What Buffett sold is not BYD, but the automotive industry.

When cars first emerged, you might have already realized their significance. However, it was still difficult to pick the profitable companies when opportunities arose - Buffett's closing speech at the Sun Valley Summit in 1999.

In the movie "Hello, Mr. Billionaire", Wang Duoyu spent 40 million yuan to bid for a lunch with Buffett (referred to as Lafitte in the movie). After treating Mr. Buffett to a grilled kidney, Wang Duoyu asked a question:

How to lose money?

Buffett's answer was: I only know how to make money, not how to lose it. Of course, this is for the comedic effect of the movie. In fact, Buffett surely knows how to lose money, even better than others. He repeatedly emphasizes the pitfalls of losing money at the annual shareholders' meetings. If Wang Duoyu had really invited Buffett himself, Buffett might have talked non - stop about how to lose money for two hours to Wang Duoyu.

One of the points might be: Don't invest in businesses on wheels.

Buffett has publicly stated multiple times that even though the automobile industry has infinite growth potential, it's difficult to tell which company will be the winner in the end due to the small differences between enterprises. From this perspective, it's not hard to understand the news that Buffett cleared his position in BYD recently.

This also explains why there was a fierce disagreement between Buffett and Munger when Munger wanted to buy BYD stocks in 2008. Buffett only "reluctantly" bought BYD stocks. Eventually, BYD's stock price soared nearly 40 times, and both Buffett and Munger made a fortune.

However, does Munger being right mean Buffett was wrong?

01 It's not personal. Buffett just doesn't invest in automobiles

In 2008, there was a huge disagreement between Munger and Buffett regarding the investment in BYD. In Munger's view, Wang Chuanfu was extremely outstanding, and the electric vehicle market was also extremely promising. But in Buffett's view, it might not matter who BYD or Wang Chuanfu was. The important thing was not to invest in automobiles.

Buffett witnessed the cruelty of the automobile industry firsthand.

In the 1950s, Buffett graduated from college. At that time, there was an economic recovery boom after World War II, and the automobile industry entered its golden age. The U.S. automobile industry accounted for about 70% of the global automobile production. The "Big Three" automakers - Ford, General Motors, and Chrysler - almost monopolized the market.

But Buffett keenly noticed a fact: Everything in the automobile industry was good, creating jobs, benefiting consumers, and boosting the economy, but only the automakers were having a hard time.

The excitement of racing lies in the pursuit and overtaking, which is also a characteristic of the automobile industry. There is no eternal winner here. A best - selling model five years ago might face discontinuation five years later. The global leader ten years ago might be overtaken ten years later.

In the 1950s, the competition among the three major U.S. automobile groups was extremely fierce. Just like the current new - energy market, a single mistake in a car model could change a company's fate. General Motors might be leading one year, and Ford might take the lead the next year.

But just over a decade later, the competition among the three was no longer important - the U.S. automobile industry was hit by Japanese cars. The three major automakers were severely squeezed. When Buffett mentioned the cruelty of the automobile industry in his 2009 speech, two of them had gone bankrupt, and even Ford, which didn't go bankrupt, hovered on the verge of danger. Now, all three of them have become marginal players in the global automobile market.

So what if the Japanese cars won?

Nissan faced a debt explosion in the 1990s and was on the verge of bankruptcy, and was eventually acquired by Renault. Mitsubishi Motors was hit by quality problems and was also nearly bankrupt, and was only saved by a consortium's capital injection.

A popular view now is that the automobile industry has entered an elimination stage, and automakers are facing a wave of closures. But if we look back at history, it's easy to find that this view is inaccurate. In fact, every day in the automobile industry is an elimination stage. Every few years, international automakers are acquired due to broken capital chains.

After the test of time, only a few winners remain. But are the winners really living a comfortable life?

- Of course not. Looking through the historical financial reports of Honda, Nissan, and even BMW, profit margins below 5% or even 1% - 2% can be often seen. The most difficult business in the world is not failing to beat the opponent, but winning the opponent without high profits.

At the 1999 shareholders' meeting, Buffett said:

"If you could foresee the impact of cars on the world around 1905, not to mention on the United States, or the impact of airplanes on the world, you might think it was a good way to get rich. However, only a very small number of people got rich from the automobile industry."

What Buffett meant was that even if you predicted the rise of the automobile industry 50 years in advance, it was still difficult to make money from it. And in the era of new - energy, this statement still seems to hold true.

02 New - energy vehicles are still vehicles

In 2013, Tesla, which had once planned to sell itself to Google, had a huge turnaround. The Model S sold well, and Tesla achieved its first quarterly profit. Many people realized that the automobile industry was about to change.

This was a disruptive technology. It not only changed the power source of cars but also brought an intelligent system. The automobile industry seemed to be becoming a brand - new industry.

But Buffett's strength lies in that his views can always transcend time. From fuel tanks to batteries, from engines to electric motors, from radios to intelligent car systems? But a car is still a car. Even more so, the long - distance marathon has turned into a sprint, and the time scale has shrunk. Changes that used to take 10 years to occur can now happen in just a few months.

In 2021, Tesla's delivery volume increased by 87.4% year - on - year, and its stock price reached a record high. The outside world's expectations for new - energy vehicles were reflected in the sales volume. To some extent, Tesla was the inventor of electric vehicles. Facing a blue - ocean market, this "inventor" clearly had a huge first - mover advantage.

