A 'Copper Standard' for the world's currency system

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cat233
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A 'Copper Standard' for the world's currency system

A 'Copper Standard' for the world's currency system?

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/516012...

Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

By Ambrose Evans-Pritchard
Last Updated: 12:33PM BST 16 Apr 2009

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.

The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.

If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.

Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.

While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.

One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.

This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.

Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".

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CB
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Re: A 'Copper Standard' for the world's currency system

http://www.nytimes.com/2009/04/16/world/16chinaloan.html?_r=1&hp

Quote:

Deals Help China Expand Sway in Latin America

Published: April 15, 2009

CARACAS, Venezuela — As Washington tries to rebuild its strained relationships in Latin America, China is stepping in vigorously, offering countries across the region large amounts of money while they struggle with sharply slowing economies, a plunge in commodity prices and restricted access to credit.

In recent weeks, China has been negotiating deals to double a development fund in Venezuela to $12 billion, lend Ecuador at least $1 billion to build a hydroelectric plant, provide Argentina with access to more than $10 billion in Chinese currency and lend Brazil’s national oil company $10 billion. The deals largely focus on China locking in natural resources like oil for years to come.

China’s trade with Latin America has grown quickly this decade, making it the region’s second largest trading partner after the United States. But the size and scope of these loans point to a deeper engagement with Latin America at a time when the Obama administration is starting to address the erosion of Washington’s influence in the hemisphere.

“This is how the balance of power shifts quietly during times of crisis,” said David Rothkopf, a former Commerce Department official in the Clinton administration. “The loans are an example of the checkbook power in the world moving to new places, with the Chinese becoming more active.” .......

 .......

One of China’s new deals in Latin America, the $10 billion arrangement with Argentina, would allow Argentina reliable access to Chinese currency to help pay for imports from China. It may also help lead the way to China’s currency to eventually be used as an alternate reserve currency. The deal follows similar ones China has struck with countries like South Korea, Indonesia and Belarus.

As the financial crisis began to whipsaw international markets last year, the Federal Reserve made its own currency arrangements with central banks around the world, allocating $30 billion each to Brazil and Mexico. (Brazil has opted not to tap it for now.) But smaller economies in the region, including Argentina, which has been trying to dispel doubts about its ability to meet its international debt payments, were left out of those agreements.

Details of the Chinese deal with Argentina are still being ironed out, but an official at Argentina’s central bank said it would allow Argentina to avoid using scarce dollars for all its international transactions. The takeover of billions of dollars in private pension funds, among other moves, led Argentines to pull the equivalent of nearly $23 billion, much of it in dollars, out of the country last year.

Dante Sica, the lead economist at Abeceb, a consulting firm in Buenos Aires, said the Chinese overtures in the region were made possible by the “lack of attention that the United States showed to Latin America during the entire Bush administration.”

China is also seizing opportunities in Latin America when traditional lenders over which the United States holds some sway, like the Inter-American Development Bank, are pushing up against their limits.

Just one of China’s planned loans, the $10 billion for Brazil’s national oil company, is almost as much as the $11.2 billion in all approved financing by the Inter-American Bank in 2008. Brazil is expected to use the loan for offshore exploration, while agreeing to export as much as 100,000 barrels of oil a day to China, according to the oil company.

...more...

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Re: A 'Copper Standard' for the world's currency system

I've been talking about this on other posts aswell.  This is where (I think) some of the 'gold nuts' have not seen the light.  Gold value in this crisis will only prevail if one of 3 things happen.

 1.  China no longer decides to support the USD.  This won't happen because then all the Treasury notes they hold will devalue rapidly.  This is why China is buying commodities now.  They're cheap & they know they can't afford to allow the USD to lose it's value.

2. The USD is dropped as the reserve currency.  Again..(same as pt # 1 I think) the rest of the world would lose out huge if this happens aswell.  And then truly we would see a collapse. ....Which is why the politicians (of any country) won't let it happen.

3.  Hyperinflation happens - I don't think the US could print enough $$ for this to happen given all the defaults in the system & vast amounts are being used to 're-capitalize' the banks.  The 'velocity' of money plays a key role here...if it doesn't reach those who will spend it then it doesn't work. ....vice being dropped from helicopters

Commodities & energy will be a better store of wealth.  Granted you can't bury a ton of copper in your backyard but that won't be necessary. (In my opinion)  There will be tough times ahead characterised by both deflation then some inflation but the whole system will not collapse.  It didn't in the 30's or WW1 or WW2 and it won't in this crisis.  I don't mean to underestimate the gravity of the situation we're in but life (albeit a more frugal life) will go on.

