So Buffett invested in BYD. That doesn’t make it infallible.
Uber-investor (don’t know how to type an umlaut on this laptop…) Warren Buffett said in his latest note to investors that his investment company, Berkshire Hathaway www.berkshirehathaway.com , was looking to buy companies. I wonder if it has considered selling its stake in Chinese automaker BYD? www.byd.com
Because a recent move by BYD to end a slide in its car sales by cutting prices will not only fail to shore up its sagging sales, it will be bad for the brand, and will hurt the company’s attempt to portray itself as a high-tech pioneer.
Many seem to see the Buffett investment as a guarantee BYD won’t fail.
A New York Times reporter recently reviewed BYD’s F3DM hybrid vehicle. He wrote glowingly of its performance in electric mode. http://www.nytimes.com/2011/02/20/automobiles/autoreviews/byd-f3-dm-review.html?pagewanted=1&_r=2&sq=BYD&st=cse&scp=1
But, when the car switches to its gasoline engine, it “screeches like a banshee,” the steering wheel vibrates, and the dashboard hums, he added. That’s not all. Instead of becoming silently electric when the car stops, the engine “stays noisily on task,” wrote the NYT reporter.
He dismisses these problems as growing pains, and trots out Buffett’s investment as proof that BYD is capable of turning its alternative-fuel cars into inexpensive cars that Americans will want to buy. Besides, he points out, BYD had the best-selling compact car in China in 2010.
Well la di da, as Diane Keaton said in the Woody Allen classic “Annie Hall.” Has he ever seen, let alone ridden in or driven, an F3, as the compact is known?
Let’s dig a little deeper into the BYD story. Past Buffett’s investment.
Last week, BYD, based in the east China city of Shenzhen, announced it would cut prices on its models by up RMB 15,000 per model. http://www.cnbc.com/id/41656075/China_s_BYD_Says_Cuts_Car_Prices_by_Up_to_19
The cut represents an almost 20% reduction for some models.
Cutting prices is a business model that does not work, says Randy Berlin, global account director for Detroit-based consultancy Urban Science. www.urbanscience.com “BYD is putting things on a slippery slope for the perception of the brand, dealers’ profits, and the profitability of the company,” he says.
BYD has thrived in China’s cut-throat automotive market by offering affordable transportation, and until the second half of 2010 that strategy seemed to be working. BYD sales more than doubled in 2009 on the back of its best-selling F3 compact. The first half of 2010, sales continued to rise. Then the decline began. BYD’s sales fell each month for the last six months of 2010 compared to the previous year. It ended the year with a 17% sales increase, according to J.D. Power and Associates.
In most markets, that would be a triumph. But not in China, where the overall market for passenger vehicles grew by 37%, according to J.D. Power. In early 2010, BYD announced it would sell 800,000 vehicles in 2010. Instead, it sold fewer than 520,000.
Price isn’t the only problem BYD faces. Its standards for its cars haven’t kept pace with those of Chinese consumers’. Foreign automakers have come out with low-priced models for the domestic market, for example General Motor’s New Sail. www.gmchina.com Foreign brands are often perceived by Chinese consumers as higher quality, with justification. Suppliers say that BYD sometimes sacrifices quality to keep prices low.
The second half of 2010 had another unpleasant surprise for BYD. In October, land in Xian on which the company planned to build a plant was seized by the Ministry of Land and Resources, and BYD was fined RMB 2.95 million. The Ministry said the land’s zoning was illegally changed from agricultural to industrial. http://online.wsj.com/article/SB10001424052748704763904575549793829052072.html
That might turn out to be a blessing in disguise, however, as it appears BYD isn’t going to need the additional 200,000 unit capacity the Xian project would have added.
Here in the U.S., meanwhile, BYD is busy promoting itself as a high-tech company. Besides leasing a small number of hybrid cars to the Los Angeles Municipal Housing Authority, http://www.hacla.org/byd-and-the-hacla-launch-electric-vehicle-testing-program/ BYD has signed an agreement with the city to provide batteries as storage devices for a planned wind farm. http://mayor.lacity.org/PressRoom/PressReleases/LACITYP_011469
Last year, it showcased its solar panels, LED lighting, and home vehicle chargers at a model home in the Los Angeles suburb of Lancaster. http://www.evoasis.com/news/city-of-lancaster-byd-and-kb-home-provide-a-look-into-the-future-of-energy-efficiency/
After a press event showcasing that home, I said BYD might be successful with those technologies. It may still be. But its recent price cutting move dented my faith in the company’s ability to succeed. Even if Warren Buffett has invested in BYD.