“Well, I thought it would be instructive to go back and look at a couple of industries that transformed this country: automobiles and aviation. Take automobiles first: I have here [a list] of 2,000 car manufacturers that have operated in this country. If you had foreseen in the early days of cars how this industry would develop, you would have said, “Here is the road to riches.” After corporate carnage that never let up, we came down to three U.S. car companies – themselves no lollapaloozas for investors. So here is an industry that had an enormous impact on America – and also an enormous impact, though not the anticipated one, on investors.” —Warren Buffett in Fortune, November 22, 1999
Buffett’s disdain for the high-capex-low-ROIC automobile industry was as deep-seated as the airline industry in which he made his pointed remarks that he would shoot down Orville Wright if he had been at Kitty Hawk in 1903. Buffett even shorted automaker Kaiser-Frazer in 1949 for two years. Yet, Buffett seemed to have gone against his own advice and bought in September 2008 a roughly 10% stake in China’s electric car maker BYD for around US$200 million at HK$8 per share. Despite its poor fundamental performance, BYD had since tripled in under five years, trouncing the 23%, 14% and 8% for the S&P 500 index, Hang Seng index and Shanghai index respectively over the same period, beating even Hyundai (162%), Ford (143%), BMW (+110%), Toyota (16%), Daimler (-2%), GM (-15%) and Volkswagen (-48%). However, BYD’s performance pales in comparison to Great Wall Motor (GWM) which is up 20-fold during the same period. Pre-GFC (Global Financial Crisis), BYD handily outperformed GWM and was up over 10-fold to its HK$85.5 peak in October 2009; post-GFC, BYD is down over 70%. So who is GWM? Why is it able to be resilient in an industry where two-thirds of passenger cars sold are foreign brands and the motley crew of over 170 domestic car makers are considered “lowest in the food chain” with over half to disappear in coming years despite government subsidies as predicted by the state-backed car association?
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