Textile Industry

Hathaway Mills, by Marcbela via Wikipedia Commons. 

Warren Buffett has built Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) into one of the world's greatest wealth-building empires over the past 50 years. Yet Buffett has called his decision to purchase the namesake company as his biggest investing mistake. At the time, Berkshire Hathaway was a struggling textile manufacturer in an industry on the decline. Today, however, the textile industry in the U.S. is making a comeback, which makes one wonder whether Buffett will give it a second chance.

Why Buffett's original investment in the textile industry was a mistake
Ever the astute investor, Buffett saw an interesting trading pattern in Berkshire Hathaway's stock back in the early 1960s. He noticed that when Berkshire sold off an underperforming textile mill, the company would use the proceeds to buy back its own stock at a higher price. So when he saw that Berkshire Hathaway had sold a mill, he would buy its stock and then sell it back to the company through the buyback offer.

The big mistake comes when the company tried to shortchange Buffett on a buyback. In a fit of ego, he decided to buy control of the company so he could fire the CEO. However, in doing so he was buying control of a struggling company in an industry that was in a secular decline. No matter how much money Buffett pumped into the company, and he pumped a lot into it, he couldn't turn it around because its industry wasn't coming back. Textile jobs were being lost overseas to places such as China, as U.S. producers simply couldn't be competitive in a global market. So Buffett wasted a lot of time and money on a business that he ended up shuttering two decades later.

The textile industry is making a comeback
Now, the textile industry that proved to be one of Buffett's biggest investing blunders is making a comeback in the United States. After much of the textile industry went out of business in the 1970s and 1980s as factories closed and jobs moved overseas, we're seeing the opposite these days. Currently, the textile industry employs about 233,000 people, or 2% of the U.S. manufacturing workforce, well off the industry's peak employment of 1.3 million in 1948. Still, the textile industry these days isn't trivial: It generates $54 billion in shipments each year, with a growing portion of its goods being exported around the globe. In fact, the U.S. textile industry's exports surged 45% between 2009 and 2014, hitting $18.3 billion last year -- good enough to rank fourth globally.

This resurgence is coming to a textile industry that's different from the one of yesteryear. Long gone are labor-intensive mills that just couldn't compete with cheap labor in developing countries. Instead, today's mills are technologically advanced. The industry is plowing a lot of money, including $1.6 billion in total capital spending in 2013, to create 21st-century mills. These fully automated mills have increased textile productivity and make U.S. textile production much more competitive globally. In fact, in a unique turn of events, a Chinese cotton-spinning company is investing $218 million to build a 230,000-square-foot yarn factory in a former textile manufacturing hub in rural South Carolina, of all places, creating more than 500 jobs. It's one of several new textile plants being built in the U.S. as the industry comes back from the grave.

Why the textile industry won't make a comeback in Berkshire Hathaway
Despite the automation-driven cost improvements, the textile industry is unlikely to make a comeback within Berkshire Hathaway. Buffett tends not to like to repeat his investing mistakes. The main drawback of the textile industry back when Buffett tried to revive Berkshire Hathaway, aside from the industry's decline, was the capital-intense nature of the business, and that's still the industry's main drawback. So Buffett will probably watch the textile industry's renaissance from afar, content to make his money elsewhere. 

 

Matt DiLallo has the following options: long January 2017 $135 calls on Berkshire Hathaway and short January 2017 $145 calls on Berkshire Hathaway. The Motley Fool owns and recommends Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.