Buffett/Berkshire - general news

[benhacker]

I'm with FarEastWarriors on this.

 

The national dealership revenue breakdown is kind of the opposite of profit.  Revenue is like 55:35:10 for new:used:service sales.  But I would bet new car sales make the dealership $0 on average or close... used cars can be nice, agree there.  But I would bet service margins are astronomical... I'd guess blind that is 75% of dealership profits.  consequently, if you talk to someone who works at a dealer (assuming they aren't running it) they may not perceive how the money is made... or maybe I'm confused!

 

Some details here after some googling, basically says the service is most of the profits.  ROIC for dealerships is high.  New cars don't make a ton, used is more.  Service is the most.  (page 10) I guess makes sense re: new cars, they make money (haven't always in years past) but it's a loss-leader for service.

 

http://www.nada.org/NR/rdonlyres/DF6547D8-C037-4D2E-BD77-A730EBC830EB/0/NADA_Data_2014_05282014.pdf

 

This is a curious area, mostly because if electric cars really take off, they will turn the dealership model over and screw it... because the service aspect of an electric car should be fewer small ticket items, so I would imagine less need for a dealership.

 

I wonder if this isn't one of those businesses though that is perceived as dieing, but actually has a very long cash flow tail, with little competition and a strong competitive dynamic with car makers?  Leucadia and Berkshire both jumping in... it will be interesting to see it unfold.

 

 

[jay21]

LUK/MKL/BRK all have exposure to auto dealers. I think they are right. BRK and MKL are focused on scale in a fragmented industry, LUK is focused around distressed dealers.

[oddballstocks]

Here's another way to look at it.  This is how auto dealerships were viewed classically by founders.

 

You start a dealership in an area.  Usually you purchase land on the outskirts of town, you need land for a dealership.  The dealer takes a loan on the land.  The dealership pays the loan down over 10 years or so maybe longer.  The dealership makes fairly poor profits unlevered, nice money levered.  Eventually the land is paid off and the owner mortgages it to buy a new dealership.  The process starts over. 

 

At the end of 30-40 years in the business the owner has a nice stable of dealership properties in ideal locations.  The business on top brings in alright money and the land is extremely valuable.  The owner then sells the dealerships but retains ownership of the land and leases the land to the new buyer.  This lease is their retirement income.

 

Obviously with some extra capital this process could be sped up, and things compound.  Some dealers are content to own a location or two and get paid decently.  Look at small towns, the car dealer is often the one doing the best.  In larger cities dealers needed to scale quickly to stay in business.  This is why the survivors have a stable of brands.

 

My buddy in the business is very attuned to costs and where they make their money.  In his view if car dealerships weren't levered there would be almost no money to be made in the business.  Almost all of the return comes from the leverage.  Much like home ownership.

 

Ben,

 

In terms of new car sales I believe the dealer makes a few hundred dollars on the initial sale.  Then they get an incentive around $1-3k per car from the manufacturer based on volume.  This can't be negotiated at purchase time because it's technically not part of the car's price.  It's a separate payment from Honda/Toyota/GM based on the number and types of cars sold in aggregate each month.

 

I don't believe dealers make a lot on financing.  It depends on the dealer.  Some will add 25 or 50 bps to each loan and make a killing.  I talked to a wholesale dealer and they said they make a straight $100 per loan originated.

 

Warranties are a big seller.  The dealer tried to sell us on an extended warranty, I believe it was going to cost us $3500 for two years or something.  For a high end car with no problems this is a sucker bet.  Of course my wife wanted to buy it for the "piece of mind" but I just said no.  I'd love to know the commission or markup on the warranties.

[Rainforesthiker]

Of course my wife wanted to buy it for the "piece of mind" but I just said no. 

 

You said "No" to your wife?  How did that go?  Do you do that often?  Brave man.  (Or foolish one) :)

[oddballstocks]

Of course my wife wanted to buy it for the "piece of mind" but I just said no. 

 

You said "No" to your wife?  How did that go?  Do you do that often?  Brave man.  (Or foolish one) :)

 

Happens all the time, a non-event.  Unlike most wives mine respects my opinions and thoughts.  I thought it was a bad deal, said no and she was fine with it.

[Jurgis]

Happens all the time, a non-event.  Unlike most wives mine respects my opinions and thoughts.  I thought it was a bad deal, said no and she was fine with it.

 

+1

 

Off topic: when we buy cars, we usually have the "good cop - bad cop" routine with my wife. Not sure it helps, but ... 8)

 

I use it other cases too - of course with my wife's knowledge ;) - I say to contractor/whatever "sorry, I have to check with my wife" or "sorry, but my wife decided to do something else". She's the bad cop usually.  8)

[Borgesian]

Of course my wife wanted to buy it for the "piece of mind" but I just said no. 

 

You said "No" to your wife?  How did that go?  Do you do that often?  Brave man.  (Or foolish one) :)

 

If you can't say no to your wife, you're doing marriage wrong.

[cubsfan]

France, i believe

[Jurgis]

France, i believe

 

Right, they were eating at a buffet when Marie Antoinette told them to eat cake.

