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5 Warren Buffett Businesses That Could Be Threatened by Elon Musk

By Evan Niu, CFA - May 7, 2016 at 10:00AM

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The two billionaires couldn't be more different.

Warren Buffett and Elon Musk don't always see eye to eye.

A quintessential capitalist, Buffett greatly appreciates the consistent cash flow of the status quo. The legendary investor has built his industrial empire on businesses that may not be particularly exciting, but are remarkably resilient and stable.

A visionary innovator and serial entrepreneur, Musk has absolutely no respect for the status quo. The self-taught industrialist has built his own empire precisely by challenging the status quo of a wide range of entrenched industries, embracing the inherent risks and utter lack of stability.

The two billionaires have butted heads on numerous occasions due to disparate business interests. Here are the two most prominent examples.

Distributed solar vs. centralized solar
The most public skirmish between Buffett and Musk in recent memory took place in Nevada. Buffett controls the dominant utility in the state, NV Energy, which successfully lobbied to change net metering rates for solar customers.

By reducing how much the utility paid to buy energy from solar customers, the change adversely affected the economics of solar systems that those customers had purchased, in some cases dramatically increasing the associated payback period. SolarCity (SCTY.DL), where Musk serves as chairman, pulled out of the state as a result.

More broadly, this conflict underscores the threat that traditional utilities potentially face from distributed solar. Musk has long been a major champion for distributed solar, hoping to free consumers from grid dependence with products like Tesla (TSLA 1.24%) Powerwall.

Musk even called Buffett to discuss the situation. In an interview with CNBC, Buffett noted:

We don't want our million-plus customers that do not have solar to be buying solar at 10.5 cents when we can turn it out for them at 4.5 cents, or buy it at 4.5 cents. We do not want the non-solar customers, of whom there are over a million to be subsidizing the 17,000 solar customers. Solar customers are subsidized through the federal government, as we are through our wind and solar operations.

Buffett is seemingly averse to acknowledging climate change directly; at the very least, he doesn't think climate change should be an investing matter.

Still, he has a compelling point here. Even if you accept that renewable energy is the right path forward, it's still an open debate whether distributed or centralized energy generation is better. Utilities are able to leverage massive scale for greater efficiency, so they can procure and distribute renewable energy at a lower cost to consumers.

Autonomous cars vs. auto insurance
Tesla is perhaps the biggest proponent of autonomous vehicles, believing that the technology will be instrumental in improving automobile safety and reducing traffic fatalities -- human error causes 99% of all traffic accidents. Earlier this year, Musk predicted that Tesla vehicles will be technologically capable of driving themselves across the country in just two years. Just last week, he followed up with a belief that half of all cars produced in seven to eight years will be fully autonomous.

The rise of autonomous vehicles could be bad news for auto insurers -- like Buffett's Geico. In another interview with CNBC this month, Buffett described the potential existential threat:

I think it's a long way off, but there's no question. Anything that makes cars safer is very pro-social, and it's bad for the auto insurance industry. But nevertheless, the auto insurance industry has always worked on making cars safer. I mean, they've led the way on things like seat belts and all that. But if there are no accidents, then there's no need for insurance.

And I think there will be a big reduction in accidents over a longer period of time. And of course there already has -- cars have been made way, way safer, but now when you start making the driver safer, that would be a big, big jump, and that will happen some day, and when it happens there will be a lot less auto insurance written.

There will always be accidents and risks associated with operating vehicles, so there will always be insurance. But in a world where the roads are full of autonomous cars, we won't need nearly as much of it. Of course, many tech and auto companies are now investing heavily in autonomous cars, but much of that activity is in direct response to Tesla leading the way.

There's more where that came from
These are just the most visible instances of Buffett and Musk duking it out. Buffett's sprawling empire has other smaller areas that could eventually come under fire from Musk indirectly in the decades ahead.

Berkshire Hathaway (BRK.A 1.69%) (BRK.B 1.64%) also owns Lubrizol, which makes engine oil additives for a wide range of vehicles. Lubrizol also makes products for oil fields and refineries. As Musk continues working toward the electrification of transportation, and the related reduction in oil and gas demand, Lubrizol theoretically stands to lose over time.

BNSF Railway is also a Berkshire Hathaway subsidiary. If Musk's Hyperloop designs eventually begin to replace traditional railroads in the distant future, BNSF could suffer. Broadly, Buffett also has many investments in the oil and gas industry, including adding $1 billion to his existing Philips 66 (PSX 2.90%) position recently. Most of Musk's work revolves around transitioning the world away from fossil fuels.

Berkshire Hathaway acquired Precision Castparts in a $37.2 billion deal last year, a prominent aerospace supplier. SpaceX is upending the aerospace industry in commercial space flight, while Musk is interested in eventually making an electric jet. Musk's threat to traditional aerospace companies, who are Precision Castparts customers, will only grow.

What will Musk do next? Start making ketchup and candy?

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