In 2008, in the heat of the global financial crisis, Warren Buffett bought a 10% stake in PRC automaker BYD. Photo: IMD

BYD Co (HK: 1211), not long ago the darling of China’s auto sector and the greatest hope for the country’s alternative fuel vehicles, is now sporting a share price 67% lower than year earlier levels and is reportedly planning massive layoffs on the order of 70% of its staff to turn things around.

Will key investor Warren Buffett with a 10% share finally have a high-profile loser in his highly vaunted portfolio?

A Chinese language piece in Sinafinance said that market watchers were absolutely dismayed by the precipitous fall in the fortune of Shenzhen-based BYD, which just a couple of years ago sported Mainland China’s top-selling sedan.

“This is crazy! What happened to BYD? What will happen to their workforce?” was just one of the comments made by the country’s hundreds of millions of netizens typical in response to the news of the automaker’s latest troubling tidings.

BYD: Bad news coming in bunches.

The firm began the year by announcing another disappointing performance, in which 2010 full-year sales failed by a significant gap to hit the original target of 600,000 units.

While BYD’s performance is echoed throughout the PRC’s recently-slowed auto market, its fall has been much more dramatic, given its high prominence a few short years ago, as well as its high-profile investment by world-famous investor Warren Buffett.

This was followed by the early August retirement of BYD’s General Manager Xia Zhibing and news that seven out of 10 workers would be axed – a report first leaked to the Internet by an employee of the passenger vehicle and rechargeable battery maker.

The report, which said the redundancies were already underway and ongoing, targeted mainly sales staff at its nationwide network of auto dealerships and showrooms.

One online PRC media outlet source was cited as saying: “The measures are severe but required in carrying out a necessary reorganization of the firm and to remedy overlap. The six geographical sales regions will be reduced to four and marketing departments attached to each region will be reduced to two from three currently.”

This latest major retrenchment marks the third time in the past 12 months the automaker has turned to reorganization to remedy woeful sales performances.

Former Glory? BYD recently had the PRC's top selling sedan, the F3. Photo: BYD

However, analysts also say that although the move looks drastic on the surface, a closer look at BYD’s on-the-ground sales force layout reveals a shockingly overexposed and overlapping network of dealerships and sales teams.

Despite tanking sales over the past three years, the Hong Kong-listed firm has maintained its dealership count at around 1,200, which is quadruple the mere 300 it operated in 2007.

This has led to painful rebates (for the firm) and price wars across the sector in an attempt to clear inventory and balance books.

It should be noted that there has yet to be an official announcement from BYD on the layoffs, but the lack of a denial of the initial report is conspicuous in its absence.

Buffeted Buffett?

Niche Market: BYD has been hoping to fill a need for electric vehicles in the PRC, like this taxi in Shenzhen. Photo: Andrew Vanburen

Naturally, with the scale of the reported layoffs and the degree of possible reorganization of BYD, many are asking how the company’s most famous shareholder will be impacted, or what preventative measures he might take?

In 2008, Warren Buffett invested 232 mln usd in what at the time was around a 10% equity stake in the automaker.

That the chief of Berkshire Hathaway was willing to put such a big chunk in a relatively little known firm (to outsiders, at the time) amid the height of the global financial crisis, quickly turned BYD into an overnight sensation.

Not too long after Buffett’s investment, BYD's shares rose from 8 hkd per share to around 85 hkd, a staggering 10-fold increase,

However, with the drastic slowdown in Mainland China’s once super-revved domestic auto sales, and BYD certainly not escaping the downturn undented, many are asking whether Buffett – famous for his long positions and strategic long-term thinking – will continue to hold onto his BYD shares.

PRC netizens are split on Buffett’s possible strategies.

Some believe he will hold onto the BYD shares and use the case as an example of what not to do during his well-attended annual investor conferences in Omaha, Nebraska.

Others assert he will hold onto the BYD shares no matter what, out of principle, and await a respectable rebound before possible selling, saying his commitment to the investment will go down with the ship – or car – if necessary.

And like with most of the long positions held by Buffett, only time will tell if his investment decision was wise.

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