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Buffett, Berkshire Continue China-Japan Pivot

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2023-04-12

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This week saw two contrasting investment decisions by Warren Buffett and his Berkshire Hathaway empire.

The first involved a visit to Japan, where he said the right things about future investment. The second was another small sale in his most successful Asian investment, battery and electric vehicle giant BYD.

Both told us a lot about how well Buffett and his managers at Berkshire understand the Asian region - they are certainly far more comfortable with Japan while China looks like being a bit too risky.

While in Japan, Buffett did an interview with the leading business paper - the Nikkei and its Asian offshoot - in which he revealed that Berkshire Hathaway had lifted its holdings in five major Japanese trading companies.

In mid-2020, Berkshire Hathaway revealed it had taken stakes of slightly more than 5% in Mitsubishi Corp., Mitsui & Co., Sumitomo Corp., Itochu Corp. and Marubeni Corp. Since he bought in, the value of the holdings is up more than $US6.8 billion.

Buffett said in the interview published Tuesday that Berkshire now owned 7.4% of Itochu and others, up from the levels in a SEC filing last November.

Before this week, Berkshire had lifted the holdings from 5% to 6.8% of Marubeni, 6.6% of Mitsubishi, Mitsui and Sumitomo and 6.2% of Itochu.  Now the stake is higher and Buffett said back in 2020 that he could go to a 9.9% holding over time.

The Nikkei said it had confirmed the higher shareholdings.

Buffett also reportedly said he will consider more investments in Japanese stocks and would be meeting other companies later this week while on a trip to the country.

Buffett said he’d consider investing in other Japanese companies or partnering with any of the trading companies if they need an investor to help them finance a deal in the future.

“We don’t think it’s impossible that we will partner with them at some point in the future in a specific deal,” he said to Nikkei.

“We would love if any of the five would come to us ever and say, ‘We’re thinking of doing something very big or we’re about to buy something and we would like a partner or whatever,” he told the Nikkei.

In the Nikkei interview, Buffett explained his interest in the five trading houses by saying, "We feel that these five companies are a cross section of not only Japan but of the world. They are really so much similar to Berkshire. They own a lot of different things."

Berkshire said separately that it was preparing to make another purchase of Yen bonds in Japan - it used a raising in 2020 to finance its initial positions in the five giant trading houses, meaning there was no foreign exchange risk. That raised speculation this week or more investments, possibly outside the trading houses.

And then there’s China.

The Nikkei interview also provided an explanation of the purchase and then quick sale of most of the company’s $US4.1bn position in TMSC, the big Taiwanese semiconductor maker.

Buffett told Nikkei Asia that rising geopolitical tensions between China and Taiwan were "a consideration" in Berkshire’s swift sale of the world's largest chipmaker. China claims Taiwan as its own territory, which Taiwan has denied for decades.

Berkshire surprised with the $US4.1 billion TSMC investment in the September quarter and by the end of the December quarter, that had been slashed to just $US600 million.

He told Nikkei that Taiwan Semiconductor is a well-managed company, but said that Berkshire Hathaway had better places to invest its money.

And yet when Berkshire assembled the $US4.1 billion stake in the September quarter of 2022, tensions were high already thanks to the visit to the island by then US House of Representatives speaker, Nancy Pelosi. That sparked days of military provocations, threats, criticism and insults from China.

The rising geopolitical “considerations” were clear for all to see and yet three months later the stake had been cut to $US600 million and we will know May 15 whether the retaining TSMC shares have been held on to.

Adding to the concerns about Berkshire’s attitude to China is Berkshire’s slow sales of one of its most far-sighted investments - the 20% stake in then small Chinese battery maker BYD back in 2007 for $US2 a share (now almost halved).

That 20% later became a very clever investment for Berkshire as BYD expanded deeper into batteries, autos and other products and then finally into what China called New Energy Vehicles (battery powered or plug-in vehicles).

A year ago, BYD stopped making internal combustion engine vehicles and plunged deeper into NEVs and is now the world’s biggest EV maker and second largest battery powered EV maker after Tesla.

BYD shares were trading at $HK224.60 on Wednesday with the total value now more than $HK750 billion. Buffett’s stake, even though it is lower because of the sales, is worth a lot more than what he paid for it.

But the redirection of investment funds into Japan is a telling move.

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