Buffett Invests In Electric Cars

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Warren Buffett's move into electric cars has sparked a surge of interest among investors.

With concern about climate change there is growing interest in electric cars. Indeed, the purchase by Warren Buffett in September 2008 of $232 million worth of shares in BYD, equivalent to a 10% stake in the Chinese battery and vehicle manufacturer, sent its shares shooting up.

Why did Buffett buy?
On the face of it, this looks like quite a departure for Buffett. He has often professed that he doesn't understand technology and likes to invest in companies with a simple business model.

However, BYD is already the world's largest manufacturer of batteries for mobile phones and it also manufactures for conventional cars. Buffett has always stressed the importance of good management and has gone on record as saying that BYD's chairman Wang Chuanfu has "an extraordinary management record".

BYD is already very profitable and is set to become more so. It has begun selling a plug-in electric car (the F3DM) that has a backup gasoline engine. It apparently goes 62 miles on a single charge and sells for $22,000, which is far less than rival products are expected to cost when they reach the market in late 2010. It also plans to introduce all electric cars soon.

To give you some idea of the scale of the company, its revenue for 2008 was approximately £2.4b with pre-tax profits of £121m. It employs 130,000 people in eleven factories, eight in China and one each in India, Hungary and Romania.

Its share price is now approximately $32 HKD (approximately £2.50) having shot up 250% in the past year.

The big question is how good are its lithium ion batteries? Further research, sales and industry gossip may help here. However, even if doesn't have the best product, it doesn't necessarily mean that it won't eventually come to dominate the market if it can form the right strategic alliances. For example, BYD has already signed a memorandum of understanding with Volkswagen to supply lithium ion batteries for hybrid and all-electric vehicles.

How else to gain exposure?
If BYD's recent share price rise puts you off, you could wait until it dips or look elsewhere for exposure to hybrid electric and fully electric cars. However, you'll need to spend a lot of time researching to ensure you don't end up with a dud.

As well as investing in car manufacturers you can look at investing in their suppliers:

Conventional car manufacturers -- some are moving into the electric car market. Nissan is planning to launch its fully electric car in 2010 with the intention of selling 100,000 by 2012. Toyota and Honda have hybrids on the market. Daimler has also bought 10% of Tesla Motors, the electric sports car maker.


Battery specialists -- there are a few companies, listed and unlisted, working on lithium ion batteries. This technology has emerged as the leading choice to power future electric cars. Battery specialist A123 systems attracted $20m in funding from GE, and General Motors is planning to use the company's batteries in its hybrid car, the Volt. The company was planning a $175million IPO late last year but is making large losses.


Other electric car makers -- these include Think Global in Norway, Lightning Car Co. here in the UK, as well as Tesla Motors and Fisker Automotive, both in the US.
If you are looking for a quoted company closer to home to gain some exposure to electric vehicles, AIM-listed Tanfield (LSE: TAN) might be worth taking a look at, but it is risky. Tanfield makes aerial lifting machines (powered access) and electric commercial vehicles. In March it announced a collaboration with Ford to produce a limited number of electric delivery vans in the US in 2010. More recently it has announced that it's developing electric passenger vehicles.

It has given investors a roller coaster ride and recently consolidated its shares. In 2008 it made a pre-tax loss of £88.7m on revenues of £145.7m.

Valence Technology is quoted on NASDAQ and another investment possibility -- its ticker code is VLNC. Valence's lithium phosphate batteries are used in thirteen London hybrid double-decker buses and it also supplied battery packs to Smith Electric Vehicles, which is a division of Tanfield.

You'll need to do a lot more work before investing. Still, it would be churlish to presume that Buffett hasn't already identified the most promising and least risky way to gain exposure to electric cars.

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