Warren Buffett doesn’t usually like companies in which the top managers are selling when the share price falls. By that standard, the Omaha investor must not be too happy with his Berkshire Hathaway’s 2008 purchase of 9.9 per cent of Chinese electric auto maker BYD.
Mr. Buffett is still up on his investment, but BYD’s Hong Kong-listed shares are down 84 per cent from their 2009 peak, and the Shenzhen-listed shares have tumbled more than 40 per cent in the last three months. The company warned in April that its first half net profit will fall by 75 to 95 per cent. Despite the sharp correction, insiders are still rushing to the door. In July, key executives and other big shareholders have sold about $133-million (U.S.) in shares, or 3 per cent of its market capitalization.
The withdrawal of the 2009 government stimulus has sharply slowed down passenger vehicle sales growth – from 33 per cent in 2010 to 5.2 per cent in 2011. Domestic producers, who mostly serve the poorest and most price-sensitive customers, have been hit especially hard. Their market share fell to 39 per cent in June from 34 per cent six months earlier, official data show.
BYD did not anticipate the change in trend. It expanded aggressively in the past two years, and the ratio of debt-to-assets ratio rose from 53 to 64 per cent between 2009 and 2011, while operating cash flow is deteriorating.
Many potential customers fear that the low-cost domestic cars aren’t as safe as foreign brands. The percentage of Chinese automobile buyers wanting to purchase a European vehicle has increased from 25 per cent in 2009 to 35 per cent this year, according to JD Power. Those fears help explain the attention given to a June crash, which killed all the occupants of a BYD electric taxi while no one in the other two cars involved was badly hurt. A government-led probe cleared the electric battery in the accident.
Mr. Buffett was attracted to the BYD concept: Make electric cars widely available in a country that is short on energy. The reality – of shifting government policies and persistent consumer doubts – is proving much more difficult.