Buffett's Appetite for China Not Suppressed
By Don Dion - 03/30/12 - 6:00 AM EDT
NEW YORK (TheStreet) -- Warren Buffett's name has been tossed around with China quite a bit over the past few days. Although he has consistently sung the praises of the United States, this world-famous investor's investing habits are far from U.S.-centric. On the contrary, in recent years he has been spotted jet-setting around the globe on a hunt for his next big opportunity.
China, in particular, has been a popular destination. In 2009, Buffett spent HK$2 billion to purchase a 10% stake in the battery maker-turned-electric car manufacturer, BYD
. Thanks to China's blossoming middle class and the wild initial success of models like the F3, BYD shares surged following his investment. For Buffett, this dramatic ascension translated into dollar signs. Less than a year after his purchase, media sources reported that it had earned Buffett USD$1 billion. BYD was shaping up to be yet another success story for the Berkshire Hathaway
Buffett continues to be in the money with his Chinese electric car company. However, in recent years, the mood surrounding BYD has soured dramatically. With issues like declining sales, product delays and land disputes weighing heavily, the company's share price has stumbled along a steady downward path, since peaking around October 2009.
Although the downturn has been dramatic, the pain may not be over. This week, Bloomberg
reported that BYD was taking an axe to its first-quarter profit forecasts, paring estimates by as much as 95%. The report notes that the growing Chinese presence of competing car manufacturers like General Motors
is largely to blame for the company's weakened expectations.
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The first two rules in Buffett's book of investing wisdom are, 1. Don't lose money; and, 2. Don't forget rule 1. While he has yet to record a loss with BYD, the company faces steep hurdles on the road ahead. It will be interesting to see what's next for the Berkshire/BYD relationship.
At the same time that his Chinese car investment is struggling, Buffett is making another transportation-related bet in the nation. This time, he is hoping that the popularity of air travel takes off in this emerging growth engine.
In Buffett's most recent shareholder letter, he confessed that, for years, Berkshire Hathaway's jet-sharing company, NetJets, was his, "number one worry." Today, however, thanks to some fruitful management decisions, the firm appears to have found its footing and is now turning a steady profit. In fact, looking to the near future, Buffett is planning to expand the company into the Chinese marketplace.
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Whereas BYD's success has depended on the growing strength of China's middle class, NetJets caters to the demands of the region's wealthy citizens. This class, however, has also grown dramatically and looks to expand further in the years ahead. In fact, according to The Wealth Report 2012
, the region (including Southeast Asia, China and Japan) now boasts 18,000 centa-millionaires, making it the largest concentration of ultra-wealthy individuals in the world. Comparatively, North America and Western Europe count 17,000 and 14,000, respectively.
The outlook appears optimistic, but it will ultimately take time to find out if NetJets' foray into the Chinese marketplace bears fruit.
We have seen some discouraging signs of an economic slowdown in China over the past few months. However, famous investors like Warren Buffett appear unwilling to give up on the nation. What are your feelings towards China? Feel free to leave a comment in the space below.
-- Written by Don Dion in Williamstown, Mass.
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