(BRK.A), (BRK.B)
No article on Yahoo these days fails to mention the company’s 15% stake in Alibaba. It’s a stock position that has grown so valuable that it’s the tail that literally wags the dog on the valuation of the high-tech company.
Is there an Alibaba in the making for Berkshire Hathaway with Chinese auto and battery maker BYD Company Ltd.?
By that I mean will the value of Berkshire’s share of BYD eclipse the rest of the company?
Well, no, because unlike Yahoo, Berkshire owns assets including insurance companies, railroads, and energy companies that have enormous value.
But, yes, if you are looking for a minority stock position that over time could rival or surpass Berkshire’s huge minority shareholder stakes in Coca-Cola, IBM, or American Express.
How We Got Here
In 2008, at the urging of Berkshire’s Vice-Chairman Charlie Munger, Warren Buffett bet on BYD’s potential, purchasing 225 million shares for $230 million, and today Berkshire owns roughly 9.1% of the company.
It’s a bet that looks better and better every year.
In 2015, BYD became the number one seller of electric cars in the world. It was a dramatic rise for a company that only ranked seventh in 2014.
That’s not all, in April 2016, BYD achieved another major milestone, the production of its 10,000th pure electric bus. The company is thoroughly dominating the rapidly growing market for emissions free buses of all sizes.
An Investment That Eclipses All Others
With a market capitalization of roughly $19.5 billion, that makes Berkshire’s original investment of $230 million worth roughly $1.77 billion.
It’s a phenomenal return in just five years, and BYD’s best days are clearly ahead of it.
Unlike Tesla, which is burning through money, and is in a race to reach ambitious sales goals before it runs out of money, BYD is already profitable.
What’s more, its profits are growing dramatically, despite China’s slowing economy.
BYD is predicting that its first-quarter profit will jump more than 50 percent from the first-quarter 2015. We’re talking profit not just revenue.
Berkshire’s Alibaba-Like Asset
Berkshire’s got some amazing assets, but most of them won’t grow dramatically in the future. GEICO is the second largest auto insurer in the U.S., but its growth at this point will be incremental not logarithmic. Some even question the future of auto insurance with the coming era of self-driving cars. The same goes for BNSF Railway, which as a Class 1 railroad is in a highly regulated industry with only modest growth potential unless anti-trust regulators approve another round of consolidations.
Even the recently completed $37.2 billion acquisition of Precision Castparts, which gives Berkshire an aerospace company poised to take advantage of the growing demand for passenger jets in India and China, has the growth potential of BYD. Precision Castparts will grow based on the estimated need for new aircraft with a total value of $5.6 trillion over the next two decades, but it won’t grow ten-fold.
Unlike these companies, BYD is operating in lightly regulated market sectors. It dominates the pure electric bus market (a market that Tesla isn’t even in), and while it has already sold its 10,000th electric bus, that is still just a drop in the bucket for a total bus market that is expected to reach eight million units by 2018.
In 2018, only a fraction of those buses will be electric, but in another decade or two they all may be, and for good reasons.
Why They Will All Be Electric Buses
Why will they be electric buses? Because they will have to be. In order for cities to meet ambitious carbon emission reduction goals, existing diesel and even hybrid buses will have to be phased out. The pollution numbers tell the tale. In countries like China and India, buses make up a huge percentage of their air pollution.
In China alone, diesel buses make up just 10% of the vehicles on the road but contribute over 30% of city air pollution and GHG emissions.
Visionary Leadership That’s Making BYD Number One
As for leadership, Tesla’s Elon Musk is clearly already one of the most fascinating corporate visionaries of the 21st century, but don’t forget that Charlie Munger hailed BYD’s CEO Wang Chuanfu as “a combination of Henry Ford, Thomas Edison and Bill Gates.”
He’s already one of China’s richest men.
While Elon Musk has lots of amazing ideas, including hyperloops, and trips to Mars, many of them don’t have a clear path to profitability. Wang Chuanfu has a goal of being number one, and he’s already there.
BYD’s number one in globally in electric car sales, number one in electric bus sales, and they are the world’s largest manufacturer of rechargeable batteries.
BYD is electrifying forklifts, trucks, and a host of other fossil fuel burning vehicles and devices.
They are also building and home scale eclectic battery storage that’s already on the market in Europe and Africa. Tesla gets a lot of attention for their Powerwall, but BYD is in the same market with their B-Box technology.
Berkshire’s $230 million bet on BYD may prove to be its best bet of all-time, as BYD grows into a a global leader that is mentioned in the same breath as Volkswagen and Toyota.
And, since unlike those auto companies it is also involved in IT, photovoltaics, and commercial and residential battery storage, it may just end up being the biggest one of all, which would be very good for Berkshire Hathaway.
For More on BYD, read the Special Report: BYD, Berkshire’s Tesla.
© 2016 David Mazor
Disclosure: David Mazor is a freelance writer focusing on Berkshire Hathaway. The author is long in Berkshire Hathaway, and this article is not a recommendation on whether to buy or sell the stock. The information contained in this article should not be construed as personalized or individualized investment advice. Past performance is no guarantee of future results.