Charlie Munger on International Expansion

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.

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 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.

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.

Munger closed the 2019 meeting with a series of operating lessons drawn from Berkshire's history. He pointed to the founding businesses of Berkshire Hathaway - a doomed department store, a doomed New England textile company, and a doomed trading stamp company - and said that out of that mix came Berkshire. They had handled those losing hands pretty well and they had bought into them very cheaply. But, Munger said, of course the success came from changing their ways and getting into better businesses. The lesson was that scrambling out of mistakes without letting them cost too much is a real and underappreciated part of long-run compounding. He sharpened the point. It isn't that we were so good at doing things that were difficult, he said. We were good at avoiding things that were difficult, and finding things that were easy. The inversion of the popular image of Berkshire - which celebrates Buffett and Munger as patient geniuses who solve the hardest problems - was deliberate. Munger was telling the room that the actual edge was in saying no to the hard stuff and saying yes only when the proposition was simple, durable, and within reach. He connected the lesson to expectations and to China. His advice to a seeker of compound interest that works ideally was to reduce expectations, because he thought returns were going to be tougher for a while, and that having realistic expectations made you less crazy. On China, he repeated his 2017 line: the great companies in China were cheaper than the great companies in the United States. And he closed with the too-hard pile again - there was a pile on his desk, he said, that solved most of his problems. Every once in a while an easy decision came along and he made it. That was the system.

At the 2017 Daily Journal meeting, Munger made one of his most explicit pitches for Chinese equities. Some very smart people were wading into China, he said, and he expected more to follow. His core observation was simple and structural: the great companies in China were cheaper than the great companies in the United States. He had been making the same observation privately for years, and at DJCO 2017 he made it on the record. Munger's reasoning was not a macro call. He was not predicting the renminbi, the Politburo's next move, or the exact timing of trade frictions. He was making a relative-value statement about the cost of buying world-class franchises in two markets. A great company in China, on the metrics he cared about - long-run return on capital, durability of the moat, growth runway - was available at a lower multiple than a comparable great company in the United States. That gap, in his view, was an opportunity for the patient investor who could underwrite the Chinese business honestly. The risk, he acknowledged, was real. China had governance, disclosure, and political-risk dimensions that American investors had to take seriously. But Munger's framing was that those risks had already been priced into the cheap multiples - that the market had over-discounted them. The implicit recommendation was to do the work, find the genuine franchises, and pay the cheaper price while other investors were still standing on the sideline. He would, of course, take his own advice in the BYD position - the Chinese EV maker he had championed at Berkshire a decade earlier and that, by 2017, was making real money.

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.