Reports of Buffett Dumping Stake in BYD Lack Credibility

Published on September 24, 2010

Several media reports have appeared today suggesting that Warren Buffett’s visit to China next week may be due to concerns regarding Berkshire Hathaway’s investment in BYD.  Most of the reports cite a Reuters article which seems quite unconvincing.  While BYD has experienced some difficulties recently related to alleged violation of government regulations and weaker than expected automobile sales, there have been no public statements by Berkshire regarding dissatisfaction with the investment or any plans to sell.  In fact, all recent comments by Berkshire executives have been very positive.

BYD has been a very successful investment for Berkshire Hathaway over the past two years with the original investment of $225 million rising to nearly $2 billion at the end of 2009.  However, BYD shares have fallen over 17 percent so far in 2010 amid well publicized problems that have alarmed some analysts.

Munger’s Idea

BYD does not necessarily fit the typical profile of an investment Warren Buffett would make.  However, most reports fail to mention that the idea came from Berkshire Hathaway Vice Chairman Charlie Munger who has sounded as enthusiastic as ever about BYD’s prospects in recent appearances.  Berkshire holds its investment in BYD through MidAmerican and is represented on BYD’s Board of Directors by David Sokol.

A Bet on Wang Chuanfu

Warren Buffett has characterized the BYD investment as a bet on BYD Founder Wang Chuanfu.  Mr. Buffett has also said that all cars will be electric within two decades.  BYD is particularly strong in battery technology which also has applications far beyond automobiles.  For example, MidAmerican and BYD announced an initiative last year to use BYD battery technology to store energy created by renewable sources such as wind and solar.  The ability to store renewable energy is critical because energy generation may not always occur at times when energy demand exists.

In his appearance at the University of Michigan last week, Charlie Munger did not specifically discuss BYD but he did comment on the prospect for solar energy to radically change the economy in the future.  The ability to store energy from solar production will involve battery technology of the type pioneered by BYD.  Mr. Munger has also indicated that Li Lu, who introduced him to BYD in the first place, will likely serve in a key role at Berkshire Hathaway at some point in the future.

Sale is Unlikely

Given Mr. Munger’s obvious enthusiasm for BYD’s prospects, the fact that Li Lu has been named as a key candidate for a top level job at Berkshire in the future, and the existing business ties between the two companies, it seems highly unlikely that Mr. Buffett is visiting BYD’s facilities in China in order to explore whether he should dump Berkshire’s investment.  Even if Mr. Buffett does not believe that BYD is attractively valued, he would almost certainly defer to Mr. Munger on this key investment. Anything is possible, but current media reports making the case for a BYD sale seem very weak and based entirely on speculation rather than reliable sources.

Disclosure:  The author of this article owns shares of Berkshire Hathaway.

Reports of Buffett Dumping Stake in BYD Lack Credibility
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