Monday, June 01, 2009

What’s In Your Garage? Part II

Serendipity strikes again –– and more than once. You will recall that in last month’s article, I referred to the delayed government response to the Tesla car company’s request for $450 million in federal funding. As of this writing, no decision on the hoped for grant has been made. However, a most surprising (even astonishing) bit of news was reported just two days before the deadline date for this article. The oldest car manufacturer in the world, Daimler (founded almost 120 years ago), made a substantial investment in one of the newest automakers Tesla Motors. More specifically, it purchased 10 percent of Tesla and although the specific dollar amount has not been revealed, it is estimated to be around $50 million. That would value Tesla as worth some $500 million. Considering that as of this writing, General Motors is valued at only a bit over one billion dollars, Tesla’s imputed value is remarkable.

This injection of cash will somewhat ease Tesla’s need for additional funding, and also provide engineering support, parts, and additional design capabilities from Daimler. It gives Daimler a leg up in the field of electric vehicles as well as Tesla’s battery pack technology. This seeming vote of confidence by a company of Daimler’s stature could also favorably influence the federal government’s view of Tesla’s request for funding. Whether or not that happens, Elon Musk, the Chairman of Tesla, maintains that the car will be built with or without that funding. We shall see.

The Second Serendipitous Happening

That was only the first of three serendipitous events. The second one was just after Part I of this article (describing the Model S Tesla four door electric vehicle), was submitted to the publisher of Viewpointe on April 27 th for the May issue. Two days later, on the evening of April 29 th, a working prototype of the Model S Tesla was displayed on stage on the Letterman Late Show, and David Letterman interviewed Elon Musk, the Chairman of Tesla Motors. At least a partial explanation for Mr. Letterman’s interest in Tesla relates to his ownership of one of the 450 or so $109,000 Tesla Roadsters currently roaming the streets, primarily of California. Letterman was most enthusiastic about the new car and its forward thinking technology.

The Third Happening

On May 19 th, three days before this article was to be submitted, the Obama White House announced new fuel and emission standards for cars and trucks. If implemented as planned, this action will undoubtedly result in the most consequential transformational period ever recorded for the American automobile industry. Auto manufacturers will finally be forced to not only recognize, but to immediately begin to transition from the 100 year old era of antiquated gasoline powered combustion engines, most probably into the age of the electric car, be it plug-in hybrid gas/electric, or plug-in full electric.

A Fourth Consequential Development

However, an extremely interesting development occurred late last year (one that did not garner much attention at the time), one that could have significantly greater consequences than the Tesla car. The story gained prominence from its exposure in the April 27 th issue of Fortune magazine, when it was not only the magazine’s feature story, it was also highlighted by a cover picture of a grinning Warren Buffett holding a coiled orange electric extension cord in front of what the magazine’s headline reads, “Buffett’s Electric Car.” The car in question is an all-electric vehicle that looks much like a slightly older version of the Toyota Camry, except that it is not made in Japan –– the car is made in China.

Can you picture the world’s second wealthiest man driving a fake Camry, electric car or otherwise? Despite Buffett’s unostentatious lifestyle –– no chauffer, he drives his own car –– until two years ago he drove an eight-year old Lincoln Town car that he donated to a charity that auctioned the car on eBay garnering over $78,000 for a good cause. In his effort to bolster a failing General Motors, he then purchased, and still drives a Cadillac DTS,

In reality the Fortune magazine headline was misleading since Buffett did not actually buy the Chinese made car. Oh no! He merely bought the Chinese car company. However, even that is misleading because his investment of some $230 million bought only 10 percent of that company. (Buffett really wanted to buy 25 percent of the company, but the owner refused to sell more than the 10 percent.)

The Real Reason

But the story is even more complicated than that. Although Buffett has expressed his belief in the electric vehicle concept, the true purpose of the investment was not the car or indeed even the company –– it was to purchase the talents of the man who founded the company, Wang Chuanfu, known as Mr. Wang. Apparently Buffett’s interest was piqued when Charley Munger, his erstwhile partner, was quoted as saying, “This guy [Wang] is a combination of Thomas Edison and Jack Welch [former CEO of General Electric] –– something like Edison in solving technical problems, and something like Jack Welch in getting done what he needs to do.” This was punctuated by Munger concluding, “I have never seen anything like it.” (Incidentally, the actual purchase was made by MidAmerican Energy, 88 percent owned by Berkshire Hathaway. This large utility company is interested in ultimately establishing charging stations for plug-in electric vehicles, thereby selling its electricity).

Mr. Wang is indeed a unique individual. Despite growing up in extreme poverty, Wang managed to enter college studying metallurgical physics and chemistry. He ultimately received a Master’s degree as an engineer, then becoming a government researcher. However, in 1995, at age 28, he harked back to his college days and his interest in batteries. Borrowing money from his family, he hired a few dozen engineers and began to sell batteries to giant cell phone companies such as Motorola, Sony, Nokia, and Samsung, ending up doing so very successfully.

The Largest Battery Company

Wang’s company, BYD (standing for Build Your Dreams), now employs some 130 thousand people of which 11,000 are engineers plucked from the top schools in China. With 11 factories producing literally millions of batteries, BYD has been cited as the largest rechargeable cell phone battery producer in the world. At only 42 years old, Wang is China’s youngest billionaire, and according to Forbes, he is the 23 rd wealthiest person in the country. Fortune magazine lists him as the 10 th most influential person in China. Not too bad for a poor peasant raised on a rice farm by an older brother and sister.

The Largest Car Company?

However, based primarily on his company’s expertise in the battery field, Wang has even greater aspirations. Simply put, he has stated that his goal is to make BYD China’s largest car company by 2015, and the world’s largest car company by the year 2025. That sounds like quite an undertaking, so how did a “battery guy” suddenly become a “car guy” with such fanciful ambitions? In 2003 he bought a small bankrupted car manufacturer owned by the Chinese government that had basically given up on the company. By 2005 BYD was selling a car under its brand, and only three years later, in late 2008, its monthly sales were higher than any other Chinese car company. In fact, in 2008 sales doubled to 400,000 units, and they are expected to double again in 2009.

By the first of this year, BYD was selling the very first mass produced Plug-in Hybrid Electric Vehicle (PHEV) in the world, the F3DM (for dual mode). With an amazing 62-mile battery-only range, and a 100 mph speed range, it sells for $22,000. That is almost one half the expected price of the Chevy Volt that is not anticipated to debut until 2010. (As BYD scales up production, the price is expected to be reduced to some $16,000). BYD is planning to enter the U.S. market in 2011 with the F3DM.

The First Mass Produced Electric Car

At the Detroit auto show in January, BYD displayed its E6 model, an all-electric Plug-in Crossover with a battery range of an unheard of 250 miles, and a speed of 100 mph. The unique iron phosphate battery developed by, and exclusive to BYD, can be recharged from an ordinary house current, and can be specially charged to 50 percent capacity in only ten minutes. This is a car that could revolutionize the industry. Although it was announced that the car would be sold in Europe by 2010, there is no date set for U.S. distribution.

While it may seem ironic that a small, heretofore unknown Chinese car company may have an enormous influence on the future of the automobile industry, it is even more ironic (and sad) that from the beginning of this year through April, more cars have been sold in China than were sold in the United States, making China the world’s largest automobile market. This and other factors affecting what will ultimately be in your garage will be discussed in next month’s issue. (Strictly for your information, BYD stock can be bought in the “Pink Sheet” market under the symbol BYDDF. This is not to be construed as a recommendation.)


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