Caution to those (hoarding) gold...time your sell well because when the people who are buying the stuff now realize that we will survive this go to sell it back, the bottom will fall out of gold.  Look at the stages of a bubble again & ask yourself if that's not happening now in PM's.

I only post this not to restate what has already been said a thousand times but I do think there is significant 'risk' in PM's now and my purpose is to caution my 'friends' here.

 

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Re: A 'Copper Standard' for the world's currency system

chris_m,

Caution to those (hoarding) gold...time your sell well because when the people who are buying the stuff now realize that we will survive this go to sell it back, the bottom will fall out of gold.  Look at the stages of a bubble again & ask yourself if that's not happening now in PM's.

I only post this not to restate what has already been said a thousand times but I do think there is significant 'risk' in PM's now and my purpose is to caution my 'friends' here.

Some good points. However, silver, platinum and palladium are industrial metals (silver also a monetary metal). Silver is about 43% off its high last year, platinum about 50% off its high. We can store silver/platinum in a safe, no counterparty risk).

Gold is probably not a good buy now, compared with silver.

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Farmer Brown
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Re: A 'Copper Standard' for the world's currency system
Quote:

I've been talking about this on other posts aswell.  This is where (I
think) some of the 'gold nuts' have not seen the light.  Gold value in
this crisis will only prevail if one of 3 things happen.

1.  China no longer decides to support the USD
This won't happen because then all the Treasury notes they hold will
devalue rapidly.  This is why China is buying commodities now.  They're
cheap & they know they can't afford to allow the USD to lose it's
value.

2. The USD is dropped as the reserve currency
Again..(same as pt # 1 I think) the rest of the world would lose out
huge if this happens aswell.  And then truly we would see a collapse.
....Which is why the politicians (of any country) won't let it happen.

3.  Hyperinflation happens - I don't think the US
could print enough $$ for this to happen given all the defaults in the
system & vast amounts are being used to 're-capitalize' the banks. 
The 'velocity' of money plays a key role here...if it doesn't reach
those who will spend it then it doesn't work. ....vice being dropped
from helicopters

Commodities & energy will be a better store of wealth.  Granted you
can't bury a ton of copper in your backyard but that won't be
necessary. (In my opinion)  There will be tough times ahead
characterised by both deflation then some inflation but the whole
system will not collapse.  It didn't in the 30's or WW1 or WW2 and it
won't in this crisis.  I don't mean to underestimate the gravity of the
situation we're in but life (albeit a more frugal life) will go on.

Caution to those (hoarding) gold...time your sell well
because when the people who are buying the stuff now realize that we
will survive this go to sell it back, the bottom will fall out of gold.  Look at the stages of a bubble again & ask yourself if that's not happening now in PM's.

I only post this not to restate what has already been said a thousand
times but I do think there is significant 'risk' in PM's now and my
purpose is to caution my 'friends' here.

Despite my sign-off quote, I'm not a "gold bug".  However, I would like to contest a few things you are saying here.

First, #1 is already happening just based on what China is doing.  Why buy a commodity you do not need unless you think that in the near future, your reserve dollars will buy less of that commodity even after otherwise earning interest by investing them in US T-bills?  Also, not mentioned in this article but it should be apparent to anyone watching the news, is that China is not buying anywhere near the amount of T-bills it did in the past.  That sounds like "not supporting" the dollar to me.

As for #2, the whole world is talking about doing exactly that.  The Arabian countries are talking about their own currency (in year 2 now of talks as far as we know), China has called for it, Russia has called for it, the IMF (no surprise there) has called for it, and Europeans have called for it.  No, it hasn't happened, but the writing is on the wall, isn't it?

#3:  I wouldn't underestimate the ability of the Fed to anything wrong, but in any case, I think you are missing a different aspect of this:  Even if all this printed money is "only" going to the banks and sitting there, i.e., it is not increasing money velocity, the fact remains that money was printed and lent to the Treasury and the only way they can pay it back is through raising taxes.  Rasing taxes they can do, but they will reach a point where people will refuse to pay over a certain amount, and they will have to resort to printing again.  Therefore, inflation can easilly occur in a stagnant economy, and has in the past.

Finaly, gold is just a defensive play.  Nobody is going to get rich by investing in gold.  The best case is you do not become poor or less rich. I would like to know what you recommend putting your money in after selling gold as you recommend.  I surely do not have many ideas.  I have some gold, some play money, lots of commodities, and usually a stiff drink.  So far so good.  :)

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jlshen2000
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Re: A 'Copper Standard' for the world's currency system

Patrick,

Fully agree with you. I bought 2000 oz silver today for physical delivery (Like silver more because of its industrial and monetary nature).

