The Auto Board

[MWM]

Warren Buffett's China car deal could backfire

By Ben Berkowitz, Kevin Krolicki and Lee Chyen Yee

NEW YORK/DETROIT/HONG KONG | Wed Mar 9, 2011 11:02am EST

NEW YORK/DETROIT/HONG KONG (Reuters) - An ordinary American investor would probably not put money into a foreign electric car start-up suspected of openly copying competitors, let alone one whose franchised dealers occasionally put other companies' logos on its own vehicles.

But Warren Buffett is no ordinary investor, and China's BYD is no ordinary company.

At the depths of the financial crisis, Buffett put $232 million into BYD Co. Ltd., taking a 9.9 percent stake in the nascent Chinese auto business. Lest there be any doubt of the relationship, BYD showrooms are adorned with giant pictures of Buffett shaking hands with Chairman Wang Chuanfu.

More than any winning presentation at the Detroit Auto Show, more than any statistics or innovations, Buffett's imprimatur put BYD on the map, instantly making it the most serious Chinese contender among those seeking to sell an all-electric car in the U.S. market.

But diplomatic cables revealed by WikiLeaks and provided to Reuters by a third party, as well as interviews with industry consultants and executives who have examined the company's operations, raise a number of questions about the fledgling carmaker. Among other things, they describe a record of stealing designs from rivals, using those savings to undercut competitors on price and scrimping on safety.

"While BYD has certainly achieved a measure of success based on a business approach of copying and then modifying car designs just enough to convince Chinese courts that the company has not infringed on patents, it is far less certain that foreign courts will be as sympathetic," Guangzhou Consul-General Brian Goldbeck wrote in an October 30, 2009 cable that was unclassified but marked for U.S. government eyes only. It was submitted just days after BYD shares hit a new peak, driven by Buffett's backing.

BYD's questionable behavior went beyond copying designs, though. According to the consulate, the company also sold some vehicles almost at cost to boost its market share and may have advertised safety ratings for one model it did not have.

The scorching assessment of BYD by U.S. officials carried the title, "BYD seeks to 'Build Your Dreams' -- based on Someone Else's Designs." Nothing in the consulate's cable describes the motivation for the secret review of the Chinese upstart, although it notes that Buffett's bet had put BYD in the spotlight and allowed it to be seen as "one of the most promising carmakers of the future." The State Department did not respond to request for comment on the cables.

It is true that analysts view some of BYD's behavior as broadly typical of the Chinese auto industry, particularly the meticulous copying of better-known international cars. Yet analysts and industry experts in the United States say even in that context, BYD stands out, and there are questions about whether the company's much-ballyhooed -- and oft-delayed -- e6 all-electric car will ever make it to the U.S. market.

Micheal Austin, the vice president of BYD America, defended the company, its track record and the promise of its battery technology that made Buffett a believer.

He said in an email: "So where is the true technology and intellectual property? -- is it in wrapping of piece of sheet-metal around a car? or is the genius in creating a vehicle with ZERO emissions? Zero, Nada, Zip -- no noise, no smell, no smog. A vehicle that does no harm to the environment and can sell in Shenzhen China for $10,800 (after Chinese National and local incentives) -- that is genius!"

"No one can match the technology in that. Should 'they' be worried, yes. Will 'they' complain that 'Chinese' cars follow World design trends and follow design best practices? Yes," Austin said in the email.

"BYD's business and intellectual property practices in China, as well all places of the World, are compliant with local and international requirements and regulations. If there are factual complaints from (other automakers), we work hard to resolve them," he said.

Buffett did not respond to a request for comment made via his assistant, who handles his press inquiries. A spokeswoman for Buffett's MidAmerican Energy unit, which controls the investment, said "we do not speak or comment on behalf of BYD."

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