Warren Buffet's China Bet Pays Off

Warren Buffet's China Bet Pays Off

Warren Buffett is a busy man, and never more so than during Berkshire Hathaway's annual meetings, sometimes called the Woodstock of capitalism, which attract thousands of people each year to Omaha, Nebraska.

But Buffett found time during this year's gathering to sit down for an hour with Chuanfu Wang, the chairman and CEO of BYD, the Chinese company that makes cars, batteries, electronics and solar power equipment.

And why not? Berkshire's MidAmerican Energy Holdings unit bought a 10% stake in BYD for about $230 million in September, 2008. Today, it's worth nearly $2 billion.

That's a nifty return, even by Buffett's standards.

"BYD is really running on all cylinders," says Li Lu, a BYD investor and money manager who brought the company to the attention of Berkshire vice chairman Charles Munger several years ago. Munger took the idea to Buffett and to MidAmerican chairman David Sokol, who now sits on BYD's board.

I wrote a FORTUNE cover story about BYD in 2009, met with Mr. Wang in Shenzhen and late had the pleasure of meeting Li Lu. He's a fascinating guy -- participated in the Tiananmen Square uprising in 1989, then fled China, earned business and law degrees at Columbia University and for the past 13 has run an investment firm called Himalaya Capital. He's been an informal adviser to BYD and traveled to Omaha with Mr. Wang. Li Lu now lives and works in Pasadena, Ca., where we met last week.

warren_buffett_byd.03The most important thing to know about BYD -- the letters are the initials of the company's Chinese name, but they have come to stand for Build Your Dreams–is that the company has enormous ambitions. It aims to be not only the world's biggest carmaker, but a leader in cheap solar power and utility-scale battery storage as well. Mr. Wang, the founder and chairmen, has said that he believes that the automobile and energy industries are on the verge of a major transformation. Buffett, Munger and Sokol all told me that they were really impressed with Mr. Wang–not a bad trio of endorsements.

BYD's been in the news lately for three reasons. In March, the company announced a joint venture to develop electric cars in China with Mercedes. The idea is to combine Mercedes' design excellence with BYD's technological savvy, particularly with respect to batteries, and the Chinese firm's access to its home market. "Daimler's know-how in electric vehicle architecture and BYD's excellence in battery technology and e-drive systems are a perfect match," Mercedes chief Dieter Zetsche said at the time.

Last month, BYD announced that it will open its North American headquarters in a downtown neighborhood of Los Angeles. Mr. Wang was joined by California Gov. Schwarzenegger and LA Mayor Villaraigosa at the ceremony and, interestingly, the company said it would put more than its electric cars on display -- it will showcase "solar panels, energy storage systems and advanced LED lighting products" as well.

To lure BYD, the city of Los Angeles promised to buy some of the company's electric vehicles, including buses; to streamline the approval process for installing charging stations in garages; to make it easier for people to install charging stations in their homes and to display a BYD car at LAX, according to the Wall Street Journal.

Third, BYD and KB Homes, the big homebuilder, announced that they would build homes together that not only include solar panels on the roof but batteries in the garage–so that the owners can enjoy solar-powered electricity even when the sun's not shining. This is a big deal, as the Sunpluggers blog reported:

Off-grid solar owners for many years have used battery banks to store their generated electricity for later use, but the plan for the KB Home development -- smack in the middle of a grid-tied suburban subdivision -- could help alter the trajectory for adoption of both solar electricity and plug-in vehicles.

BYD is already growing fast, as Li Lu reminded me. It has about 160,000 employees, most in Shenzhen and Xian in China, but others at offices in the Netherlands, Denmark, Hungary, Romania, Japan, South Korea, India, Taiwan and Hong Kong. (There's even an office in Shaumburg, Illinois, where Motorola is a big customer for BYD's batteries and handsets.)

BYD sold about 450,000 vehicles in 2009, up 170 percent from a year earlier, and it intends to sell about 800,000 this year, nearly all of them gasoline powered. The company's all-electric car, called the e6, is currently running as taxi in Shengzhen in small volumes. Rollout is slightly behind schedule, but more are expected to be produced this year. Unlike the U.S., China has yet to lay out a policy for subsidizing electric cars, which has slowed things down. The car will cost about $40,000, the company has said. It hasn't talked about a timetable to bring the car to the U.S. or Europe, which could be a big export market because prices there are high.

Li Lu

"The big challenge now is to bring down the initial cost," Li Lu told me. Eventually, BYD would like to sell the car for about the same price as conventional vehicles, and win over auto buyers by offering them lower operating costs and higher performance. "The only way to conquer this market is to provide a product that is comparable at the beginning and superior in the end," he said.

BYD's greatest strength is in battery technology, the company's first business. Manufacturing a safe, reliable, long-lasting, and fast-charging battery for a car at an affordable price is a complex and costly undertaking. The Chinese firm believes that it has an edge over its rivals.

{related_content}"There are not many in the world that have comparable experience and expertise," Li Lu says. "They seem to have a commanding lead right now." The BYD technology is super safe, its batteries will last a long time and they will cost less than competitors, he said.

All that remains to be seen, of course. But BYD has not one but three opportunities to change the world–with its electric cars, its rooftop solar panels with battery storage and with large-scale batteries that could be used by electric utilities to store solar or wind power.

If BYD succeeds in even one of those businesses -- let alone all three -- it will become one of the most important clean tech companies in the world.