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
- 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.”