But in a fiercely competitive market, no player gets special treatment.

In 2022, the domestic new - energy vehicle market witnessed explosive growth. BYD rose strongly, and international fuel - powered automakers also gradually made a transformation. In just over a year, Tesla's stock price plunged. It dropped from $410 in 2021 to $102 at the beginning of 2023.

Domestic new - energy automakers are winners. But this doesn't mean any single automaker is a winner - because there is still internal competition.

In 2022, Nezha Auto became the sales champion among new - energy vehicle startups. But just two years later, the champion was involved in a production - halt crisis. Leapmotor, which was once on the verge of being eliminated, overtook others and became the sales champion among new - energy vehicle startups multiple times. XPeng was once considered "the next new - energy automaker to go bankrupt", but it made a comeback after the MONA series and became the sales champion among new - energy vehicle startups multiple times.

These are just a microcosm of the "pursuit and overtaking" in the new - energy vehicle market. In the past three years, players like Li Auto, NIO, XPeng, Aion, and Wenjie have risen and declined repeatedly. Any automaker might quickly fall behind, and any automaker might quickly overtake an opponent that seemed unattainable before.

Even with the addition of the "high - end" intelligent driving technology, a car is still a car.

In 2023, Tesla's FSD V12 was officially launched. This autonomous - driving product had a disruptive performance. Autonomous driving replaced electrification and became the new narrative in the automobile industry. Many automobile investors were overjoyed: This was a data moat similar to those of Baidu and Google, and it would change the logic of the automobile business.

But the fact proves that in front of diligent and excellent automakers, the technological moat is easily broken. Li Auto, which was once considered "not caring about technology", started to focus on intelligent driving. BYD, which was previously thought to lack the genes for intelligent driving, launched a full - range of high - level intelligent driving systems and became a leader in intelligent driving. Great Wall also made a magnificent transformation, and its chairman publicly stated that Great Wall's comprehensive intelligent - driving level was the best in the industry.

For a while, almost all brands seemed to have a very powerful intelligent - driving technology and became "intelligent - driving brands". So, the story of "pursuit and overtaking" remained unchanged, and no automaker could sit back and relax.

Who will be the winner in the new - energy vehicle market? This should have been a question whose answer would become clearer over time. But now, it has become even more blurred.

The only clear thing is the profit margins of automakers: According to media statistics, the average profit margin of 11 domestic listed automakers, including BYD, Seres, NIO, Leapmotor, and Li Auto, was only 2.49% in 2024. According to data from the China Passenger Car Association, the profit margin of the Chinese automobile industry in 2024 was 4.3%.

Image source: The official account of Cui Dongshu, the secretary - general of the China Passenger Car Association

Many people think this is the pain during the elimination stage of the new - energy vehicle industry. But if we understand the past data, it's not hard to find that the profit margin of the automobile industry has always been like this. From the 2013 fiscal year to the 2017 fiscal year, the combined net profit margin of three Japanese automakers - Toyota, Honda, and Nissan - was 6.2%. Toyota's profit margin was close to 10%. If we exclude Toyota, the average profit margin of the other two was less than 5%.

For domestic automakers that haven't entered the stable stage yet, the current profit is not too low.

03 A good industry but not necessarily good investment targets

In 2023, the total output value of China's automobile industry reached 11 trillion yuan, accounting for nearly 10% of the country's GDP. For the first time, it exceeded the real - estate industry and became China's first economic pillar.

In Slovakia, the automobile industry accounts for about 44% of the total industrial production. The number of people employed in the automobile industry chain exceeds 260,000, accounting for nearly 6% of the country's total population. It's roughly equivalent to one in every 20 people working in the automobile - related industry chain. The salaries of automobile workers have further driven the development of various service industries.

In North Africa, the automobile industry accounts for more than 10.4% of Morocco's GDP, creates more than 220,000 direct jobs, and contributes 25% of the country's total export volume.

In Japan, according to multiple third - party reports, the automobile - related industries provide more than 5 million jobs, accounting for more than 8% of the country's total labor force.

With its huge scale and long industrial chain, the automobile industry has an unparalleled ability to drive related industries.

- It also gives automakers and entrepreneurs great influence. Automakers have strong resource - mobilizing capabilities, and many automakers have hundreds of billions of yuan in their accounts. This is unimaginable for a light - asset Internet company with the same market value.

In terms of public influence, within a month after the release of Xiaomi SU7, Lei Jun gained more than 6 million followers on Douyin. Now, Lei Jun can compete for the title of the most influential entrepreneur in China. The leaders of automakers like Li Xiang and Wei Jianjun have also become top influencers on social media.

Fang Sanwen, the founder of Xueqiu, was once asked why entrepreneurs keep flocking to the automobile industry despite its low profit margin. His answer was: "As a consumer product, a car is expensive. As an industry, it has a large output value, which satisfies entrepreneurs' pursuit of scale. As a consumer product, a car is a man's big toy. As an industry, it is the flagship of the industrial age and has strong externalities, which satisfies entrepreneurs' spiritual needs."

Of course, these things have little to do with investors in the secondary market.

This article is from the WeChat official account "Lüe Dà Cān Kǎo" (ID: hyzibenlun). The author is Yang Zhichao. This article is published by 36Kr with authorization.