BYD: A sinking ship?

Billionaire investor Warren Buffett must certainly be wondering about his 2008 decision to buy 10 per cent of sputtering car maker BYD (1211.HK ; Shenzhen: 002594), which is starting to look like the proverbial sinking ship after the recent defection of 2 key top executives. After seeing his US$232 million investment soar by many multiples in the 2 years after he bought it, Buffet has seen his BYD shares have come crashing back to earth in the last 2 years after the company's core car making business stumbled badly. Meantime, BYD founder and visionary Wang Chuanfu continued to try to sell investors on a longer term vision of building his company into an electric vehicle powerhouse of the future, even as BYD has had to implement massive layoffs and its profits have fallen to nearly zero.

At this point Buffett's stake is still worth about US$400 million, meaning he could still get a handsome 70 per cent return on his investment if he sold it today. Such a prospect must certainly be going through his mind, following word of the latest defection from BYD with its announcement that vice president and sales manager Yang Longzhong has left the company. 

BYD didn't say too much beyond announcing the actual departure, saying it was part of a restructuring and was also for personal reasons. Perhaps one of those personal reasons was Yang's decision last month to sell a hefty portion of his Shenzhen-listed A-shares in the company, according to media reports, which netted him more than 100 million yuan in proceeds. Yang's departure follows the resignation last year of Xia Zhibing, another BYD vice president and sales manager of its car division at the time.

Two years after BYD rose to prominence on the back of Buffett's investment and soaring sales of its best-selling F3 model, which for a time was China's best-selling car, the company is nowhere to be seen in the list of China's top 10 car makers. As its woes have mounted, the company has instead chosen to focus on hyping its big gamble on electric vehicles, announcing a steady stream of mostly pilot programs with various bus and taxi operators around the world, both in the west and developing markets.

But even on the electric car front, the company received a big setback in May when one of its electric taxis caught fire after a high-speed crash in its hometown of Shenzhen, burning the vehicle's 3 occupants to death. At the time, media quoted other drivers of BYD taxis saying their business had fallen off sharply as many passengers were afraid to use the cabs due to all the negative publicity.

The departure of 2 prominent vice presidents just as the company faces problems on so many fronts certainly can't be assuring to Buffett or BYD's other major investors, even as Beijing tries to jump-start its own sputtering new energy vehicle program by pressuring major cities to buy more electric and hybrid vehicles from companies like BYD.

With any meaningful contributions from its electric vehicle business probably at least 2 years away and its traditional vehicle business sputtering, the only things keeping BYD alive these days are its older battery business and the continued vote of confidence from Buffett. While the battery business will probably survive and perform reasonably well for a while to come, it remains to be seen if Buffett will keep his patience with this company or instead choose to sell his stake while he can still earn a profit on it. If that happens, which seems like a strong possibility, look for BYD's stock to fall even more as the company's prospects grow cloudier by the day.

Bottom line: The departure of a co-founder of BYD is the latest setback for the struggling company, whose superstar shareholder Warren Buffett must certainly be considering selling his stake.

The opinions expressed in this article are the author's own. To read more commentaries from Doug Young, click on youngchinabiz.com