I’ve probably mentioned this before, but I got a ride from BYD Chairman Wang Chuanfu in one of his plug-in hybrids back in 2008, just a few months before legendary investor Warren Buffett bought a large stake in the company. I thought BYD was a fascinating company and its founder a visionary, but it would have been unethical for me to invest in a company I also covered.
That’s the excuse I’m using, at least. The other one is that I didn’t have the millions of dollars Buffett had at the time to invest. I’ve been watching Buffett’s company sell his shares for the last few years, and his timing has been near perfect. Why? I often cover the challenges of the Chinese market here in The Morning Dump, and now we have a word for what’s happening: Involution.
Whereas Buffett’s Berkshire Hathaway made at least $8 billion on its investment, Porsche’s parent company just had to take a $6 billion write-down on its EV shift, which hasn’t exactly panned out. Now the company is getting back into ICE and hybrids.
If that doesn’t work, BMW continues to try to make hydrogen happen.
Buffett Shifts Money To Investments That ‘I’ll Feel Better About’
It’s hard to express how little attention the press gave to Chinese automaker BYD back in 2008. This was the year that a bunch of brands from China flooded the Detroit Auto Show, but most were relegated to the basement.
There was just a vague hint that something could be happening in the housing market in the United States, but everyone was pretending like nothing was wrong. Instead, drinks were flowing from the major automakers, and they pretty much treated the Chinese brands with their little electric vehicles as a joke. The prevailing belief at the time was that China was the place where companies like GM and VW made huge profits, and not an actual threat.
What struck me from my test drive with BYD’s chairman downstairs was that his company was already building what everyone upstairs was only pretending to build. Chuanfu’s pitch, via his translator, was that the Chevy Volt being paraded around in the main hall was just a concept, but he had a real working car with a relatively cheap-to-produce LFP battery.
He was right, even if no one else realized it at the time. One person who did see the potential upside with BYD [Ed Note: There’s a famous video of Elon Musk scoffing at BYD’s car in 2011. The car was pretty unimpressive compared to a Tesla. -DT] was Berkshire Hathaway’s Charlie Munger, who led the firm to put about $230 million into the company.
There’s great audio from the 2009 Berkshire Hathaway annual meeting wherein someone asks why the usually conservative investment firm would make such a silly investment, which seemed more like something a VC fund might do. Here’s Munger’s response:
“From a standing start at zero and with very little capital, [Chaunfu] rapidly was able to create the best-selling single model in China, and that’s against competition that was Chinese Joint Ventures with all the major automakers of the world… this is not some unproven, highly speculative activity. What this is is a damn miracle.”
It’s hard to say to the dollar exactly how much the company made because I don’t have specific dates for every sale, but the company’s Hong Kong-listed stock went up around 4,000% over the period it was owned, and the value of the company’s holdings was listed at a peak of $9 billion. It’s safe to assume the company made at least $8 billion on the original investment.
Berkshire Hathaway did start selling its shares a few years ago, and Buffett explained why to CNBC:
Buffett says it is an “extraordinary company” being run by an “extraordinary person,” but “I think that we’ll find things to do with the money that I’ll feel better about.”
What does he mean? While the Chinese market has expanded and BYD has seen its share price rise, recently things have been going in the opposite direction. If the trends hold, it’ll make Buffett’s purchase and sale seem incredibly well-timed.
The issue is “Involution,” which is the name given to the Chinese EV market essentially eating itself alive. Let’s talk about what this looks like.
Chinese Automakers Are In Trouble As ‘Involution’ Sets In
It’s no secret that China made a massive effort to become the world’s leader in both electric cars and the technology that underpins these vehicles. The way China’s politics work, most of the society is capable of moving in one direction towards a goal.
While this has worked from a product standpoint, China has a massive overcapacity problem, as the domestic market simply cannot buy all the cars Chinese automakers are building. At the same time, global exports aren’t happening fast enough, and these same automakers are finding obstacles to reaching new markets.
