Charlie Munger on EV Transition

At the 2023 Daily Journal meeting - Munger's final DJCO appearance before his death later that year - he was asked why he preferred an investment in BYD to one in Tesla. His answer was pointed: Tesla, last year, reduced its prices in China twice and BYD increased its prices. They are direct competitors. BYD is so much ahead of Tesla in China, Munger told the room, that it is almost ridiculous. He went further, noting that if you counted all the manufacturing space BYD had in China to make cars, it would amount to a big percentage of all the land in Manhattan. He then gave the room BYD's recent numbers. BYD had made more than two billion dollars after taxes in the auto business in China the previous year. He asked who in the hell makes two billion as a brand new entrant in the auto business, for all practical purposes. It was, he said, incredible what had happened. The number was not a projection - it was a result. And it confirmed what he had been saying about BYD since the original 2008 investment: this was a real business with a real moat, not a speculative bet on a foreign manufacturer. Munger closed the BYD reflection with a structural point about capitalism itself. There was, he said, still some old-fashioned capitalist virtue left in the Daily Journal, and some left in Berkshire Hathaway, and some left in BYD. The virtue he meant was the one where the founder and chairman used his own stock - not the company's stock - to reward executives, because he believed the rewards should come out of his own hide. Most places, Munger said, everybody is trying to take what they need and just rationalizing whether it's deserved or not. The minority that operated differently, in his view, were the ones who compounded.

Wang opened the 2023 annual results briefing against the backdrop of a year in which BYD had sold approximately 3.02 million new energy vehicles, including 1.6 million pure electric vehicles and 1.4 million plug-in hybrids, and had become the largest manufacturer of new energy vehicles globally for the second consecutive year. Management told analysts that net profit had grown to approximately RMB 30.0 billion on revenue of approximately RMB 602 billion, with the automotive business contributing the majority of both revenue and operating profit and the mobile phone components and assembly business providing a stable second leg. Wang walked analysts through the international expansion trajectory, indicating that the overseas new energy passenger vehicle sales had reached approximately 242,000 units during the year, with the Atto 3, the Dolphin and the Seal having been positioned across the European, the Southeast Asian, the Australian and the South American markets. He flagged that the local manufacturing footprint in Thailand, in Brazil and in the planned Hungarian site was being built as the long-term structural anchor of the international expansion and that the export of vehicles from the Chinese manufacturing base continued to provide the near-term volume. On the Q&A, analysts pressed on whether the price reductions taken during the year, especially in the Chinese market where the broader industry had engaged in a sharp price war, would compress the long-term unit economics of the franchise. Wang responded that the price reductions had been executed from a position of cost leadership, that the captive battery supply chain and the scale of the manufacturing footprint provided the unit cost discipline required to maintain the margin trajectory through the price war and that the long-term competitive position of the franchise had actually strengthened during the year as the lower-cost competitors took share from the weaker players. He also defended the choice to continue to invest aggressively in research and development through the price war, arguing that the technology trajectory of the franchise was the central long-term advantage. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles, the leading manufacturer of new energy solutions and the leading manufacturer of new energy commercial vehicles, anchored on the captive battery supply chain, the DM-i hybrid platform, the international expansion and the technology trajectory of the blade battery and the cell-to-pack architecture.

Wang opened the 2022 annual results briefing against the backdrop of a year in which BYD had sold approximately 1.86 million new energy vehicles, exceeding Tesla's global deliveries and becoming the world's largest manufacturer of new energy vehicles by volume. Management told analysts that net profit had grown to approximately RMB 16.6 billion on revenue of approximately RMB 424 billion, with the automotive business contributing the majority of both revenue and operating profit, the rechargeable battery and the photovoltaic businesses contributing a stable second-leg earnings stream and the mobile phone components and assembly business providing the third leg. Wang walked analysts through the cessation of the pure internal combustion engine passenger vehicle production in March 2022, indicating that the Company had moved to an exclusively new energy vehicle model range ahead of the regulatory schedule and that the transition had been driven by the unit economics of the captive battery supply chain, the regulatory environment and the consumer demand for new energy vehicles. He flagged that the DM-i hybrid platform had become the dominant growth driver of the passenger model range, that the Han, the Seal and the Atto 3 had been positioned as the flagship pure EV models and that the Company had launched the international expansion with the Atto 3 entering the Australian, the Thai and the European markets during the back half of the year. On the Q&A, analysts pressed on whether the international expansion would dilute the near-term earnings given the cost of establishing the overseas distribution and the manufacturing footprint. Wang responded that the international expansion was being executed gradually, that the local manufacturing footprint in Thailand and in the planned European sites would be the long-term structural anchor and that the underlying unit economics of the captive battery supply chain provided the cost advantage required to compete in the international markets. He also defended the company's vertical integration strategy as the central advantage of the franchise in the international expansion. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles and the leading manufacturer of new energy solutions, anchored on the captive battery supply chain, the DM-i hybrid platform and the international expansion.