I have some gold, some play money, lots of commodities, and usually a stiff drink.  So far so good.  :)

I am curious how you play with commodities. Commodities themselves or equities, or both? Maybe we shall have some foreign currency as well (CAD, Aussie dollars).

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Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A 'Copper Standard' for the world's currency system

jishen,

No, I do not "play" with commodites (unless you consider fire to be a commodity - but that was a long time ago).  I have "play" money (a very small amount) I do not worry about and that's for other things. 

My commodity investments are through two exchange-traded-note funds based on Jim Rogers' commodity indexes, RJI, RJA, RJN, and RJZ.  Be forwarned that exchange traded notes are backed by nothing.  They are literally loans to the bank that issues them (in this case the Swiss) and they invest the money in the funds.  I normally would not consider them, but these have Jim Rogers behind them.    

 

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Davos
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Re: A 'Copper Standard' for the world's currency system

After doing extensive research on automobiles I am convinced that electric cars will be the future. Unless I'm wrong, copper will be required - and a LOT of it.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
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Posts: 1503
Re: A 'Copper Standard' for the world's currency system

Davos,

I agree, and so does some dude named "Warren Buffet":

Market Scan

Buffett-Backed BYD Goes Electric

Tina Wang,
12.15.08, 05:45 AM EST

The company has produced China's first plug-in hybrid car.

Times are tough for automakers, but fast-rising Chinese company BYD, which stands for Build Your Dream, dreams big in the electric car market. BYD, partially-owned by billionaire investor Warren Buffett,
beat Japanese and U.S. automakers to release the first plug-in hybrid
car in China. If it fulfills its promises, the cheaper car may have a
good chance against Toyota Motor's Prius in the urban Chinese market.

BYD shares soared 16.4%, or 1.88 Hong Kong dollars, to 13.32 Hong Kong dollars on Monday afternoon in China.

BYD's F3DM model operates in either full electric or gas-electric
modes, and contains an electric battery that can be charged at a
regular plug or at a recharging station. It can travel up to 100
kilometers (62 miles) solely on battery power, and contains a back-up
gas engine, BYD said on Monday. Drivers alternate between the two power
modes by flipping a switch: the electric mode is optimal for city
driving, as gas engines are more wasteful under constant acceleration
and deceleration, and the gas-electric mode is more appropriate for
travel on highways and outside of cities.

The
battery takes up to seven hours to charge with a regular plug, and up
to 15 minutes to be 80.0% charged at a special recharging station.


The
F3DM will have to overcome a cost barrier to do well among China's
middle class. Its price tag is 149,800 yuan ($22,000), much higher than
BYD's $14,000 regular gas-powered F3 model, though lower than the
Prius' 259,800 yuan ($37,938) cost. But the car may get a government
subsidy, given Beijing's emissions-curbing program.

The different
designs of the F3DM and Prius, currently the top-selling hybrid vehicle
in China, entails some trade-offs for consumers. "One is an intelligent
student with high IQ and the other one is very hard-working, so it
depends on what examination you give them. That is, it depends on the
usage and habits of the consumer," said a Hong Kong-based analyst with
a European bank who asked to remain unidentified due to company policy.

The Prius is designed "intelligently" because it automatically charges
when energy discarded by the gas-powered engine during deceleration
gets transferred to the electric battery. In the F3DM, the gas and
electric engines are isolated from each other, so the battery has to be
separately charged manually--but the F3DM may run on electricity more
often than the Prius, according to the analyst.

Though
electricity is not necessarily a clean energy source in China due to
the country's reliance on dirty coal-fired plants, plants are generally
more efficient than car engines in burning energy. Transferring
electricity from plants to power stations is also more efficient than
transferring gasoline from refineries to pump stations.

Toyota

(nyse:
TM -

news
-

people
), General Motors

(nyse:
GM -

news
-

people
) and Nissan Motor

(nasdaq:
NSANY -

news
-

people
)
are reportedly likely to start selling a plug-in or electric car in
China after 2009. BYD said it aims to sell 10,000 F3DM's in 2009, and
launch the model in U.S. and European markets in 2011. Various
state-run companies, such as China Construction Bank, and local
governments, such as Shenzhen, reportedly have already placed orders.

