Warren Buffett is big on metalworking

Tooling & Production, Jul 2006 by Stover, Mark

More than likely you've heard of Warren Buffett. With a net worth of over $40 billion dollars, Buffett trails only Microsoft founder Bill Gates on the list of the world's wealthiest individuals.

You may also be familiar with Berkshire Hathaway, Buffett's investment holding company. Berkshire Hathaway invests in other publicly traded companies (a few current examples being Wal-Mart, Coca-Cola, and American Express), as well as having a large number of wholly or majority-owned subsidiaries. Some of the more commonly known Berkshire Hathaway operating company brands are GEICO Insurance, Fruit of the Loom, Benjamin Moore, and Dairy Queen.

At this point, you might be wondering what Warren Buffett is doing in a column about cutting tools. Well, back in the first part of May, Buffett announced that Berkshire Hathaway was acquiring an 80 percent stake in Iscar Metalworking Companies (IMC). It's quite possible that your operation uses cutting tools from one of the affiliated IMC brands, such as Iscar, Ingersoll, or TagueTec. What could be even more interesting is to consider the fact that Warren Buffett, who has been referred to as the most successful allocator of capital that has ever lived, has basically bought himself a production floor.

At first glance, you may not think of global cutting tool companies as production floors-but they are. Cutting tool production is remarkably similar to the processes involved in most metalworking operations. Tool are manufactured on the same lathes, machining centers, and grinders as found on any production floor. Tool producers have presses, heat treating furnaces, CAD systems, CMMs, and productioncontrol software.

Simply put, Warren Buffett has invested $4 billion in an operation that markets a specific range of products around the world.

While the metalworking and manufacturing industries have certainly experienced some significant challenges in the recent past, two common themes continue to be voiced by successful manufacturers:

1) Stake out your niche.

2) Embrace globalization.

It may not be coincidental then that Iscar is a living example of breeding success through focus on niche expertise as well as through globalization. From very humble beginningsabout 50 years ago-in what was nothing more than a small garage, Iscar grew through successive niches. The first niche of producing spare parts for the military led Iscar to discover a developing expertise in producing cutting tools. Then, in the latter half of the 1970s, Iscar focused intently on one niche within cutting tools-applications for cutoff tools for lathes. Broad success in this niche led to various expansions to a broader cutting-tool offering and, most notably in the latter 1980s, a major focus on indexable end mills and milling cutters utilizing a helical-cutting-edge design.

As Iscar's market success in these two niche areas grew, they also embraced the broader trend of globalization. Although headquartered in one of the world's more remote areas for industrial manufacturing, Iscar grew to operate in more than 60 countries worldwide. Building on its success in certain key niche solutions and its worldwide go-to-market strategy, Iscar has gone on to become one of the three largest cutting tool producers in the world, with a broad product offering covering practically all types of cutting-tool applications.

In what is perhaps the most striking example of a CEO who walks the talk, Warren Buffett has 99 percent of his personal net worth invested in Berkshire Hathaway stock. Two of his most basic investment principles are that the companies he invests in must be simple businesses to understand, and be able to generate a sufficient return on equity. With this in mind, Buffett has invested in metalworking, the same industry we've all chosen for our careers. Berkshire Hathaway's purchase of Iscar represents one of the largest acquisitions the Omaha, NB-based firm has ever made. Not insignificant, considering that Berkshire Hathaway ranks in the 15 largest U.S. corporations, with revenues in excess of $80 billion a year.

Perhaps we can all smile that our often-overlooked industry has caught the eye of someone like Warren Buffet. And it may not hurt to keep in mind that Iscar is a living example of a company that found great success and growth by staking out successful niches and embracing globalization.

Mark Stover provides sales and marketing services to manufacturers and distributors in the metalworking industry. He's had chips in the soles of his shoes for the last 25 years. This column appears in T&P every other month. Mark can be reached at mstover@strsolutions.com