Wang opened the 2020 annual results briefing against the backdrop of a year in which the Chinese passenger vehicle market had been disrupted by the COVID pandemic and in which the Chinese government had accelerated the new energy vehicle policy support. Management told analysts that net profit had grown to approximately RMB 4.28 billion on revenue of approximately RMB 156.6 billion, with the new energy vehicle business contributing the majority of revenue growth and the medical mask and the consumer electronics businesses providing incremental support during the pandemic response. Wang walked analysts through the blade battery technology launch, indicating that the new cell format had been validated through extensive safety testing, that the technology was being deployed across the BYD passenger model range and that the structural advantage of the blade battery was the inherent safety of the lithium iron phosphate chemistry combined with the space efficiency of the long blade format. He flagged that the Han EV, the first model to deploy the blade battery, had been launched during the year and that the early demand response had positioned the model as a credible competitor to the global premium EV brands in the Chinese market. On the Q&A, analysts pressed on whether BYD would spin off the battery business as a separate listed entity. Wang responded that the captive battery supply chain remained a structural advantage of the BYD franchise and that the Company intended to continue to deploy the battery technology across the captive model range while exploring selective external supply opportunities. He also defended the strategy of being an integrated manufacturer rather than a specialist EV player, arguing that the vertical integration provided the cost discipline and the technology validation that were the central advantages of the BYD franchise. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles and the leading manufacturer of new energy solutions, and with the Company committing to invest aggressively in the blade battery technology, the DM-i hybrid platform and the new energy commercial vehicle franchises through the cycle.

Munger used the 2019 platform to reflect on BYD, more than a decade after Berkshire's original 2008 investment. The position had been the source of considerable public attention, and Munger had been the principal advocate inside Berkshire for the bet on the Chinese EV maker. He told the audience that the bet had worked out, that BYD had become a serious business, and that the early conviction about the founder and the technology had been validated by the company's subsequent execution. The reflection was characteristically Munger in two respects. First, he refused to take credit for foresight. The investment had worked because the founder had executed; the bet had been a bet on a person and a culture, and the person and the culture had delivered. Munger's framing was that he had identified a small number of things that mattered - the founder's character, the technology trajectory, the Chinese government's commitment to electrified transport - and had refused to be talked out of the bet by the surface-level concerns about Chinese governance and disclosure that had scared other foreign investors away. Second, Munger connected the BYD reflection to the broader thesis on international investing. He told the room that Berkshire had made a serious amount of money in China over the years - PetroChina before BYD - because the great companies in China had traded at lower multiples than comparable great companies in the United States. The pattern was not luck; it was the consequence of doing the work and being willing to underwrite a foreign franchise when other investors were standing on the sideline. The lesson for the audience was that the international opportunity set was real and recurring, and that the patient, disciplined investor who did the work would be paid for doing it.