This has led to what many are calling “involution.” There’s a big Reuters piece that gets into all of this that is worth reading:
The problem of excess capacity leading to overly ambitious sales goals isn’t unique to China. In the early 2000s, General Motors, Ford and Chrysler had too many factories cranking out too many cars, and eventually closed more than a dozen U.S. plants.
But pressure to hit sales targets and gain market share is greater in China, industry analysts and former executives say. Lately, industry players have been using the term “involution” to describe competition that becomes self-destructive and incentivizes irregular practices.
Vehicle manufacturers in China are driven to keep selling and producing, even at deep losses, because this ensures cash flow, which is crucial to survival, said Liang Linhe, the chairman of Sany Heavy Truck, one of China’s largest truck makers.
“It’s like riding a bicycle: As long as you keep pedaling, you might feel exhausted, but the bike stays upright,” he told Reuters.
As the story details, almost no one is making money in this market. Dealers, automakers, insurance companies, and suppliers are all maxed out building cars. It’s fine for consumers, who can regularly get brand new cars for less than a quarter of the original price, but it’s not sustainable.
As a shrewd investor, Buffett seems to have started divesting right before the price war and overcapacity problems started really hitting the market.
VW Takes $6 Billion Hit On Porsche EV Transition
I have seen a few electric Porsche Macans on the road, and I think they look nice. The Taycan, though range-limited, is incredible to drive and absolutely one of my favorite electric cars. Are electric Porsches the future? Probably. That future, however, is way way further away than anyone at Porsche predicted, so the company’s rapid shift towards electrification now looks like an overreach.
The great news this weekend is that we’re getting a gas-powered Porsche 718 Boxster/Cayman to go along with the new EV version. There will also be a few other plug-in hybrids and ICE models joining the team.
According to Volkswagen, via Reuters, that un-transition will cost the company something like $6 billion:
The move comes after Porsche, which is 75.4 percent-owned by VW Group, said it would change its product strategy to reflect a slower-than-expected electric vehicle market.
“We are seeing massive changes within the automotive environment,” Oliver Blume, CEO of both Porsche and VW Group, told analysts and journalists on Sept. 19, citing a clear drop in demand for exclusive EVs.
“We have made key strategic decisions,” he said. “Now it’s time to put them into action. It’s going to be a tough and long road, and it will demand our full focus and strong effort.”
That, plus tariffs, is keeping profit forecasts for the company severely diminished.
Oh, Look, Another Hydrogen BMW
Technically, I guess this is the first look at the new BMW X5, which will have a bunch of powertrains, including battery electric, plug-in hybrid, regular ICE, diesel, and a hydrogen fuel cell. This is the iX5 Hydrogen, which, as the name suggests, is a fuel cell vehicle.
It looks good, I guess. Here’s what the company says about it:
“By launching the new BMW X5 with a choice of five drive system variants, we are once again demonstrating our leading position as a technology pioneer,” says Joachim Post, Member of the Board of Management of BMW AG, Development at an BMW event in New York. “Hydrogen has an essential part to play in global decarbonisation, which is why we are committed to driving the technology forward.”
I don’t get it, to be honest. Scaling hydrogen for consumers hasn’t worked yet, and that’s with Toyota trying very hard.
What I’m Listening To While Writing TMD
My friend Dan has this theory that you can tell if someone is an android if they clap too early in the break in the chorus for “Private Eyes” by Hall & Oates. Try it!
The Big Question
If you had $230 million to spend on automaker stock, what are you buying?
Top photo: DepositPhotos.com
Hydrogen. It’s the future man.
https://en.wikipedia.org/wiki/BMW_Hydrogen_7
BMW said it 20 years ago.
It’s still the future.
SWG Motors. Refurbishing solid-bones but otherwise junked vehicles sold for a fair price with a 6 month warranty.
Starts with 10 dealers in the Carolina’s and grows from there.
$230m… Just buy a couple of blue chip collector Mercs and Ferraris. I dare say long term that is going to be the best investment, and you don’t have to worry about much at all on them.
Hubris is the game and no one escapes it. Just ask those smug toga-wearing Romans.
Leave H2 alone man. They should succeed- happy they give it a try.
Once, a few of us went to see a Stop Making Sense tribute cover band at a local venue. About a week before the show they announced a surprise Hall and Oates cover band as the lean into the main affair.
