In February, Warren Buffett’s Berkshire Hathaway, Inc. (NYSE: BRK-B) reported ownership of 225 million shares of Chinese battery and auto maker BYD Company Ltd. (OTC: BYDDF). Berkshire Hathaway paid $232 million for a 10% stake in the company in 2008. That stake was worth $1.986 billion in February, for a tidy gain of more than 800%.
Since then BYD shares are trading down about $2/share, from around$7.75 to $5.70 after climbing above $10/share in April. The reason for the decline is the drop in Chinese government incentives to purchase a new car. BYD’s original projection of 800,000 unit sales was lowered to 600,000 units earlier this month, and the company reported sales for the first half of the year of just 286,000 units, only 36% of the original target.
China’s auto market is expected to grow 20% annually in each of the next five years. That should be good news for the country’s domestic automakers, but it’s not. Chinese automakers account for 32% of sales in China, and by 2015, that is projected to rise to just 37%. Hardly a strong showing.
Volkswagen AG and its two joint ventures in China account for 16% of unit sales. Hyundai accounts for 10% and General Motors accounts for 9%, according to a report from AlixPartners.
As always with China, the government is directing traffic. The government has established a goal of reducing major auto groups from 14 to 10 by 2012, and to establish 2 or 3 “giants”. The government is encouraging this shift by pushing for domestic industry takeovers. Foreign acquisitions, such as that by Geely of the Volvo division from Ford Motor Co.
(NYSE: F) and BAIC’s acquisition of parts of Saab are not likely to be repeated until the government gets its desired consolidation of the domestic auto industry.
Of the Chinese automakers, BYD is expected to gain the most domestic market share. In 2006, BYD held 1.4% of the domestic market. That grew to 5.1% in 2009, and is expected to grow to 6.4% by 2015, which will put it in first place among domestic manufacturers. Mergers and acquisitions in line with government proposals could change this outlook considerably.
BYD’s earnings in the first half of 2010 more than doubled to $356.4 million from the first half of 2009. Revenue jumped 50%, to about $3.5 billion. The outlook for the second half of the year is not so rosy.
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