Why Charlie Munger Says China EV Firm Beats Tesla

Charlie Munger turned 99 years old on January 1, 2023, and it’s pretty clear that the word “retirement” isn’t in his vocabulary. He has held the position of Vice Chairman of Berkshire Hathaway since 1978, and he has long been Warren Buffett’s most trusted adviser, partner, and friend.

Neither has plans to retire, and in fact, when asked for specifics, Buffett said he will retire “about five to ten years after I die.” The same is apparently true of Munger.

Over the 40+ years Munger has been with Berkshire Hathaway, he has been instrumental in many decisions related to Berkshire Hathaway’s portfolio, which has a current value of almost $334 billion. The company’s market cap is more than $685 billion, and Berkshire Hathaway Class A stock is the most expensive in the world at just under $500,000 per share.

Of the many, many trades and acquisitions that Munger has recommended, he can point to the one that makes him most proud: China’s top electric vehicle company, BYD.

In a February 2023 interview, Munger said, “I have never helped do anything at Berkshire that was as good as BYD and I only did it once.” He went on to add, “BYD is so much ahead of Tesla in China … it’s almost ridiculous.”

So, why did Charlie Munger say this Chinese EV firm beats Tesla? Is BYD stock a better buy?

Why Did Tesla Stock Go Down?

Tesla is an unusual company, in part because of its unusual leader, Elon Musk. It trades like a tech stock though it’s in the business of manufacturing automobiles, and share prices are often affected by Musk’s off-the-cuff remarks on social media. Tesla stock peaked alongside many other tech companies in November 2021 with a share price above $400. By the start of 2023, it was under $115 per share. Only now is it starting to recover.

Though Tesla is producing some of the most advanced electric vehicles available in luxury styles that appeal to high-end consumers, at its core, the company doesn’t have manufacturing experience. That fact put Tesla in a bind when global supply chains were in turmoil, and Tesla had a more difficult time than its auto industry peers when inflation and interest rates increased in 2022.

Musk and the company as a whole have demonstrated that they take a scientific approach to developing next-generation EVs. They are prepared to test out features, and they expect to see failures before they find an effective solution. That’s problematic when it comes to auto manufacturing, as companies like General Motors, Toyota, Ford, and Honda know all too well. When public safety is at risk, a trial-and-error approach creates catastrophes that tarnish the entire brand.

In 2021, Tesla had to recall close to half a million cars because of faulty rear view cameras. Then, in 2022, Tesla issued multiple recalls that covered several million vehicles. Some of the issues included loss of steering function and airbag malfunctions.

Now in 2023, nearly 400,000 Tesla cars with autonomous driving capabilities are being recalled. In all cases, the issues prompting the recalls increased the likelihood of crashes, but the issue with self-driving software is truly alarming for investors. Tesla fans like ARK Invest’s Cathie Wood believe that the future of Tesla stock depends on its success with self-driving cars.

Recalls are common in the auto industry, but they rarely involve such significant safety concerns. More importantly, because Tesla sells far fewer cars than its traditional gas and diesel engine peers, the recall numbers make up a larger proportion of Tesla’s total sales.

The bad press, coupled with class action suits over Musk’s handling of the company, contributed to the 2022 drop in share price. Economic conditions that impacted most tech stocks were also responsible for the company’s loss in value.

The last straw came when Musk took over Twitter, which required him to sell a large portion of his Tesla stock. The acquisition was widely condemned for its poor execution, and current and prospective Tesla shareholders have voiced their concerns that Musk can’t focus on Tesla when he is also operating a foundering social media platform.

With all that in mind, it’s no wonder that Warren Buffett and Charlie Munger never bought Tesla stock, but they haven’t ignored the potential of electric vehicles altogether. China’s BYD ticked all the boxes required of a Berkshire Hathaway purchase, and Munger’s gamble on BYD has paid off.

Why Did Charlie Munger Say BYD Beats Tesla?

BYD was founded in 1995, and it started trading on China’s stock exchange in 2008. Berkshire Hathaway made its first BYD purchase – 220 million shares – that same year. This was just before electric vehicle sales took off, so the timing couldn’t have been better. To date, Berkshire Hathaway has realized more than 1,500 percent growth on its initial investment.

There are several key differences in BYD’s business model vs. Tesla’s. One of the most obvious is that Tesla exclusively manufactures EVs, while BYD’s product line is broader. BYD’s vehicles are simpler and less luxurious than Tesla’s cars, but they are far more affordable. In China, one of the biggest markets in the world for just about everything, including electric vehicles, affordability is critical to success.

However, in an interesting twist, BYD has been able to increase its prices, and it is starting to develop a presence in markets outside of China. Last year, it outsold Tesla for the first time, and it looks like 2023 will bring more of the same.

Meanwhile, Tesla has had to reduce its prices in China twice over the past year – a point Munger says perfectly illustrates why BYD is the best choice for investors. If BYD can increase its prices while Tesla prices go down, BYD will overcome the biggest argument against BYD stock and for Tesla stock: Tesla’s profit margin. BYD averages approximately $1,190 in profit for every vehicle it sells, while Tesla’s profit is nearly $10,000 per car.

Time will tell whether Munger made the right call with BYD or Tesla will ultimately dominate the EV market, but most investors agree BYD stock is a buy when they hear of the latest development in the EV wars. Tesla, which has always competed on the strength and power of its batteries, is starting to put BYD Blade batteries in some Tesla vehicles. That suggests BYD is winning in technology, safety, and affordability, which leaves Tesla behind.

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