One
of the world's biggest producer of rechargeable batteries for cell
phones and laptops by sales, BYD moved into the auto market five years
ago. In September, Buffett-controlled MidAmerican Energy Holdings
bought a 9.9% stake in BYD for $230.0 million (See "Buffett's Battery Bet").

 

Warren Buffett takes charge

Warren
Buffett hasn't just seen the car of the future, he's sitting in the
driver's seat. Why he's banking on an obscure Chinese electric car
company and a CEO who - no joke - drinks his own battery fluid.

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warren_buffett_byd.03.jpg
Warren Buffett with BYD's E6. The car came straight to Omaha from the Detroit auto show.

chart_flooring_it2.gif

wang_chuan_fu.03.jpg
BYD CEO Wang Chuan-Fu figured out how to make cheaper batteries than the Japanese by replacing machines with migrant workers.
byd_showcase.03.jpg
BYD's breakthrough all-electric E6, photographed at this year's Detroit auto show.
byd_plugin.03.jpg
The
E6 will hit the Chinese market later this year. The first buyers will
be fleet users, which will build central fast-charging facilities.
wang_plane.03.jpg
MidAmerican's
David Sokol, BYD's Wang, and company advisor Li Lu flew with Sokol from
Detroit to Omaha so that Wang could meet Buffett in person.

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(Fortune
Magazine) -- Warren Buffett is famous for his rules of investing: When
a management with a reputation for brilliance tackles a business with a
reputation for bad economics, it is usually the reputation of the
business that remains intact. You should invest in a business that even
a fool can run, because someday a fool will. And perhaps most famously,
Never invest in a business you cannot understand.

So when Buffett's friend and longtime partner in Berkshire Hathaway (BRKB),
Charlie Munger, suggested early last year that they invest in BYD, an
obscure Chinese battery, mobile phone, and electric car company, one
might have predicted Buffett would cite rule No. 3 above. He is, after
all, a man who shunned the booming U.S. tech industry during the 1990s.

But Buffett, who is 78, was intrigued by Munger's description of
the entrepreneur behind BYD, a man named Wang Chuan-Fu, whom he had met
through a mutual friend. "This guy," Munger tells Fortune, "is a
combination of Thomas Edison and Jack Welch - something like Edison in
solving technical problems, and something like Welch in getting done
what he needs to do. I have never seen anything like it."

0:00
/3:23Buffett eyes electric carsvidConfig.push({videoArray: ["/video/technology/2009/04/10/fortune.buffett.byd.fortune.json"], collapsed:true});

Coming
from Munger, that meant a lot. Munger, the 85-year-old vice chairman of
Berkshire Hathaway, is a curmudgeon who frowns on most investment
ideas. "When I call Charlie with an idea," Buffett tells me, "and he
says, 'That is really a dumb idea,' that means we should put 100% of
our net worth into it. If he says, 'That is the dumbest thing I've ever
heard,' then you should put 50% of your net worth into it. Only if he
says, 'I'm going to have you committed,' does it mean he really doesn't
like the idea."

This time Buffett asked another trusted
partner, David Sokol, chairman of a Berkshire-owned utility company
called MidAmerican Energy, to travel to China and take a closer look at
BYD.

Last fall Berkshire Hathaway bought 10% of BYD for $230
million. The deal, which is awaiting final approval from the Chinese
government, didn't get much notice at the time. It was announced in
late September, as the global financial markets teetered on the abyss.
But Buffett and Munger and Sokol think it is a very big deal indeed.
They think BYD has a shot at becoming the world's largest automaker,
primarily by selling electric cars, as well as a leader in the
fast-growing solar power industry.

Wang Chuan-Fu started BYD
(the letters are the initials of the company's Chinese name) in 1995 in
Shenzhen, China. A chemist and government researcher, Wang raised some
$300,000 from relatives, rented about 2,000 square meters of space, and
set out to manufacture rechargeable batteries to compete with imports
from Sony and Sanyo. By about 2000, BYD had become one of the world's
largest manufacturers of cellphone batteries. The company went on to
design and manufacture mobile-phone handsets and parts for Motorola (MOT, Fortune 500), Nokia (NOK), Sony Ericsson, and Samsung.

Wang
entered the automobile business in 2003 by buying a Chinese state-owned
car company that was all but defunct. He knew very little about making
cars but proved to be a quick study. In October a BYD sedan called the
F3 became the bestselling sedan in China, topping well-known brands
like the Volkswagen Jetta and Toyota (TM) Corolla.

