What Does Warren Buffett’s Recent Acquisition Tell Us About Manufacturing?
In early August, Warren Buffett made his largest acquisition ever by agreeing to buy Precision Castparts for $32.5B. Much was made in the financial press about Buffett’s “big bet on manufacturing.” What does this tell us about manufacturing, especially in the U.S.?
This is not so out of character for Buffett as one might expect. His acquisitions of Duracell in 2014, Lubrizol in 2011, Marmon Holdings in 2007, and even BNSF Railway in 2009 have some similar threads. The three primary elements of his strategy seem to be:
- High precision, high barrier to entry, high margin components
- Consumable products that are continuously reused and have a strong brand presence
And always make sure these products feed into an industry that will grow in the future.
Precision Castparts is an example of the first element. It is a supplier of precision turbine engine parts and other components to the aerospace industry. Buffett seems to believe that the air transportation industry will continue to grow over the long term and PCC feeds into that growth with critical, high-value components and a strong market share.
Another example of this philosophy is Tesla Motorcars. Understanding that the cost of developing and manufacturing the new technology in this car would be much higher than for gas-powered vehicles (Tesla has spent over $1B in capex, not to mention the cost of manufacturing them in California), Elon Musk wisely chose to offer his first models as high-performance luxury vehicles selling for between $80,000 and $100,000. That is roughly triple the average price for a typical new gas-powered car. A stripped-down “electric car for the masses” would not have commanded such a high price tag. The entire biotech industry is another example where high-value products do well in a high-cost environment.
Duracell, Lubrizol, and even BNSF are examples of the second element, consumables. With strong marketing, Duracell holds roughly 25% of the battery market worldwide. No matter what higher-order electronics are popular (phones, tablets, wearables), they are going to need batteries. This creates a continuous need. Lubrizol makes lubricants and other chemicals that will wear out a need to be replaced. Even transportation, in the form of BNSF railroad, is a sort of consumable that serves many industries and benefits from any growth in the economy.
So what are the implications for a manufacturing strategy in the U.S.? A strategy for manufacturing in the US would consist of:
- Serve an industry that will grow. This seems obvious, but if you currently play in a market with slow growth, you may want to consider entry into another one with more potential.
- Develop products that are high precision and high quality. Better yet, develop products that can be used as OEM components in any number of products. Use your quality as both a barrier to entry and to justify high prices and high margins.
- If possible, develop products that are consumable, periodically replaceable, or upgrades to existing components. Use quality as a differentiator and create a sustainable demand for your products – “buy the commodity and sell the brand.”
Such a strategy can work with consumer products as well as industrial. Luxury fashion goods have done well with this strategy over the last several years (think Shinola watches, made in Detroit, or craft breweries).
Due to increased costs (labor, regulation, etc.), the U.S. is no longer a place where simple goods like oven mittens, plastic garbage pails, and flashlights can be made competitively. This is generally not low-cost producer territory. High-tech, high-precision, high-margin is the way to go in the future.