This Warren Buffett-backed electric car company is forecasting that its sales will triple this year.
BYD (BYDDF)
From The Complete Investor
The rivalry between the U.S. and China plays out on many different fronts. One is a battle for leadership of the electric vehicle (EV) market.
China’s BYD (1211.HK, BYDDF), through its subsidiary BYD Auto, is the world’s biggest manufacturer of electric cars, with U.S.-based Tesla (TSLA) in second place. In this battle, we give BYD the edge, but we’re not writing Tesla off. For both, the critical backdrop is that electric cars will be indispensable in a world that urgently needs to move away from oil as the world’s major transportation fuel.
Oil’s role in transportation is the major reason it now represents more than 30% of global energy consumption. Even under the most optimistic assumptions about the growth of renewables, oil is still expected to be the world’s largest energy source in 2035, accounting for more than one-quarter of energy consumed. The big attraction of electric cars is that they don’t need oil: their electricity can come from any energy source, including renewables.
Comparing the two EV companies, Tesla has a large technological lead, with its vehicles able to travel much farther on a single battery charge. But unlike BYD, it has yet to turn a profit. EVs are expensive, and lacking government subsidies, Tesla has had to spend its cash flow on research and development.
Tesla hopes to gain the upper hand by building a massive battery manufacturing that may prove insurmountable, and it seems doubtful that Tesla’s battery factory will achieve the hoped-for economies of scale. Batteries and EVs require large quantities of scarce materials ranging from heavy rare earths to graphite to cobalt. Tesla’s ability to obtain these is constrained, while China, through its natural endowment and relationships with countries like the Congo and Australia, has ready access to them.
BYD has been in the black since at least 2007, and while its profits have been erratic so far, the company is likely to segue into a fast-growing dependable stream. The Chinese government has contributed to this metamorphosis into a growth company.
Beijing not only subsidizes purchases of EVs, it penalizes fleet owners who don’t buy them. And BYD’s less sophisticated technology has kept its cars cheaper, another reason they are far bigger sellers than Tesla’s more advanced cars. It’s not surprising that Warren Buffett has been an investor shire Energy and owns 10% of the company.
All in all, BYD seems the best bet for a stake in EVs. Still, Tesla isn’t out of the running. We think the next U.S. president will need to aggressively promote renewables, and Tesla could be a beneficiary.
Stephen Leeb, PhD. and Genia Turanova, The Complete Investor, www.completeinvestor.com, 866-833- 2070, April 2016