Berkshire Hathaway 2018 Annual Meeting Audience Question # 38

Warren and Charlie talks about Berkshire’s subsidiary TTI

Warren Buffett:

OK, Jonathan?

Jonathan Brandt:

TTI has been a nice growth story since Berkshire acquired it 11 years ago, more than doubling its pre-tax earnings to about $400 million due to fine organic growth and at least two successful bolt-on acquisitions. Business momentum appeared to accelerate in the first quarter.

Can you please talk about the competitive landscape in the electronic components distribution industry and what TTI’s advantages are? Is it just a great industry to be in or is TTI’s business model and/or management team special?

Warren Buffett:

Well…

Jonathan Brandt:

Do you expect it to continue to be one of Berkshire’s faster growing non- insurance subsidiaries?

Warren Buffett:

TTI is run by a fellow named Paul Andrews who’s done an absolutely sensational job with us.

He’s a wonderful man. He’s a wonderful manager.

And in the last… he’s quadrupled the business, basically, but in the last year and accelerating right to this point.

They distribute little electronic components. They actually… their average… they’re a many- billion dollar business… and their average item is less than a nickel that they sell. So it’s kind of like being in the jellybean business or something like that. Except these things go into all kinds of fancy machines that I don’t understand.

And we have a worldwide operation based in the Dallas, Fort Worth area. And built by one man who left a division of General Dynamics 45 or 50 years ago. And step-by-step built up this business… like we just bought within the last two months, we bought an operation in South Korea that will be another substantial addition. We do business worldwide. And electronic components that have absolutely taken off in the last year.

And they use something called, you know, well, it’s essentially a measure of backlog. And book- to-build is the ratio they call it. But it’s just kind of a special term.

The… but, it’s grown… I mean, it’s just improved dramatically in the last year. And it continues month after month. So something is going on out there because nobody buys these things to store them in their basement or anything of the sort. I mean, these get used, these electronic components.

Some of them are on allocation. We have a great relationship with suppliers. We have a very good relationship with our customers because we carry more inventory than most of our competitors. So particularly when the business is tight we can deliver and do a very first-class job doing it.

So I give credit to Paul. He increased his physical facility, started on that a few years ago. And it’s a godsend that he did it because with the business going through there now we wouldn’t have been able to handle it.

But it’s a competitive business. I mean, if you look at Arrow Electronics, you know, on the New York Stock Exchange… we’ve got competitors. I think Paul is doing a better job, by a considerable margin, than they are. And I’m delighted as a part of the Berkshire family.

There will be times when that business slows down because their customers, you know, will have their own cycles. And what it does will go down. But over time that business is going to grow.

Charlie?

Charlie Munger:

Yeah, it’s a wonderful business because it’s so difficult to do that competitors don’t want try it.

When I lived in Omaha there was a man who lived in great prosperity and almost no work. And his business was gathering up and rendering dead horses. And he never had any competitors.

He used to come up to the Omaha Club and start drinking about 11 in the morning. It was not a difficult business. But nobody ever crowded him with new competition.

And very few people want to distribute zillions of electronic parts that are worth a nickel each. It’s very complicated.

And of course that business is terribly good at it. And it keeps getting more and more of the same. So you’re right. It’s a huge growth business which is sort of the electronic equivalent of gathering up and rendering dead horses.

Warren Buffett:

Imagine keeping track of close to a million different items, you know, with very small values attached to them and getting them out to your customer fast because they
want them fast, all over the world. You know, and those things are not easy to manage. I mean, yeah.

Charlie Munger:

And staying in stock on so many items. It’s very complicated. And that business is very good at it.

Warren Buffett:

Yeah, we’re luck…

Charlie Munger:

And of course it’ll grow. The horses went away but these parts aren’t going to go away.

Warren Buffett:

Charlie made a profession of studying businesses where the owners could sit around and drink all day and have… he thought that was where we ought to be competing but… or buying.

Charlie Munger:

My theory, Warren, is if it can’t stand a little mismanagement, it’s no business.

Warren Buffett:

Yeah and we’re testing that sometimes.

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