By Anjani Trivedi
Warren Buffett obtains many investments through his patient and deliberate buy and hold strategy. And it is becoming evident that he is starting again with electric vehicles. For investors investing in technology, it would be wise to consider how the Sage of Omaha envisioned the future of the industry.
The value of Berkshire Hathaway Inc.’s stakes in BYD Co. Ltd., one of China’s oldest car and battery manufacturers, has soared this year: BYD’s share price has risen by nearly 30 %. Buffett has supported BYD for more than a decade, owning about 22% of the Hong Kong-listed company, which now has a market cap of over HK $ 915.6 billion ($ 117.6 billion). That’s more than darling investor Nio Inc., the New York-listed next-generation Chinese automaker.
So how is this different from the rest of the ever-growing universe of electric vehicles?
BYD is more than just an upstart trying to take on Tesla Inc. It is getting closer to mastering the right technology for electric vehicle batteries – the heart of the electric car which accounts for almost 50% of the price and is crucial for the widespread adoption of electric vehicles. And that’s what Berkshire focused on.
Buffett’s longtime partner Charlie Munger spotted the genius of Wang Chuanfu, the chemist and researcher behind BYD, which led Berkshire to take a 10% stake for around $ 230 million in the company in 2008. In a 2009 Fortune magazine cover story, Munger described Wang as “a combination of Thomas Edison and [General Electric’s] Jack Welch – something like Edison to solve technical problems, and something like Welch to do what he needs to do. I’ve never seen anything like it. “
It turned out to be a pretty premonitory call. Wang understands batteries: getting the right chemistry would determine how well cars with these powertrains would and could do. This has given his business a head start as the rest of the industry stumbles through recalls and battery fires. BYD electric cars are clunky and lack the technical coolness of next-gen cars like Nio Inc.’s or Tesla’s Model X with its hawk-winged doors. But it has the right price and safe battery technology. It is now China’s largest electric vehicle maker, selling more cars than the competition on the mainland.
BYD has doubled its efforts to make affordable batteries on a large scale and has bet on technology to achieve this goal. In its 2020 full-year results, the company said it would end plans to adopt nickel-cobalt-manganese batteries, which most car and battery makers are determined to be. Instead, BYD turned all of its attention to what’s known as lithium iron phosphate, or LFP, for its so-called Blade battery, which launched early last year.
Wang’s emphasis on LFPs is a game-changer. It’s cheaper and easier to use. The chemistry is much more stable than the new type NCM which promises to take cars hundreds of miles further but is not as safe. Meanwhile, the flat Blade battery takes up less space and reduces the weight of the car, another problem that car manufacturers have had to contend with. BYD has succeeded in reducing costs by almost 30% and reducing the number of parts while increasing efficiency.
BYD has nearly 15% of the battery market in China, behind Contemporary Amperex Technology Ltd. Globally, it could end up with a 3% share of the electric vehicle market by 2025, according to an estimate by analysts at Goldman Sachs Group Inc. BYD’s battery shipments – for its own cars and external sales – could reach 30% of industry consumption, notes Goldman.
Automakers are also realizing that this is the way to go. Or at least, until other options can be produced commercially that don’t result in frequent battery fires. Tesla is testing BYD’s Blade battery for its Model Y, according to reports in Chinese media. The likes of Volkswagen AG, for their part, want to make their own powertrains. Even for one of the biggest automakers in the world, it’s a difficult task that shouldn’t pay off any time soon.
Berkshire’s recognition of Wang’s expertise and the value of battery chemistry (much more than the rest of the car itself) has turned out to be a victory – for now. If Wang and his company can stay ahead of the competition through the evolution of electric vehicle technology, BYD could be a model for investors to watch. It was – more than the fascinating but distant shots of some automakers – the kind of realism that caught Buffett’s attention.