 

 

 

 

8)

[original mungerville]

A related juicy business is the same-hour-auto-repair-parts business that supports the service shops. I know a guy who is in this business, he rakes it in.

 

Longinvestor,

 

This is interesting, can you describe/elaborate on this business just a bit - and the potential you see in it.

[fareastwarriors]

Buffett on CNBC today

 

 

 

Buffett's automotive group goes shopping

http://www.cnbc.com/id/102549930

[Jurgis]

"The billionaire businessman also dismissed the notion of an near-term takeover of self-driving cars, saying he thought "I think it's a long way off and I don't think everybody will adopt it." He said that he would bet there is less than a 10 percent penetration rate for self-driving cars by 2030."

 

I will take that bet.

[Guest longinvestor]

Buffett on CNBC today

 

 

 

Buffett's automotive group goes shopping

http://www.cnbc.com/id/102549930

 

Larry Van Tuyl: We like volume dealers that fit our entrepreneurial model

Buffett: They'd have to come to us

 

The phone's ringing off the hook.

[Guest longinvestor]

Is something up with Netjets?

 

This from the visitor's guide:

 

Please Note: Shuttle Service is no longer provided to Eppley Airfield. Also there will not be a

NetJets Display at Signature Flight Support this year and therefore no shuttle provided to

Signature Flight Support.

 

And no mention about fly coach in and your own private plane out......

 

I've been subscribing to the WSJ for about 6 months and caught the ads( 2 or 3 times?)  by the Netjets union. And this recent union news,

http://money.cnn.com/news/newsfeeds/articles/prnewswire/DC90735.htm

 

[Jurgis]

Wow, it looks like NetJets continues to be a headache for Buffett.

 

I wonder if he's gonna throw Tracy at the problem and if she's gonna succeed in solving it somehow...

[sleepydragon]

Warren Buffett shows up at Coke's annual shareowners meeting

 

http://www.coca-colacompany.com/stories/warren-buffett-if-youre-looking-for-a-wonderful-business-its-hard-to-beat-coca-cola

 

[petec]

"The billionaire businessman also dismissed the notion of an near-term takeover of self-driving cars, saying he thought "I think it's a long way off and I don't think everybody will adopt it." He said that he would bet there is less than a 10 percent penetration rate for self-driving cars by 2030."

 

I will take that bet.

 

Me too.  I think the adoption rate will be steep.  I'll buy one asap and I'm not an early adopter.  Technological breakthroughs are usually incremental; this is a big leap in productivity, like touch-screens. 

 

I wonder how much he's prepared to bet? ;)

[petec]

^To be fair, WEB does have a weakness for young, attractive blondes...

 

I think it’s much more likely that she got lucky.  She can’t have been the first woman to try.  He may have started to realize just at that time that he needed more help for some of these things.

 

To be fair, consider this: she was a new MBA graduate in 2009. During the summer of 2008, she had internship with Lehman Brothers, Bank of America, and 85 Broad (85 Broad is a None-profit organization founded by Women MDs/Partners at Goldman sachs). In 2008, every banks was firing people, nobody was hired. Lehman bankrupted. Yet, she got 3 jobs. And she had no real world work experience, especially in finance(before MBA, she was an undergraduate at harvard). After graduation, she got a job with Warren Buffet when I think she could be the only person in her MBA class who got a job.

 

Let me be clear: I have no doubt she’s good.  Very good.  But clearly inexperienced.  What I mean by luck is that surely many many people along the years, some of whom may have been objectively better (though that’s very difficult to actually measure) would have gotten turned down.  That’s life.  All of us who have been successful have some measure of luck, though we may do our best to tilt the odds in our favor.

 

Then again, 3G have made their success by putting very young people in positions of serious responsibility.  If they're good enough, it works brilliantly.

[rpadebet]

"The billionaire businessman also dismissed the notion of an near-term takeover of self-driving cars, saying he thought "I think it's a long way off and I don't think everybody will adopt it." He said that he would bet there is less than a 10 percent penetration rate for self-driving cars by 2030."

 

I will take that bet.

 

Me too.  I think the adoption rate will be steep.  I'll buy one asap and I'm not an early adopter.  Technological breakthroughs are usually incremental; this is a big leap in productivity, like touch-screens. 

 

I wonder how much he's prepared to bet? ;)

 

Consumer adoption wont be a problem. But I see regulation being a major roadblock. Imagine the complexity of allowing some self driving cars with other mostly regular cars... there will be all sorts of debates on safety,control and hacking etc. All it would take is one bad accident involving a self driving car (and we know initial softwares can be buggy) and it would immediately slow down everything.

 

[Guest longinvestor]

"The billionaire businessman also dismissed the notion of an near-term takeover of self-driving cars, saying he thought "I think it's a long way off and I don't think everybody will adopt it." He said that he would bet there is less than a 10 percent penetration rate for self-driving cars by 2030."

 

I will take that bet.

 

Me too.  I think the adoption rate will be steep.  I'll buy one asap and I'm not an early adopter.  Technological breakthroughs are usually incremental; this is a big leap in productivity, like touch-screens. 

