Shareholders at Berkshire Hathaway’s early-May annual general meeting, often described as a pilgrimage for many who idolize Warren Buffett, might have been puzzled by some aspects of CEO Greg Abel’s presentation.
Abel, a long-time lieutenant to Buffett who took over as CEO at the beginning of this year, underlined that he planned to continue with the Buffett tradition of buying undervalued businesses.
One of the examples Abel highlighted was Bell Laboratories. After being approached by Bell’s CEO, Berkshire had bought the business with annual revenues of less than $100 million. The company is known for being an efficient producer of chemicals that kill rodents. Abel candidly said, “We only wish it had been ten times bigger.”
Instead of being an acquisition to boast about, Bell Laboratories is emblematic of the huge challenge Berkshire and Abel face in the years to come. Buffett is staying on as chairman, but the last significant investments he made were in large amounts of Apple Inc’s shares (from 2016) and the equity of five Japanese trading houses (in 2020).
This year marks a transition at the top of Apple as well, with Tim Cook about to step down as CEO after a 15-year stint. Apple’s profits this year are expected to be in excess of $125 billion, a fivefold jump from when he became CEO.
The dysfunctional company that he took over from visionary founder Steve Jobs has become a byword for supply chain efficiency and spawned a host of successful Chinese companies in the bargain.
Patrick McGee, the author of a book on Apple in China, argued recently that the mythology around Jobs’ Apple turnaround that climaxed in the 2007 launch of the iPhone overlooks that the company was a kind of “manufacturing hell”. Cook’s big achievement was to focus on building a supremely efficient supply chain in China and pivoting the company to one in which 40% of its revenues are from services.
But as Cook prepares to step down, large questions loom over the high performer he built. By outsourcing production to China, Cook, who once described himself as “Attila the Hun of inventory,” has helped build China into a high-value manufacturing behemoth.
As McGee notes, BYD, which started as a supplier of Apple’s metal casings and then became a big assembler of Apple products and titanium alloy components, has transformed itself into a leading electrical vehicle company.
One may wonder why Apple did not similarly capitalize on its manufacturing prowess. Apart from the fact that various Apple products (like wearables) never gained much traction, it is widely seen as a laggard in artificial intelligence.
While OpenAI, Google and Claude dominate the AI conversation, Apple must also fend off new challenges in smartphones from lower-cost Chinese producers as well as from new rivals that excel at AI offerings.
As Richard Waters, who covers Silicon Valley for the Financial Times, wrote last month, “AI isn’t just another service, like search, that Apple can collect a fee on. It’s a technology that changes the way computers are programmed and controlled, and it promises entirely new experiences and services… if other developers are drawn to creating apps that run on top of AI, the models could become major computing platforms in their own right.”
In time, this could lead to operating systems like Apple’s proprietary iOS receding from the prime position they hold today. Then again, monetizing AI may prove more difficult than the hype suggests. Waters says that it is possible AI will be far less of a game-changer.
The reputations of Apple and Berkshire’s new CEOs may seem Lilliputian in comparison with their predecessors, but the parallels end there.
The challenge for Berkshire Hathaway is that its mission of finding value is no longer relevant in a market where the high performers are highly priced tech shares.
Even with Buffett, 95, continuing as chairman, its problem is that hunting for large acquisitions has become a somewhat existential dilemma. Berkshire’s old ‘Buffett premium’ has been replaced by a ‘conglomerate discount,’ which is arguably a fairer estimation of a company with more than 50 diverse businesses, excluding its insurance business run by Ajit Jain.
Berkshire made its name for value investing in a world that was the very opposite of the momentum game practised by hedge funds and day traders in the US. In what seems like an almost perpetual bull market, Berkshire’s class-B shares are down about 13% in the past year, against a US stock market that rose by 26% over the same period.
Apple still benefits from the supply-chain skills that Cook honed over the past decade-and-a-half, including a quick shift of some assembly lines to India. Apple conforms to what Buffett described as a business with wide “economic moats,” or almost impregnable advantages. This was the kind of company he invested in for decades, such as Gillette and American Express.
This week, the Wall Street Journal revealed that Apple had salvaged some silicon chips that had slight defects. Instead of discarding them, Apple ingeniously used them to power the MacBook Neo, its lower-priced computer offering at $599.
By contrast, Buffett said this month that in six decades of investing, he had seen a case for being greedy just half a dozen times. He is inclined to be patient, but Berkshire has a cash hoard approaching $400 billion.
Against that backdrop, acquiring a small rodent control company underlines how the sun may be setting on Berkshire’s long-held strategy.
The author is a former Financial Times foreign correspondent.