Warren Buffett takes charge

[maxprogram]

http://money.cnn.com/2009/04/13/technology/gunther_electric.fortune/index.htm

 

"Warren Buffett hasn't just seen the car of the future, he's sitting in the driver's seat. Why he's banking on an obscure Chinese electric car company and a CEO who - no joke - drinks his own battery fluid."

 

I've always thought that Buffett is a lot more technologically proficient than people give him credit for. Along with some of the ventures into wind energy, Berkshire is proving it is less old and stogy than some may think.

 

Looks like he got BYD at around 12x 2008 earnings, not bad for its potential growth.

[cheapguy]

There must be something sustainable advantage or moat in BYD.

 

I am sure the article is incomplete, as Buffett is well aware of Aircraft, car manufacturing companies history for the past 100 years of more..

 

So what could that moat be ?

 

any guesses ?

[maxprogram]

http://www.ted.com/index.php/talks/shai_agassi_on_electric_cars.html

(thanks to Miguel from Simoleon Sense)

 

A related video on the potential for electric cars (and batteries). The economics discussed in this video are very interesting. I'm sure both Buffett and Munger have contemplated scenarios like this, and how they potentially change the economics of the energy business (for better or worse). i.e., If the entire U.S. moved to electric vehicles within 10 years, what would that do to the oil/gas and utility industries?

 

In regard to moats, I think that the NA car manufacturers had competitive advantages many decades ago but they eroded to nothing over time. For BYD, it could be being the low cost provider, or having technological advantages through patents or other proprietary knowledge.

[ExpectedValue]

I think it's better to look at BYD as a major battery manufacturer that coincidentally purchased an automaker and made them profitable. If cars flop, they still have the ability to sell batteries and compete.

 

That makes it appear more like a Buffett-style investment.

[cheapguy]

So what are their advantages/moat in battery manufacturing ?

 

What are their advangates/moat in electric-car manufacturing ?

 

What intrigues me, is this a very young company.

For such a company to establish a sustainable moat is amazing.

 

There are many tech companies which will change the world, but they do not have a moat to sustain.

 

Microsoft, intel are examples.

 

Warren did not invest in them.

 

So this is just not another tech company..

 

Knowing WEB's philosophy being applied to a new seemingly tech/car company is amazing.

 

Hope someone digs, deeper and deeper to get to this.

[kyleholmes]

Are we sure that this is not a Lou Simpson investment, or has Buffett acknowledged that it was him? Just curious

 

Kyle

[ExpectedValue]

Are we sure that this is not a Lou Simpson investment, or has Buffett acknowledged that it was him? Just curious

 

Kyle

 

Max linked the article, it says that Charlie brought the idea to Warren.

[kyleholmes]

Sorry, never saw the link... thanks for the heads up... This man is quite interesting, that is for sure!

 

 

[JAllen]

At least one of or part of the moat(s) is the management obviously.

[Partner24]

I admire companies that help us to use energy more efficiently, cleaner, etc. To me, iIt's necessary if we want to keep and expand our prosperity. See houses use solar energy, cars use an autonomous, renewable and clean energy is one of my lifetime dreams. It would be terrific.

 

Just a question here on people who understand these technologies better than me (believe me, the bar is low). If all cars were using rechargeable electric batteries, wouldn't it create a very significant shortage of electricity power? We would need to provide new electricity energy for millions of cars. Assuming same supply, why electrical cost wouldn't go up significantly? And what sources of energy would be used to that? Coal, nuclear, ??? If so, how would it help create a cleaner world? I don't know much about that, but I find it really interesting, so insight would be appreciated.

 

Cheers!

[basl1]

Why is buffett buying connoco phillips at the same time he's investing in an electric car?

[Phoenix01]

I do not think that the oil companies in China have the same clout as in America.  The electric car will not face as many challenges.

 

The main technology of an electric car is essentailly the batteries.  The car body is a know technology.  The electric engine is straight forward.  If BYD is a world leader in batteries, then it makes sense that they will be the world leaders in electric cars.

 

 

[Mandeep]

Why is buffett in COP in general? I mean don't they have cash/debt problems. There's no moat/brand in terms of gas. I don't understand other than COP moves more than cash-rich XOM. But then again buffett has WMT and JNJ which don't really move.

[cheapguy]

In commodity businesses, the moat is for any company which can produce for the lowest cost.

This should not be just one time deal, but a structural and ongoing advantage.

 

Walmart basically has the lowest cost for supply chain and distribution

[Guest JackRiver]

cheapguy

 

I agree, and they are manufacturing at the lowest cost using people and not machines.  It's counter intuitive that this method would be better, but if you can figure out a way to manufacture cheaper with people versus automation, then you've got an advantage that the other guy can't replicate easily. 

 

The organizational culture and people are the moat.  BTW, Buffett has bet single men before, Ajit Jain, and we are talking a relatively small amount of money here.

 

Yours

 

Jack River

[scorpioncapital]

Why is buffett in COP in general? I mean don't they have cash/debt problems. There's no moat/brand in terms of gas. I don't understand other than COP moves more than cash-rich XOM. But then again buffett has WMT and JNJ which don't really move.

 

For oil companies, you are also interested in reserves. COP has some massive reserves, although lots of it in Russia.

[ExpectedValue]

Why is buffett buying connoco phillips at the same time he's investing in an electric car?

 

According to the 2008 AR, hasn't he been selling COP?

[Partner24]

If people in the US use a lot of rechargeable electric car, then demand for electricity should go up significantly (so the price of it), then MidAmerican, with more than 700 000 clients for electricity, will make a lof of $.