 

I wonder how much he's prepared to bet? ;)

 

Consumer adoption wont be a problem. But I see regulation being a major roadblock. Imagine the complexity of allowing some self driving cars with other mostly regular cars... there will be all sorts of debates on safety,control and hacking etc. All it would take is one bad accident involving a self driving car (and we know initial softwares can be buggy) and it would immediately slow down everything.

 

Agree, disasters in the making. A great parallel to this was when the wall came down in Germany. Trabants/Wartburgs and Porsche/BMW's driving alongside on the Autobahns post-reunification was disastrous. Between safety, the required near 100% reliability and infrastructural changes, this is a long tail event.

 

[petec]

"The billionaire businessman also dismissed the notion of an near-term takeover of self-driving cars, saying he thought "I think it's a long way off and I don't think everybody will adopt it." He said that he would bet there is less than a 10 percent penetration rate for self-driving cars by 2030."

 

I will take that bet.

 

Me too.  I think the adoption rate will be steep.  I'll buy one asap and I'm not an early adopter.  Technological breakthroughs are usually incremental; this is a big leap in productivity, like touch-screens. 

 

I wonder how much he's prepared to bet? ;)

 

Consumer adoption wont be a problem. But I see regulation being a major roadblock. Imagine the complexity of allowing some self driving cars with other mostly regular cars... there will be all sorts of debates on safety,control and hacking etc. All it would take is one bad accident involving a self driving car (and we know initial softwares can be buggy) and it would immediately slow down everything.

 

Agree, disasters in the making. A great parallel to this was when the wall came down in Germany. Trabants/Wartburgs and Porsche/BMW's driving alongside on the Autobahns post-reunification was disastrous. Between safety, the required near 100% reliability and infrastructural changes, this is a long tail event.

 

I see those risks, but I don't agree.  First, it's not complex to imagine driven and driverless cars sharing the roads so long as they confirm to the same crash test standards (which Porsches and Trabants manifestly do not).  Second, the technology will have to be proven but existing drivers are not 100% reliable and it is quite possible that driverless cars will prove safer than driven cars quite quickly.  Third, early adopters (whether it's Uber or vehicles at fairgrounds or whatever) will get people used to the idea quite fast.  And finally, there are *huge* potential cost and productivity savings - imagine the work that could be done (or the sleep that could be had) during the commute! 

 

I don't see what infrastructure would need to change.  I don't see a demand for 100% reliability, just a significant increase in safety over the current drivers.  I don't see that one crash will hold things up any more than the Titanic stopped people using ocean liners.  (In fact I don't see why "my driverless cars saved my life" stories won't be just as prominent.)  Remember when people said no-one would put their credit card details online?  How many people don't do that today?  I think people have a good innate sense of when the reward exceeds the risk.

 

I'm not suggesting there will be no hurdles but I come back to the fact that this is a clear leap forward that demand will be significant and I believe plenty of jurisdictions will develop regulations quite quickly.

 

P

[Jurgis]

OT.

 

I completely agree with Petec.

[cubsfan]

You have to wonder how driverless software makes decisions and who has the liability. I think Warren alluded to this last year.

Imagine a scenario where a driverless car going at a high speed encounters a child crossing in front. What happens with 3 choices faced.

 

1 -  straight ahead and kill the child

2 -  swerve left into on coming traffic - how many potential deaths there

3-  swerve right into concrete wall and kill occupants of your car

 

All outcomes are bad - how do those decisions get made and who accepts liability?

 

Stuff like this will take place hundreds of times a year. Hard for me to understand how you easily roll out

driverless vehicles with these type of issues.

 

Should be interesting.

 

[JBird]

How about the car just slams the brakes as hard as possible and doesn't swerve. If a person steps into the road with no time for a car to stop that is a tragedy. Why should it be the driver's responsibility to risk his own well-being or others by swerving?

[Jurgis]

You have to wonder how driverless software makes decisions and who has the liability. I think Warren alluded to this last year.

Imagine a scenario where a driverless car going at a high speed encounters a child crossing in front. What happens with 3 choices faced.

 

1 -  straight ahead and kill the child

2 -  swerve left into on coming traffic - how many potential deaths there

3-  swerve right into concrete wall and kill occupants of your car

 

All outcomes are bad - how do those decisions get made and who accepts liability?

 

Stuff like this will take place hundreds of times a year. Hard for me to understand how you easily roll out

driverless vehicles with these type of issues.

 

Should be interesting.

 

This is a strawman argument. First of all, you have no data how often such situations happen. Second, the same situations happen with human drivers on board and obviously they cannot make any choice - they are not fast enough or clear headed enough or aware enough. So it is obvious that automated car will make a better choice whatever it chooses. Like JBird said, it could just slam on breaks and hope for the best. Note that it will detect the person faster than human and it will slam on the breaks faster than human. So even if the person on road dies, they would have died with human at wheel too.

 

You could as well make the same argument to prohibit humans to drive cars. Cause obviously they cannot t make decisions in situations like this and liability may bankrupt them. Yet, we allow people to drive.

 

If you are concerned about liability, let car manufacturers and insurers work it out. It's not your problem.

 

I am sick and tired of hearing this old and - sorry to say - broken argument.