global exchange

Chinese cars: an amber light

Financial Times

From the FT's Lex blog



That’ll teach investors to follow Warren Buffett too blindly. Sure, the share price of BYD (Build Your Dreams), China’s second-biggest homegrown car brand by unit sales, jumped more than tenfold in the year after Mr. Buffett’s investment through a subsidiary of Berkshire Hathaway in September 2008.

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Then it fell by three quarters. And now a profit warning: the company says that its first-quarter net profit could fall 95 per cent from a year earlier. That wiped another 5 per cent off the share price on Monday. Poor performance in BYD’s battery segment, which makes up a 10th of sales, is partly to blame.

The bad news, however, is that BYD’s car segment - which makes up half of revenue and carries gross margins one-fifth higher than its average - will do little to turn things around.



Traffic congestion and restrictions on car purchases are damping car demand in China’s big cities. That leaves inland China and small towns to pick up the slack. Lower incomes here should favour cheaper domestic cars. But as trusted foreign brands such as General Motors roll out their own cheap cars, pure Chinese makers are still up against it. Sales of homegrown cars fell by one-sixth in the first two months of this year, more than two and a half times faster than China’s overall decline in car sales.



BYD’s (and investors’) hopes are pinned on electric vehicles. That is why the company’s shares trade at 28 times forward earnings, a large premium to domestic peers. Its Daimler joint venture electric car will be revealed at the Beijing auto show in April. But electric cars are a side show. To date, only 300 of BYD’s electric vehicles are in use in China, and only thanks to government support. Meanwhile, peer Geely is making inroads overseas and has a strong pipeline helped by its parent’s purchase of Volvo. Success for BYD is further down the road.