BYD
has also begun selling a plug-in electric car with a backup gasoline
engine, a move putting it ahead of GM, Nissan, and Toyota. BYD's
plug-in, called the F3DM (for "dual mode"), goes farther on a single
charge - 62 miles - than other electric vehicles and sells for about
$22,000, less than the plug-in Prius and much-hyped Chevy Volt are
expected to cost when they hit the market in late 2010. Put simply,
this little-known upstart has accelerated ahead of its much bigger
rivals in the race to build an affordable electric car. Today BYD
employs 130,000 people in 11 factories, eight in China and one each in
India, Hungary, and Romania.

Its U.S. operations are small -
about 20 people work in a sales and marketing outpost in Elk Grove
Village, Ill., near Motorola, and another 20 or so work in San
Francisco, not far from Apple. BYD makes about 80% of Motorola's RAZR
handsets, as well as batteries for iPods and iPhones and low-cost
computers, including the model distributed by Nicholas Negroponte's One
Laptop per Child nonprofit based in Cambridge, Mass. Revenues, which
have grown by about 45% annually during the past five years, reached $4
billion in 2008.

In acquiring a stake in BYD, Buffett broke a
couple of his own rules. "I don't know a thing about cellphones or
batteries," he admits. "And I don't know how cars work." But, he adds,
"Charlie Munger and Dave Sokol are smart guys, and they do understand
it. And there's no question that what's been accomplished since 1995 at
BYD is extraordinary."

One more thing reassured him. Berkshire
Hathaway first tried to buy 25% of BYD, but Wang turned down the offer.
He wanted to be in business with Buffett - to enhance his brand and
open doors in the U.S., he says - but he would not let go of more than
10% of BYD's stock. "This was a man who didn't want to sell his
company," Buffett says. "That was a good sign."

***

We're lost in Shenzhen.
I've flown 8,000 miles to meet Wang, and on the way to the interview,
my driver pulls to the side of a dusty highway. He's yelling in
Cantonese into his phone and frenetically sketching Chinese characters
on the touchscreen of a GPS navigator. The PR woman beside me looks
worried. "The GPS isn't working," she says. "Too many new roads."

I
can't blame the driver or the GPS - which, it occurs to me, was
probably made nearby, since Shenzhen is the manufacturing hub of the
global electronics industry, the place your cellphone, digital camera,
and laptop probably came from. Just across a river from Hong Kong,
Shenzhen is the biggest and fastest-growing city in the world that most
Americans cannot find on a map. It's also the Chinese city most like
America, because people who live here have come from elsewhere in
search of a better life.

When Deng Xiaoping designated Shenzhen
as China's first "special economic zone" in 1980, inviting capitalism
to take root, it was a fishing village; today, it's a sprawling
megacity of 12 million to 14 million people, most of them migrant
workers who toil in vast factories like those run by BYD and earn about
1,300 renminbi, or $190, per month.

When we find BYD's new
headquarters - a silvery office building that would not look out of
place in Silicon Valley - I'm given a tour of the company "museum,"
which celebrates products and milestones from the firm's brief history,
and then escorted into a conference room where plates of apples,
bananas, and cherry tomatoes are spread on a table. Wang takes a seat
across from me - he is 43, a smallish man, with black hair and glasses
- and begins, through an interpreter, to tell me his story.

He
started BYD with a modest goal: to edge in on the Japanese-dominated
battery business. "Importing batteries from Japan was very expensive,"
Wang says. "There were import duties, and delivery times were long." He
studied Sony and Sanyo patents and took apart batteries to understand
how they were made, a "process that involved much trial and error," he
says. (Sony and Sanyo later sued BYD, unsuccessfully, for infringing on
their patents.)

BYD's breakthrough came when Wang decided to
substitute migrant workers for machines. In place of the robotic arms
used on Japanese assembly lines, which cost $100,000 or more apiece,
BYD actually cut costs by hiring hundreds, then thousands, of people.

"When
I first visited the BYD factory, I was shocked," says Daniel Kim, a
Merrill Lynch technology analyst based in Hong Kong, who has been to
the fully automated production lines in Japan and Korea. "It's a
completely different business model." To control quality, BYD broke
every job down into basic tasks and applied strict testing protocols.
By 2002, BYD had become one of the top four manufacturers worldwide -
and the largest Chinese manufacturer - in each of the three
rechargeable battery technologies (Li-Ion, NiCad, and NiMH), according
to a Harvard Business School case study of the company. And Wang
stresses that BYD, unlike Sony and Sanyo, has never faced a recall of
its batteries.

