When one considers the torchbearers of entrepreneurship and industry, one thinks of Tech-giants like Google, Apple, or Tesla, along with the Automobile empires of Ford, General Motors, or Toyota. But rarely does one think of how these companies finance their operations. This is of course, down to the investors. People tend to believe that investors merely move money around and manipulate the market, but that’s just an oversimplification. Investors seldom hog the limelight like entrepreneurs do, which makes this analysis of how one of the world’s largest holding companies- Berkshire Hathaway makes money, a relevant and enlightening one. So, we’ll know How does Berkshire Hathaway make money?
The mega-investor
As we transition from secondary manufacturing industries to tertiary service-based industries, the number of people owning stock has continued to rise. This has coincided with the rise of large financial institutions like banks and hedge funds. Such corporations don’t actually manufacture products but rather facilitate their production by investing wherever they see a profit. This is what Berkshire Hathaway does. They have their hands in just about everything, from insurance to energy to retail and transportation. You can bet that Berkshire probably has a stake in some of your favorite Tech and Auto companies as well.
Warren Buffet
One can’t talk about Berkshire Hathaway without talking about Warren Buffet, the man who turned a successful textile company into a multinational conglomerate with holdings in almost every sector. One might forget Berkshire Hathaway or who found it, but Warren Buffet’s name will be etched into our collective imagination as the very definition of wealth. His levels of success are what every young investor seeks to achieve. He may not be an engineer or programmers like Bill Gates or Mark Zuckerberg, but it’s no coincidence that the holding company has grown to become one of the wealthiest organizations in the world since his takeover in 1970. It’s quite possible that without Buffet’s money, some of your favorite products might never have been made. And he’s still maintained his position as one of the richest people in the world!
Insurance and much more
If there’s anything that Berkshire Hathaway is best known for, it’s insurance. A good chunk of its revenues (28%) comes from its insurance businesses. These include 3 major companies:
- GEICO- Government Employees Insurance Company: Which provides automobile insurance to 15 million car owners and is the 2nd largest insurer in the USA.
- Berkshire Hathaway Primary GroupBerkshire Hathaway Reinsurance Group
Berkshire Hathaway raked in $69.4 Billion in revenues and $6.8 billion in earnings before taxes from its insurance activities. These insurance companies are profitable because they make underwriting profits, something that is not often seen in insurance providers. Berkshire also makes money by investing the float generated into more businesses. These two factors have boosted the fortunes of the company and have propelled it to invest further.
The Railway Mogul
It is almost a fact of history that whoever owns the modes of transport essentially becomes the king-maker. Railway Moguls have dominated supply chains and dictated goods production ever since the dawn of the industrial revolution. This has made them filthy rich, and the same applies to Berkshire Hathaway. The source of this river of gold is BNSF Railway which operates the largest rail network in America with 32,500 miles of track. It ships coal as well as consumer, industrial, and agricultural products. The Railway generated over 25% of Berkshire Hathaway’s earnings before tax with a revenue of $20.9 billion.
Manufacturing
Another bulk of Berkshire Hathaway’s profits come from its stake and ownership in a variety of manufacturing companies. These are companies that create a wide range of products both industrial and commercial. The manufacturing segment of Berkshire Hathaway produces $59.1 billion for the company which accounts for a whopping 30% of their pre-tax earnings. Manufacturing companies are rarely well-known to anyone except to their investors and people working in the sector. With that said, Berkshire Hathaway owns some of the biggest names in the manufacturing industry, some of which are mentioned here:
- International Metalworking Companies
IMC is the second largest company for metalworking products. Berkshire Hathaway owns IMC through its subsidiaries like Iscar, Ingersoll, and Tungaloy manufactures cutting tools. The IMC Group is in the automotive, aerospace, general engineering, bearing manufacturing, and oil and gas industries. IMC produces carbide metalworking tools and a wide range of carbide inserts, carbide endmills, and cutting tools covering all metal cutting applications.
- Precision Castparts
It manufactures pipes, airplane engine parts, and castings for medical devices. It generates about $9 billion in revenue for the company.
- Marmon Holdings
They produce an interesting repertoire of products ranging from plumbing, industrial, and automotive parts, lighting systems, and electrical wiring, safety equipment for construction, truck trailers to food storage equipment for restaurants and beverage dispensers, water cooling, and treatment systems.
