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Warren Buffett enters the used car business

Berkshire Hathaway (BRK-A, BRK-B) is currently the 13rd biggest public company in the entire world by sales with annual sales of $178.8 billion behind Wal-Mart Stores (WMT), Royal Dutch Shell (RDS.A, RDS.B), Sinopec-China Petroleum (SNP), Exxon Mobil (XOM), BP, PetroChina (PTR),Volkswagen Group (VLKAY), Toyota Motor (TM ), Glencore International (London: GLEN), Total (TOT), Chevron (CVX) and Samsung Electronics. (London: SMSN, SMSD)

As you can see, you don’t need to be a mutual fund manager to see that there are only four ways to sell more than $178.8 billion:
Buy a Discount Store
Buy an Oil & Gas Operation
Buy a company that sells Semiconductors
Buy a company that sells cars
Warren Buffet has decided to buy a company that sells cars, hoping to one day sell more than $255.6 billion, which is what Toyota Motors currently sells each year.

There are only 26 Auto & Truck Manufacturers in the entire world and it is very difficult to acquire them because most of these companies have governments as shareholders.
It is likely that Warren Buffet may acquire Peugeot in the near future. This is the only Auto & Truck Manufacturer at this point in time with losses. If anybody can turn this company around, it’s him.

Obviously France is not going to let that happen. If anybody from Japan, South Korea, China, India or the United States of America ever decides to acquire Peugeot, they are just going to lend Renault enough money to outbid all of them.
Things are already in very bad shape in France and losing 204,287 employees in a day does not look good for French politicians.

Even if he somehow manages to convince the government of France to sell their shares. This company only sells $71.8 billion, which means Berkshire Hathaway would only increase annual sales from $178.8 billion to $250.6 billion assuming sales don’t drop which is highly unlikely.
As you can see, even if you acquire Peugeot in the future, you still need to find another company that sells a lot of cars.
What is the Van Tuyl Group?

The Van Tuyl Group is currently the fifth largest dealership of used cars in the United States of America and now a Berkshire Hathaway subsidiary.

Enough about sales, let’s talk about profit

Berkshire Hathaway currently makes $19.5 billion each year and they need to increase annual profits to at least $27 billion if they ever want to make more money than the Agricultural Bank of China and obviously you cannot do that selling new cars, but you may do exactly that selling used cars.
Allow me to explain you the math behind the sale of a used Volkswagen Jetta.
You can only make less than 5% each time you sell a new car, which means you can only make less than $12,500 every time you sell a $250,000 Lamborghini.

When you sell a used Volkswagen Jetta for $12,500 or less you can make as much as $12,500 every time you sell one. How can this be?  Most millionaires have at least a college degree.
If you charge a millionaire a 20% rate or about $50,000 for the car loan, he will just use his $250,000 credit card to buy the car at a 10% rate and you get nothing and Bank of America gets $25,000 in the first year.

On the other hand, if you charge a foreign cab driver a 100% rate or about $12,500 for the loan, he will take that deal because nobody else is willing to lend him $12,500 despite the fact that he has been working hard for the past five years in this country for the taxi company.
He now wants to be his own boss and buy a car that he can use to work for Uber, which pays as much as $75,000 in some large metropolitan areas.

It does not matter to him if you are going to charge him $12,500 for the car. He will only pay you for a year and then he will be free.
Obviously, as soon as he erases his debt, he is going to come back to buy another car and you are going to say yes again. Now he has three employees working for him driving around the clock and making as much as $150,000 each year assuming he is paying them at least $25,000 each year.  In other words, he has evolved from being an employee to being an employer.

Eventually, he will make as much as $1,500,000 each year and he will have at least 30 employees. Not bad for a guy without a college education born in Brazil or Mexico.
As you can see, it is only a matter of time before one of these 30 employees decides to acquire his own used car and the cycle starts over.

Uber is going to become a publicly traded company with a market value of at least $100 billion in the future and Warren Buffet knows this.
Do you?

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Comments

  • It s hard for anyone to question an investment decision made by the Oracle of Omaha. But much like when Buffett began his foray into the world of newspapers — an industry that, unlike car dealerships, no one doubts is circling the drain — you can t help but wonder what it is that he sees that others are missing.

    fensrescicom.science September 12, 2015 12:55 pm Reply
    • Really good point.

      Staff February 1, 2016 8:30 am Reply

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