Deploying the armies of laborers at BYD is an
officer corps of managers and engineers who invent and design the
products. Today the company employs about 10,000 engineers who have
graduated from the company's training programs - some 40% of those who
enter either drop out or are dismissed - and another 7,000 new college
graduates are being trained. Wang says the engineers come from China's
best schools. "They are the top of the top," he says. "They are very
hard-working, and they can compete with anyone." BYD can afford to hire
lots of them because their salaries are only about $600 to $700 a
month; they also get subsidized housing in company-owned apartment
complexes and low-cost meals in BYD canteens. "They're basically
breathing, eating, thinking, and working at the company 24/7," says a
U.S. executive who has studied BYD.

Wang typically works until
11 p.m. or midnight, five or six days a week. "In China, people of my
generation put work first and life second," says the CEO, whose wife
takes responsibility for raising their two children.

This
"human resource advantage" is "the most important part" of BYD's
strategy, Wang says. His engineers investigate a wide array of
technologies, from automobile air-conditioning systems that can run on
batteries to the design of solar-powered streetlights. Unlike most
automakers, BYD manufactures nearly all its cars by itself - not just
the engines and body but air conditioning, lamps, seatbelts, airbags,
and electronics. "It is difficult for others to compete," Wang says.
"If we put our staff in Japan or the U.S., we could not afford to do
anything like this."

Wang himself grew up in extreme poverty.
His parents, both farmers, died before he entered high school, and he
was raised by an older brother and sister. The train ride from the
village where he grew up to Central South Industrial University of
Technology, where he earned his chemistry degree, took him by Yellow
Mountain, a popular destination for hikers and tourists, but he has
never visited there. "I didn't go then because we had no money," he
says. "I don't go now because we have no time."

As for
accumulating wealth? "I'm not interested in it," he claims. He
certainly doesn't live a very lavish lifestyle. He was paid about
$265,000 in 2008, and he lives in a BYD-owned apartment complex with
other engineers. His only indulgences are a Mercedes and a Lexus, and
they have a practical purpose: He takes their engines apart to see how
they work. On a trip to the U.S., he once tried to disassemble the seat
of a Toyota owned by Fred Ni, an executive who was driving him around.
Shortly after BYD went public, Wang did something extraordinary: He
took approximately 15% of his holdings in BYD and distributed the
shares to about 20 other executives and engineers at the company. He
still owns roughly 28% of the shares, worth about $1 billion.

The
company itself is frugal. Until recently, executives always flew coach.
One told me he was appalled when he learned that Ford, which lost
billions last year, had staged a gala at the Hotel George V during the
Paris auto show. By contrast, the last time BYD executives traveled to
the Detroit auto show they rented a suburban house to save the cost of
hotel rooms.

This attention to costs is one reason that BYD has
made money consistently even as it has expanded into new businesses.
Each of BYD's business units - batteries, mobile-phone components, and
autos - was profitable in 2008, albeit on a small scale. Overall, net
profits were around $187 million. BYD, which is traded on the Hong Kong
exchange, has a market value of about $3.8 billion. That's less than
Ford (F, Fortune 500) ($7 billion at the beginning of April), but more than General Motors (GM, Fortune 500) ($1.3 billion).

Near
the end of our conversation, I ask Wang about the company name. It's
been reported that BYD stands for "Build your dreams," but he says he
added that as the company motto only later. Others say that as
Motorola, Apple, and Berkshire Hathaway have made their way to
Shenzhen, the name has taken on yet another meaning: Bring your
dollars.

***

When David Sokol toured BYD's operations last summer,
Wang took him to a battery factory and explained that BYD wants to make
its batteries 100% recyclable. To that end, the company has developed a
nontoxic electrolyte fluid. To underscore the point, Wang poured
battery fluid into a glass and drank it. "Doesn't taste good," he said,
making a face and offering a sip to Sokol.

Sokol declined
politely. But he got the message. "His focus there was that if we're
going to help solve environmental problems, we can't create new
environmental problems with our technology," Sokol says.

Sokol, author of a slim volume on management principles called Pleased but Not Satisfied,
sized up Wang during that visit and decided he was an unusually
purposeful executive. Sokol says, "Many good entrepreneurs can go from
zero to a couple of million in revenues and a couple of hundred people.
He's got over 100,000 people. Few can do that." When he got back to the
U.S., Sokol told Buffett, "This guy's amazing. You want to meet him."

