Friday, July 31, 2009

BYD Doesn't Really Need Buffet's Money

Buffet's Midas Touch is Enough

A story appearing on Bloomberg's website yesterday reported that Warren Buffet's Berkshire Hathaway had already earned a US$1 billion paper profit on shares in Hong Kong listed, Chinese automaker BYD.

What makes this interesting is that, as of yesterday, Berkshire Hathaway (or more precisely, Berkshire's subsidiary Mid-American Energy) had yet to actually purchase any of BYD's shares. Only on July 30 did BYD receive approval from the China Securities Regulatory Commission (CSRC) to sell the shares to Buffet's company.

Since the joint announcement by Buffet and BYD last September 27, the value of BYD's shares have increased nearly fivefold -- before Buffet had invested a single dime in BYD stock. Apparently BYD only needed for the world to see that Warren Buffet approved in the direction the company is going to benefit from his Midas touch.

Of course, there is more credit to be handed out. BYD's sales of 176,814 vehicles in the first half of 2009 more than doubled their sales in the same period last year. Credit can also be given to China's State Council whose 50% tax break on small engine passenger cars have boosted sales of China's domestic automakers. BYD's F3 (the gasoline model) is China's fourth most popular passenger car.

A New Shanghai Bubble?

Unfortunately, there may have also been some irrational exuberance at work. China's stock market has been one of the best performing in the world so far this year, and this has also provided some lift to the Hong Kong market. Analysts are concerned that the sudden resumption of IPOs may have unleashed pent-up demand and begun to inflate a stock market bubble.

And speaking of IPOs, BYD is also considering one of its own on the Shanghai market. This will be a key for the growth of the company as Chinese auto companies may only draw 50 percent of their capital from overseas sources. And despite the fact that Hong Kong now belongs to China, capital raised on its stock market is still considered to be "overseas".

While the run up in BYD's Hong Kong stock price is certainly welcomed by the company, this will increase pressure on them to raise more funds on the mainland. Now that the CSRC has turned on the tap again, there is apparently a lot of money waiting on the sidelines, eager for more IPOs. Two other Chinese auto companies, Chery and Lifan, are also considering IPOs.

But what will happen when the CSRC turns off the tap again? I'm afraid the CSRC will soon discover they are riding a tiger.

Tuesday, July 28, 2009

Malcolm Bricklin and Chery, The Movie

I stumbled upon this fascinating documentary today, and dropped what I was doing to watch the entire film in the middle of the day. The Entrepreneur documents the efforts of Malcolm Bricklin to introduce cars made by Chery of China into the United States. Bricklin previously had success with introducing Subaru to the US, and later, initial success by introducing the Yugo (which later turned out to be a fiasco).

The film was made by Bricklin's son, Johnathan, who was apparently given uncensored access, not only to Bricklin's board meetings, but also to negotiations with senior Chery management in China.

What I found most fascinating is the way Bricklin basically browbeats his Chinese hosts into signing an agreement with him. This goes against everything that China "experts" tell us about negotiating with the Chinese -- that typical Western emotional reactions have no effect on Chinese negotiators.

I don't think I am giving anything away by revealing the fact that Bricklin's venture was ultimately unsuccessful. If it had been, we would see Cherys on US roads today. However, I must admit surprise at how it all ended. My original assumption had been that the failure lay completely at Bricklin's feet. Indeed, the entire documentary, except for the last five or so minutes, gives one the impression that this excitable, hot-tempered entrepreneur could not possibly succeed in holding up his end of the contract.

So why did it all fall apart? Well, I'll leave that for you to judge -- that is, if you have about an hour and a half to watch a fascinating story.

You can find the entire documentary online at Once you've watched it, feel free to return here and post your thoughts.

How does Bricklin get away with breaking all the "rules" of negotiating in China?

Did he ever really have an agreement with Chery?

Whose fault was it that this venture never got off the ground?

Friday, July 24, 2009

In Lieu of an Actual Blog Post...

A decision to spend the rest of the summer in LA, followed by a decision to move to a different apartment, have interrupted my original research plans. Once my move is out of the way, I expect to spend the rest of the summer absorbing the content of the 30+ interviews I have conducted in China thus far and planning my return to China later in the year, as well as hopefully resuming a more regular blog posting schedule.

Meanwhile, I was recently interviewed about my research by the intrepid Aimee Barnes, a New Yorker and China specialist who interviews other China specialists with diverse backgrounds. I am honored to have been added to the mix.

You can find a transcript of the interview on Aimee's blog, here.