To The Moon

The electric vehicle competition is intense and only to get worse as legacy automakers as well as tech companies are rushing into the space to fight for a pie of it.

Buffett famously said that this isn't a good sign as a similar pattern happened to gasoline car makers in the 1920s. There were over 2,000 brands and only 3 remained and all were not doing well. Competition kills profits.

Ironically, he invested in BYD, $BYD COMPANY(01211)$the China EV maker in 2008. Perhaps it was less competitive in those days and BYD had other businesses that include making batteries as well as electronics assembly.

Berkshire bought BYD stake for $232 million and it is now worth $9.3 billion. That is a 39x return in 14 years or a compounded annual return of 30%.

The value of the stake was boosted due to the soaring BYD share price, which was up 28% in 2022 year-to-date. In contrast, Tesla $Tesla Motors(TSLA)$share price has fallen by 42% in the same period.

This is not without merits. From Jan 2022 to Apr 2022, BYD has outsold Tesla globally. BYD sold 391,782 units while Tesla did 349,432. The rest of the players were too far to worth a mention.

Tesla has been sitting on the throne for years and now BYD has caught up with it. It is still early to say BYD has won the race in 2022 but the game of thrones has definitely began.

It doesn't help when Tesla is firing staff and controlling costs while BYD is expanding. BYD is even selling batteries to Tesla very soon.

Slightly more than half of BYD's revenue was from its automotive segment in 2021. It was equivalent to US$16.4 billion. As for Tesla, it generated 95% of its revenue from automotive segment worth US$51 billion in 2021.

This is because BYD's price points are lower, between RMB 100k to 200k per unit while Tesla prices above RMB 300k. This is also evident in the differences for their operating profit margins - BYD at 3% while Tesla is at 12%.

Hence, BYD technically should outsell Tesla but it may not be as profitable. The parallels would be Apple vs Samsung. The latter outsold Apple in terms of the number of handsets but the margins for Apple are a lot fatter.

Given the same argument that Buffett invested in Apple instead of Samsung, he should buy Tesla instead of BYD. But the reverse happened.

Of course there are other factors that Buffett considered which we will never know with 100% confidence what they were.

Hence it is more important that you have the competency in the EV space to know who is going to be the winner. For me, this falls in my too-hard pile.