Even
before visiting BYD, Sokol believed in electric cars. His people at
MidAmerican have studied clean technologies like batteries and wind
power for years because of the threat of climate change. One way or
another, Sokol says, energy companies will need to produce more energy
while emitting less carbon dioxide.

Electric cars will be one
answer. They generate fewer greenhouse gas emissions than cars that
burn gasoline, and they have lower fuel costs, even when oil is cheap.
That's because electric engines are more efficient than
internal-combustion engines, and because generating energy on a large
scale (in coal or nuclear plants) is less wasteful than doing it on a
small scale (by burning gasoline in an internal-combustion engine).

The
numbers look something like this: Assume you drive 12,000 miles a year,
gas costs $2 a gallon, and electricity is priced at 12¢ per kilowatt,
about what most Americans pay. A gasoline-powered car that gets 20
miles to the gallon - say, a Chevy Impala or a BMW X3 - will have
annual fuel costs of $1,200 and generate about 6.6 tons of carbon
dioxide. Equip those cars with electric motors, and fuel costs drop to
$400 a year and emissions are reduced to about 1.5 tons.

The
big problem is that they are expensive to make, and the single largest
cost is the battery. Manufacturing a safe, reliable, long-lasting, and
fast-charging battery for a car is a complex and costly undertaking.
BYD claims to have achieved a breakthrough with its lithium ion ferrous
phosphate technology, but no one can be sure whether it will work as
promised.

Skeptics say that BYD's battery cannot be both more
powerful and cheaper than those made by competitors, and the U.S.
Department of Energy has purchased an F3DM to take the battery apart.
Chitra Gopal, an analyst with Nomura Securities in Singapore who
follows the company closely, says BYD is betting on "entirely new
technology, and the ability to produce it at scale and at a low cost
remains unproven." William Moore, publisher and editor-in-chief of EV
World, an electric car website, says, "They need to persuade people
that they are selling a reliable, durable, quality automobile."

Even
BYD's admirers say the fit and finish of the company's cars leave much
to be desired. "Their cars are way behind Toyota, for sure," Sokol
admits. BYD currently exports gasoline-powered cars to Africa, South
America, and the Middle East, but they compete on price, not quality.

BYD's
first plug-in hybrid, called a dual-mode car, is designed to run
primarily on electricity, with an internal- combustion engine for
backup. Two all-electric cars - the E3 and the E6 - will follow later
this year. Both will be sold first in China, primarily to fleet users:
the government, post office, utilities, and taxi companies, all of
which will build central fast-charging facilities. Europe, with its
high gas prices, is the most promising export market for BYD's electric
cars. Wang signed an agreement last year with Autobinck, a Dutch dealer
group, to distribute its cars in the Netherlands and five Eastern
European countries.

The company hasn't yet decided whether it
will enter the U.S. market, where the economics of electric cars are
not as compelling. Sokol, who now sits on BYD's board, says BYD could
instead become a battery supplier to global automakers. Some Americans,
though, are eager to do business with BYD. The day after Fortune's
visit to BYD, Oregon Gov. Ted Kulongoski arrived to test-drive an
electric car and urge the company to import through the port of
Portland. Meanwhile, BYD researchers are on to their next big idea, a
product they call a Home Clean Power Solution. It's essentially a set
of rooftop solar photovoltaic panels with batteries built in to store
power for use when the sun's not out, all to be designed and
manufactured by BYD. "Solar is an endless source of energy," Wang says.
"With better technology, we can reduce the costs."

Wang is also
focused on building a stronger executive team to drive the company
forward. "The good news is, he's 42 years old," Sokol says. "The bad
news is that he's clearly the brains behind the organization, and the
drive. He has to develop a team faster, but I think he knows that."
Last winter it was Sokol's turn to lead Wang on a tour of his home
country. They started in Detroit, where BYD's cars generated buzz at
the North American Auto Show, and wound up on the West Coast, where
Wang met for the first time with Charlie Munger. In between, they
stopped in Omaha.

"How did BYD get so far ahead?" Warren
Buffett asked Wang, speaking through a translator. "Our company is
built on technological know-how," Wang answered. Wary as always of a
technology play, Buffett asked how BYD would sustain its lead. "We'll
never, never rest," Wang replied.

Buffett may not understand
batteries or cars, or Mandarin for that matter. Drive, however, is
something that needs no translation.  To top of page

joemanc's picture
joemanc
Status: Martenson Brigade Member (Offline)
Joined: Aug 16 2008
Posts: 834
Re: A 'Copper Standard' for the world's currency system

Venezuela and Cuba are also diversifying from the dollar, will be backed by OIL:

Quote:

An alliance of Latin American and Caribbean
governments led by Venezuela will create a regional electronic currency that is
expected to circulate by 2010, Venezuelan President Hugo Chavez said on
Thursday.

http://www.cnbc.com/id/30248609

So long dollar, it was nice knowing you...