 

 

 

 

[Granitepost]

Hi Partner24:

 

I am wondering what effect the regulation of MidAmerican would have in this case.  It would seem that the price charged for the electricity would be impossible to increase without the permission of the regulator.  I assume that the cost of generation of electricity would increase with higher demand levels as new infrastructure would be required.  Is it reasonable to assume that the price increase authorized would cover the increased cost of generation only, the cost increase plus a percent profit on the additional cost, or some price level related to what the market would bear?  I guess the increased profit would relate only to the same profit margin on a greater quantity of electricity (which could be significant in itself)?

[SharperDingaan]

This is a Chinese made (& government supported ?) green car that is relatively cheap, selling to a local market, that is one of the most populated on earth. Embedded car culture, no different to what GM/Ford were to the US in the 1950's. Hurdles: production volume, buy 'china' pride, tarrifs/foreign assembly plant requirements, etc.

 

This will be a massive employer, & in the near/medium term its job will be to employ as many people as possible, & not mechanize. Hurdles: mega project status, high employer/government influence in a recession/depression, etc.

 

Just as US/Cdn auto makers hid behind tarrif walls to protect what was once 'their' biggest car market in the world, BRIC countries can/are doing the same. Except their consumers are at the begining of the product marketing lifecycle, & the US/Can are at the end.

 

Makes a lot of very good sense to have a toe in the water.

 

SD

 

 

 

[calonego]

Partner24 -

As Granitepost is saying, all the increased demand should do is increase the required capacity, which allows for more capital in the electrical production and distribution business. It'll still be highly regulated, but you'll likely see more capital deployed there at fair, and lever-able returns. There would likely be a great amount of time/intellect/money spent on technology to improve the electrical system, but thats very different economics.

 

It would help in making the world cleaner/more efficient, due to the high relative efficiency (and cleanliness) of large power generation systems compared to small motors. An internal combustion engine has a couple major issues - inefficiency (wasted fuel plus energy wasted in many moving parts and heat energy that is created but leaves through the exhaust pipe), and pollution - which in the case of a large plant/engine can be scrubbed far better. Having full pollution limiting equipment on a car would be incredibly costly and heavy.

[UhuruPeak]

Increasing electricity demand may not require new investments or lead to higher power costs. 

Don't forget, the Holy Grail in the Electricity world is storage capacity:  without it, prices remain very volatile and ultimately expensive for all of us.  Currently, the best storage we have are (1) hydroelectricity, where you pump the water back up during the night when the cost is low; (2) under ground air compression.  I don't know much about (2) but (1) is clearly wasteful and doesn't seem all that cheap.

 

 

 

One of the many theoretical advantages that a fleet of electric vehicles would bring is storage capacity:  you charge the car at night when power demand is low (and cost is therefore low as well - not to mention that is when wind blows the best); cars parked during the day can then be used to draw power from during peak hours, thereby clipping the cost peaks.

 

Obviously a lot needs to happen before that, massive investments will be required - just not necessarily power plant investments:  you will need charging stations, smart grid (the poles & wires rather than the power plant itself).  Should this come to fruition, we could potentially have cars running on electricity generated by wind turbines.  Now this is getting pretty darn green!

[basl1]

not to mention his synergy with his own power division

[Crip1]

I distinctly remember my father saying, quite definitively, that "The next car that I buy will be an electric car". That was in 1977! This idea has obviously been long in coming but I know that there is more than one game in town:

 

http://www.teslamotors.com

 

One of our vendors has taken delivery of one of these cars a few months back. He happened to be in town last week and we had a long discussion about it...his impressions:

* The acceleration is remarkable...truly 1 to 60 in 4 seconds with little if any noise. He said it was hard to get used to not hearing an engine revving. Think of it like a quiet Golf Cart with substantially more horsepower.

* The car itself is not opulent inside, but it is remarkably nice and drives nicely.

* The car travels more than 200 miles on single charge before the battery is sufficiently "low" that he would be nervous leaving his home. I cannot recall if this comes with the car, but he has a meter which effectively measures the cost to charge the car. He can go 200 miles on a single charge of less than US$2.00, and this is in Chicago where the cost of electricity is higher than the US average.

* There was the need to do some retro-fitting to his electrical box in his house but nothing too costly.

* The company is looking to put out a sedan which can seat 5 comfortably.

* Bottom line, he loves the car. Partly because he is into the "green" aspect of it, partially because it is new and cool, and partly because the car is simply nice.

 

When we consider that we are really early in the lifecycle of electric cars, it is really exciting to think about what this is all going to look like 5-10 years down the road. New technologies morph and adapt at remarkable speeds (Think computers, mobile phones). The early mass-produced models are good, and it only stands to reason that each new year will bring about significant and positive changes. From the perspectives of technology and the impact on our planet, this is really intriguing.

 

From an investment perspective, though, I am not seeing what Buffett is. I would guess that this is a bet on the jockey because I do not see how this is an unassailable moat by any stretch. We really do not see where this is going, or if some genius in Mongolia or Haiti will improve on what either Tesla or BYD has done. I would have thought that level of uncertainty would have compelled Buffett to pass on the investment. But, far be it for me to question Warren because he obviously sees something that I don’t.

 

[DCG]

What do you guys think is a good price to pay for BYD? I'm having a hard time finding financial info on them to try to value it. It looks like it's currently selling for 35 X earnings with a market cap of near 17 $Billion.

 

It's up over 200% since december when Berkshire bought it, and no doubt most of that move can be attributed directly from the PR it's recieved from Warren and Charlie. It is still a good buy at this point?