On the night of, when the Hall and Oates cover band finished, the stage was empty for about 40mins and then the Talking Heads cover band came on stage.
IT WAS THE SAME BAND.
My friend Dan has this theory that you can tell if someone is an android if they clap too early in the break in the chorus for “Private Eyes” by Hall & Oates. Try it!
My brother is definitely not an android. He’s just severely rhythm challenged. He definitely would get it wrong, but not sure if he’d be early or late, just never on time. I should try him on the “Here Comes the Sun” clapping.
Based on this article I would put it into whichever one Berkshire Hathaway does…
Checking my stock account with decades old investments with BRK.B and also some individual automakers … yep. (I sold my TSLA stocks years ago though).
“The way Chinese politics work, most of the society is capable of moving in one direction towards a goal.”
You don’t say. Maybe Autopian can interview Jack Ma about this.
I love Hall & Oates and Private Eyes, but never watched the video before. Now I have a question. Did I just watch the cheapest to produce music video ever in the history of the universe? I mean this video makes the Bowie/Jagger Dancing in the Streets video look downright big budget. Efficient!
Private Eyes had a lot bigger budget than Ram Jam’s Black Betty video.
They gave the band some money to make a video, the band bought weed with it, and did the video shoot with what I think was a borrowed Super8 camera in grandma’s back yard.
It’s absolutely awesome.
Indeed!
If I remember correctly Hall and Oates had like 10+ top-ten hits all in a row, maybe they ran out of money for making videos. Of course, this was also the early early 80s and folks weren’t sure what music videos were really supposed to be yet.
My mother was in the music video of ‘Talking in your Sleep’ by the Romantics and talks about how it was filmed in an un-airconditioned warehouse in Detroit with garbage bags taped to the walls to make the walls look shiny and black. Then fog machine’d the whole thing. It’s amazing how little budgets they’d be working with.
A few years ago I probably would have said Rivian. I like their product and would actually buy one if I could afford it. They also have an actual product offering in the street which is a lot more than can be said for some of these other vaporware EV companies. Sadly, I’m not as confident that they’ll make it with the current EV future in flux and they have no hybrid offering to pivot to.
What’s Henrik Fisker doing these days? He’s always a safe bet, right?
Really, though, if I had that kind of money, I’d like to pick a company with a good concept and low enough budget that my investment would make a difference. If I’ve got hundreds of millions to invest, I’d rather put it somewhere it could help than somewhere it’s just gaining returns without changing anything.
On the other hand, in my current financial state, I try to diversify my investments and keep them in mostly safe companies, so I’m not trying to invest much into these sorts of companies at present.
If you’re into shorting stocks, yes.
I’d invest the $230 million into “The Autopian Motors Corporation” “AMC” 😉
Better get The Bishop to start on some more concept cars renderings ASAP! 😉
“If you had $230 million to spend on automaker stock, what are you buying?”
Whichever one that $230 million represents a significant enough controlling interest for me to get stuff done.
Investors are so out of touch and concerned with fast returns that the average man has no representation.
I want to go through that place like Hank Hill when he focus-grouped that fancy lawnmower.
Piano black plastic? Gone!
Physical knobs? Abundant!
Price? Starts at 15 mutha f**kin’ thou! (There’s your slogan, free of charge!)
Sadly, I believe it is too late to put my $230m into the Twentieth Century Motor Car Corporation. I really want to drive a Dale.
$230mill to a car company? As much as it pains me, I think GM is a reasonably safe bet, with a mix of decent ICE and EV and recently history of staying profitable.
What Would I really do though? I think Christian Von Koenigsegg could use the cash for whatever cool stuff he is building. The Gemera seems like a perfect family car!
I’m setting up Mad Max Motors, moving out to the desert someplace and buying up every last Interceptor and any other piece of history with a pre-smog-era V8. Might do the vertical-integration thing and invest in a couple of oil rigs as well. I figure I’ll be sitting pretty once the current administration’s environmental policies take root.
Bring it Immortan!
You will ride eternal shiny and chrome!