The world is an intricate web of supply chains, with every product requiring a myriad of parts and components. Berkshire Hathaway’s investments into the manufacturing sector assure it of continued profits, a by-product of this niche industry.
For the everyday Joe- Consumer Products and Retail
It might be surprising to many that Berkshire Hathaway, a brand that started as a textile mill and is well known for its insurance providers, has its hands in everyday products which might be familiar to most of us. This sector makes up about 11% of its profits before tax and contributes about $28 Billion to its revenue. Among some of these companies are sporting brands like Spalding who make the best Basketball shoes and balls, Duracell which has become synonymous with batteries, and everyone’s favorite ice-cream and milkshake franchise Dairy Queen. Again, we see Warren Buffet’s vision and ambition in wanting to diversify Berkshire’s business operations. Investing in this sector ensures a steady stream of cash, because after all, who doesn’t like ice cream?
Dependable distribution- McLane
By now, you might’ve learned that there is nothing that Berkshire Hathaway hasn’t invested in. But if you’ve invested in the manufacturing of products and providing services, then why not play a part in its distribution as well? McLane is a major distributor and logistics company. It supplies wholesale food and beverages and is responsible for servicing 49,000 different retail locations for grocery, 36,500 chain restaurants, and 24,900 retail locations for alcohol. This single company comprises 19% of Berkshire Hathaway’s revenue with $251 million in pre-tax profits.
Energy- for today and the future
With the growing population of the world comes a growing demand for electricity for both commercial and household use. Having sensed an opportunity for almost unlimited growth in the energy sector, Berkshire Hathaway Energy has several holdings in oil, natural gas, pipelines, and wind farms around the United States and Canada. It generates $21 billion in revenue for the company which amounts to 9% of its total revenues. These holdings are in subsidiaries like:
- MidAmerican Renewables
- MidAmerican Energy Company
- PacifiCorp
- Northern PowerGrid
- CalEnergy
- Kern River Gas Transmission Company
- Northern Natural Gas Company
- HomeServices of America
- BYD Company
- NV Energy
- Metalogic Inspections Services (Oil and Gas, Power Generation, Fabrication, Pipeline, Services)
- Intelligent Energy Solutions (Heat Pumps, Solar Panels, and Biomass Boilers)
- Alta Link (Electric Utility in Canada) for C$3.24 billion in 2014
Investments in renewable energy shield Berkshire Hathaway from any sudden revolutions in the energy sector and also help it maintain a clean image.
Smart, sensible, and long-time investments
Berkshire Hathaway has a diverse portfolio with a history of making sensible investments in reputable businesses with sound fundamentals. It has a stake in Apple, Coca-Cola, and the Bank of America, with the former being the most profitable company in the world. These investments have earned the company $31.6 billion in after-tax income, and like most of its escapades, will continue to make profits far into the future.
What about covid?
With the company having a stake in just about everything, it’s justifiable to wonder if covid-19 has had an impact on its revenues. But with the company on such firm footing, it has been able to weather worse shocks than this before. The advent of cheap internet has allowed the company to take its operations and work online without too much of a hassle. There were some initial losses, but expect Berkshire Hathaway to adjust to change as it always has. Modern multinational corporations are more resilient to shocks because they are more open to change. And with such a diverse portfolio, Berkshire Hathaway is not new to change and adjustments.
Is there anything Berkshire Hathaway doesn’t own?
Berkshire Hathaway’s footprints can be seen in almost everything we do. Warren Buffet’s vision has ensured that whatever we buy, Berkshire takes a small part of the profits. The company doesn’t directly manufacture products, innovate technology, or invent and discover new scientific methods. But it does bankroll many inventions and discoveries, hence making life better for millions of people. And it takes its own share of the profits as well. But even after all this, it is still the 10th largest company in the world based on market capitalization, with it being about $570 billion. This is a testament to the intricacies of the global market. For better or the worst, Berkshire Hathaway has changed the way we think about investing. Warren Buffet continues to be a model investor and has inspired many. His philanthropic activities have also provided hope to so many. Berkshire Hathaway may go unnoticed to the public eye, but the business world can never ignore it, nor will they ever forget it.