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: A 'Copper Standard' for the world's currency system

joe,

I agree the dollars days are numbered, but an Hugo-Chavez designed currency is dead on arrival.  The man is a raving (and very dangerous) lunatic and everyone (at least here in Latin America) knows it.

chris_m's picture
chris_m
Status: Bronze Member (Offline)
Joined: Feb 7 2009
Posts: 36
Re: A 'Copper Standard' for the world's currency system

Patrick,  Thanks for your points and you do have some good ones but I think that the point I'm making is that people are seeing things from only our (North American point of view).   Allow me to discuss.....

As for your first point....You are only seeing the arguement from a currency point of view.  I don't think this is entirely correct.  China is buying copper now because it is way cheap....they know they'll need it & they'll get more for their buck.  I don't think they're motives behind the purchase is a fear behind the devaluation of the USD.  I prefer to keep it simple.  I equate it to ...If I could buy gas now & store it in massive quantities I would...not because I'm concerned about the purchasing power of my dollar but more simply because I think the price is cheap due to an "oversupply' of oil in the system relative to demand ( short term future or otherwise).  I think the same has happened in copper now....It's 'oversold' if you will & the Chinese are capitalizing on that.  Saying that because they're not buying treasuries (at past levels) is not supporting the dollar is a bit too narrow a view on it for my taste. 

As for your second point....Arab countries, Russia & China can talk all they want but distrust (both internally & internationally) & geopolitical 'issues' in those regions make me believe that this is not a 'threat' high enough on my warning screen.  Currencies still need to be recognized by the world.  Sounds more like a pseudo black market to me. 

As for the IMF & Europe well maybe more of an issue there... but SDR's are just a fancy IOU really....I don't see them as a currency ( so don't many other's I think)  IOU's can be 'broken' or 'delayed' all they want...Just political plays / 'promises' made by politicians trying to 'stabilize' things.  (as an example...Millions of $$ in  'aid' gets promised everytime there's a 'disaster' of some sort around the world but very little of the aid $$ gets delivered in the long run)

I think a lot of talk masks the true threat or 'wishes' out there which is PROTECTIONISM. 

 For point 3...I do think there will be 'some' inflation as I've said earlier.  Not enough inflation, to make myself buy PM's as a store of wealth type 'protection' or 'hedge' or 'insurance policy' whatever you want to call it.  I really think there's a bubble (especially in gold & to a lesser extent silver) going on now & the risk of it losing value (more sellers than buyers) is higher than a significant collapse significantly impacting the long term value of the world reserve currency.  The US is uniquely protected here....inflation will be more severe in other countries (UK for example & eastern europe) but I think turmoil there will cause strength in the USD.

 What am I doing?...I'm not holding USD either.  CAD is very dependant on commodities & energy & that is where I prefer to be.  Their banking is stable but I think many have overlooked Canada because well...it's Canada.  The 'loonie' was at par or better when oil was $140/barrel & it will go up in the future.  I am buying oil on a longer term.  I don't think the economy will implode & we'll all be bartering at the local markets.  The price of gas will go to $6-10 / gallon & it will not be the end of the world that most americans believe it will....city folk just won't be driving Yukons / Hummers / Escalades / F350's.  Mass transit will be 'popular' again.  & yes electric cars are the way of the future.  Copper will absolutely be more valuable in the future but I think it's too volatile in the near term (People need gas daily...not copper). 

My thoughts (condensed)... 

Deflation will be predominant in 2009.  Gold is only being sustained at it's current level because it will be the last 'bubble' to pop when the 'panic' wears off.

 I'm not looking to strike it rich but rather beat 'inflation' in the future. something like the 70's I think. 

The USD (in it's present form) will survive.  The bottom will fall out of gold once sheeple realize this.  There may be a 'spike' in price if Obama gaffs a speech or when GM files for Ch11  but I'm not a fan of trying to time this spike to sell.

Enough for now

chris_m's picture
chris_m
Status: Bronze Member (Offline)
Joined: Feb 7 2009
Posts: 36
Re: A 'Copper Standard' for the world's currency system

Stole this link from another thread.....& another poster but goes to my point about the risks in PM's now.

 http://www.kitco.com/ind/nadler/apr172009A.html

 

 

 

 

 

 

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