Wang opened the 2014 annual results briefing against the backdrop of a year in which BYD had sold approximately 19,000 pure electric passenger vehicles, the largest pure-EV volume of any Chinese manufacturer, and in which the Qin plug-in hybrid had launched successfully. Management told analysts that net profit had grown to approximately RMB 2.28 billion on revenue of approximately RMB 58.2 billion, with the automotive business contributing the majority of both revenue growth and operating profit and the secondary battery business continuing to provide a stable earnings baseline. Wang walked analysts through the strategic positioning, indicating that the Company had moved from being a rechargeable battery manufacturer that had entered the automotive market to being an integrated new energy vehicle manufacturer that used the captive battery supply chain as a structural advantage. He flagged that the new energy vehicle, the new energy passenger vehicle and the energy storage product lines were being positioned as the long-term growth engines of the Company, while the traditional internal combustion engine passenger vehicle business was being managed for cash and market share rather than for aggressive growth. On the Q&A, analysts pressed on whether the new energy vehicle business was earning an adequate return on the invested capital given the early stage of the market. Wang responded that the unit economics of the Qin and the e6 were tracking within the long-term target range, that the scale being achieved through the captive battery supply chain was driving the unit cost down faster than the industry had projected and that the regulatory environment in China, including the purchase tax exemption and the license plate preference in the major cities, was supporting the volume trajectory. He also defended the vertical integration, arguing that the captive battery supply was the central structural advantage of the BYD franchise. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of new energy vehicles, anchored on the vertically integrated battery, automotive and energy storage franchises, and with the Company committing to invest aggressively in research and development through the cycle.

In the 2008 Berkshire shareholder letter, written in the depths of the global financial crisis, Buffett and Munger disclosed Berkshire's $230 million investment for roughly 9.6% of BYD, the Chinese battery and electric-vehicle maker. The investment had been Munger's champion play inside Berkshire. He had argued that BYD's founder, Wang Chuanfu, was one of the most capable operating executives he had ever met, and that the combination of low-cost Chinese manufacturing, advanced battery chemistry, and an early-mover position in electrified transport would compound for decades. The investment thesis was deliberately simple. BYD was, in Munger's view, a real company making real products at low cost, with a genuine engineering edge in batteries and a market - China - that was being underwritten by a state committed to electrification. The price was modest relative to the long-run earnings power. The risks were real - Chinese corporate governance, foreign-currency exposure, execution risk on the technology roadmap - but Munger's view was that the market had over-discounted those risks and that the underlying franchise was available at a price that did not require any heroic assumption to justify. The retrospective implication, captured in the 2008 letter's plain disclosure of the position, was that Munger had identified a small number of things that mattered - founder quality, technology trajectory, market underwriting, valuation - and had refused to be talked out of the bet by the surface-level concerns that scared other foreign investors away. The position would, over the next fifteen years, multiply many times in value. By the time Munger discussed BYD at the 2023 DJCO meeting, the company was making more than $2 billion after taxes in its Chinese auto business alone. The bet on the founder and the technology had been one of the most profitable investments Berkshire ever made on Munger's recommendation.

Chairman Wang Chuanfu opened the 2008 annual results briefing against the backdrop of the September 2008 announcement that Berkshire Hathaway's MidAmerican Energy subsidiary had subscribed for 225 million new BYD H-shares at HK$8 each, raising approximately HK$1.8 billion and giving MidAmerican a 9.9 percent stake in the Company. Wang told analysts that the transaction was structured as a long-term strategic partnership rather than as a financial investment, that MidAmerican's interest in BYD's battery and electric vehicle technology had been the strategic motivation and that the Berkshire relationship would provide BYD with access to global capital markets, technology validation and the standing to recruit international senior management. Wang walked analysts through the 2008 results, indicating that net profit had grown to approximately RMB 1.02 billion on revenue of approximately RMB 26.7 billion, with the rechargeable battery business contributing the majority of operating profit and the automotive business contributing the majority of revenue growth. He flagged that the F3 sedan had become one of the best-selling single models in the Chinese market, that the battery technology had been validated through the supplier relationship with Nokia and other global handset manufacturers and that the Company was preparing to launch the F3DM, the world's first mass-produced plug-in hybrid electric vehicle, during 2009. On the Q&A, analysts pressed on whether the electric vehicle ambition was a credible near-term business or a long-term option. Wang responded that the underlying battery technology had been developed over a decade of consumer electronics scale, that the iron-phosphate battery chemistry being deployed in the F3DM was inherently safer than the cobalt-based chemistry used in many competitor products and that the Company intended to deploy the technology across the full model range within the next several years. He also defended the choice of the iron-phosphate chemistry as reflecting the long-term safety and cost trajectory rather than the short-term energy density. The briefing closed with management reiterating the long-term ambition of being the world's largest manufacturer of rechargeable batteries, the largest manufacturer of electric vehicles in China and the leading manufacturer of new energy solutions for the global market, anchored on the vertically integrated battery, automotive and energy storage franchises.