap skilled labor. "They are the top of the top," Mr. Wang told me, when I visited BYD last year. This is a company that has already invented new processes (the way it makes batteries) and products (the battery in its electric car) and it is focused on innovation. Innovation appears to be Mr. Wang's personal passion.
2. BYD’s forward-thinking management. Sokol is a student of management—he wrote a little book on the subject called "Pleased But Not Satisfied" -- and he was impressed with Mr. Wang's thoughtful and purposeful approach to building his company. So was I. Not many entrepreneurs evolve into effective leaders of global companies with 100,000 or more employees. This fact didn't make the story, but I was interested to learn that BYD is working with the Hong Kong outpost of Business for Social Responsibility. Unlike some of its domestic competitors, BYD wants to adopt best practices in health and safety as well as find ways to empower its people to improve the company. Jeremy Prepscius, the Asia director for BSR, told me: "What makes them unique is that you have a Chinese company, a big one, that recognizes the value of continuing to evolve its internal culture, and recognizes that it is not just a top-down command-and-control culture…They are somewhere between an old state-owned Chinese enterprise and a modern Japanese company like Toyota." Sokol told me that Mr. Wang seeks his ideas and criticism whenever they meet. Perhaps surprisingly, many CEOs have the confidence to act that way. On the downside, it's hard to know whether BYD has a strong bench of managers behind Mr. Wang.
3. China's commitment to clean energy. Much as I admire the Obama administration's energy and environment team, there's no way that the U.S. government is going to help U.S. car companies and battery makers as much as the Chinese government is going to help BYD. As Keith Bradsher of The New York Times reported in a page-one story earlier this month:
"Chinese leaders have adopted a plan aimed at turning the country into one of the leading producers of hybrid and all-electric vehicles within three years, and making it the world leader in electric cars and buses after that."
The government will make direct grants to automakers (as we do, of course) and also provide "subsidies of up to $8,800 are being offered to taxi fleets and local government agencies in 13 Chinese cities for each hybrid or all-electric vehicle they purchase."

Finally, there's a fascinating footnote to this story, and it involves a man named Li Lu, who was born in China in 1966, the same year as Mr. Wang. When I began reporting the story, I wondered how Buffett and Munger had become aware of BYD. That question led me to Li Lu, who runs an investment firm, in which Munger is an investor, based in Pasadena that owns about 2.5 percent of BYD. He was the link between Berkshire and BYD.

Li Lu, it turns out, also was a leader of the pro-democracy movement that organized the mass student protests in Tiananmen Square in 1989 -- 20 years ago next month. He fled China after hundreds of demonstrators were killed and appeared on China's "Twenty-one Most Wanted List."

Escaping to New York, Li Lu was embraced by the human rights community and wrote a memoir called "Moving the Mountain" that reads like a movie. His well-educated parents were forced into labor camps during the Cultural Revolution and, as a 10-year-old-boy, he barely survived an earthquake that killed 250,000 in the city of Tangshin.

During the 1990s, Li Lu earned three degrees in six years from Columbia -- a B.A. in economics, a law degree and an M.B.A. He worked for Allen & Co. and at Donaldson, Lufkin & Jenrette before starting his investment fund. When David Sokol first flew to China to visit BYD, he stopped at LAX to have dinner with Li Lu, after which they traveled together to Hong Kong. Li Lu is still not permitted to travel freely to China.

Li Lu politely declined to speak with me for my story, telling me that some people in China are still unhappy about his role in the Tiananmen protests. Mr. Wang is not among them. "That's past history," he said. "Today, Mr Li and I share the belief that the best way to help China move forward is to make BYD a world-class company."

Li Lu has agreed to come to FORTUNE’s Brainstorm Green conference next week to talk about BYD. I'm eager to meet him and learn more about this remarkable company. You can read my BYD story here.