A sharp fall in sales of conventional gasoline cars at BYD Co. is threatening to undercut its ambitious expansion plans for electric cars and other “green” technologies, throwing further doubt on a once-soaring investment by Warren Buffett in the Chinese company that has plunged in the last year.
Investors dumped BYD’s Hong Kong-listed shares Tuesday following its disclosure late Monday that its first-half profit fell nearly 90% from a year earlier to 275.36 million yuan ($43 million), based on Chinese accounting standards. The Shenzhen-based company indicated earnings in the current quarter would fall by a similar amount. Its car sales, which account for nearly half its revenue, fell 23% in the first half of the year to 220,131 cars.
BYD’s share price fell 14.3% in Hong Kong trading to 16.18 Hong Kong dollars ($2.07)—the lowest finish since April 2009 and down 86% from BYD’s highest closing price of HK$85.50 in October 2009.
When BYD’s shares were soaring, the purchase of 10% of the company in 2008 by MidAmerican Energy Holdings Co., a unit of Mr. Buffett’s Berkshire Hathaway Inc., was hailed as another visionary triumph for the investment giant and boons to then-MidAmerican Chairman David Sokol and Li Lu, the money manager who originally brought BYD to the attention of Berkshire Vice Chairman Charlie Munger. Mr. Sokol was once a leading contender to replace Mr. Buffett, and Mr. Li was said to be in the running to take over some of Mr. Buffett’s investment duties. Mr. Li took himself out of the running last year, and Mr. Sokol resigned earlier this year.
Mr. Sokol, who held a seat on BYD’s board, hasn’t yet been replaced, a BYD spokeswoman said.
BYD’s shares still trade around twice the HK$8 price that MidAmerican paid, but its stake today is worth $3.6 billion, down from $19.2 billion at its peak.
Behind the plunging share price is fear that the big fall in revenue and profit from gasoline-fueled cars is damaging the BYD business model in which Mr. Buffett’s company invested: using sales of traditional cars and of the cellphone batteries BYD makes to help finance expensive research and development of electric cars, solar panels and other green technologies that have a potentially bright future.
Fueling that anxiety, BYD in its latest earnings report Monday said it cut spending on R&D in the first half of the year by 13% from a year earlier to 612 million yuan—following years of aggressive growth in such spending to support electric-car and other green-tech products.
BYD executives “need to keep investing in new-energy vehicles because it is that green image that differentiates the company, but they don’t have enough money left for regular gasoline-car development,” says Yale Zhang, head of automotive consulting company Automotive Foresight in Shanghai.
BYD’s car sales have been slipping since last summer in part because of competition from affordable cars launched in China by foreign companies and their local partners, such as General Motors Co.’s Chevy Sail compact car. BYD’s sales also suffered from the Chinese government’s decision to scrap purchase incentives for small cars that boosted its sales significantly in 2009 and early 2010.
Mr. Buffett didn’t immediately respond to a request for comment. A BYD spokeswoman declined to comment specifically on concerns about R&D spending.
But BYD Chairman Wang Chuanfu said Tuesday in Hong Kong that BYD hopes to revive car sales by launching more new models in the second half of this year.
“We have been developing higher-end new-car models in a bid to boost sales, and I am hopeful our sales in the second half would be better than that of the first half,” Mr. Wang said. He declined to provide a full-year sales target.
Mr. Wang co-founded BYD in 1995, initially focusing on making batteries for cell phones. It began making cars in 2003 when it acquired a small auto maker in Xian, and it found early success. In 2009, its car sales in China more than doubled to 448,000 vehicles, from 170,900 in 2008, making it one of China’s biggest privately owned auto makers.
It was Mr. Wang’s high-profile plans to expand into electric vehicles that drew the attention of Berkshire Hathaway and other investors. Mr. Wang saw the shift toward electric cars as a chance to leapfrog more established global rivals, by leveraging the technology his company had developed in its cellphone-battery business.
Last year, BYD’s traditional car business sputtered amid competition from other home-grown Chinese auto makers that outspent BYD developing gasoline-fueled models. BYD’s sales rose just 16% to 519,806 vehicles, a slow pace by China standards and far short of the 800,000 vehicles it had initially projected.
In an interview in January this year, Mr. Wang outlined a retooled strategy that he said would rejuvenate growth. Mr. Wang pledged to take more time to develop more competitive cars and cut the number of sales outlets by 5% from roughly 1,000 at the end of 2010 to weed out inexperienced stores. He said BYD would do better forecasting demand and focus more on “quality of sales” rather than “obsessing on market share.”
Those efforts have yet to show results.
Many industry observers, including Mr. Zhang of Automotive Foresight, believe BYD does have decent technology for its green ambitions.The company says it still plans to make an all-electric car called the e6 widely available to private buyers in China and the U.S. over the next couple of years. BYD is also expected to launch by 2013 in China another all-electric car it has been developing jointly with Germany’s Daimler AG since last year. A Daimler spokeswoman said that project “is on track.”
BYD is also making moves to increase sales of large-scale electric-power storage systems based on its lithium-ion battery technology for private households and businesses. Those devices are for storing power at night when electricity is abundant and cheap and using it during the day as a way to save energy cost for private buyers and businesses. The company is hoping for the business to take off in a market like Japan that is facing power shortages in the wake of the nuclear accident there earlier this year.
