2008: Will higher commodity prices affect ISCAR?

AUDIENCE MEMBER: Good morning. My name is Mike McGowan (PH). I’m from Pasadena, California. I’m a shareholder in both Berkshire and Wesco. I run a website called FinancialFoghorn.com, and I write about precious metals and things.

And I’ve asked you questions in the past about silver, and I didn’t really get them answered. So I thought I’d ask about a different commodity this time.

I read about the Chinese raising the price of tungsten, and I think about your comment last year in buying ISCAR.

Will commodity price increases in things like tungsten affect the profitability of ISCAR? And would that be the reason you’re locating a plant in China to build machine tools? Thanks.

WARREN BUFFETT: Yeah. The reason the plant was built in China was to serve the Chinese market, which is large and growing. And we opened in Dalian late last fall.

It’s nicer to be closer to the raw material, but it really had nothing to do with changes in the price of tungsten.

Generally speaking, if you’re creating a higher value-added product, as ISCAR is doing, from a raw material, there may be three months, six months, of adjustment to changes in raw material prices. And obviously, with some commodities, if it gets high enough you get into substitutes.

But there isn’t going to be any substitute for tungsten in the cutting tools, and there won’t be — you know, we tried some substitutes for crude oil in terms of gasoline or — not so — heating oil but then the substitutes like natural gas go up in price, too.

So I think largely, in our businesses, raw materials get passed through.

Now, we’re having a tough time, for example, in the carpet business in passing through the cost increases that we experience in oil-based raw materials. But we would be having trouble — we probably would be having trouble in the carpet business regardless now because of the slowdown in residential housing. It does make it tougher.

But over a period of time, our businesses are going to reflect raw material costs. You know, the candy here I have, this fudge, which I can hardly wait to get into, you know, it’s going to reflect sugar and cocoa and things like that over time.

And if you’re running an airline, it’s going to reflect the cost of fuel. So you can have little squeezes here and there, but it’s not a big deal, and it certainly isn’t the reason that we went to China to locate the ISCAR facility.

That facility — incidentally ISCAR — we have a number of people here from ISCAR, and families in some cases.

That is — I had very high expectations for that when we bought it. It’s exceeded it in every way. It’s exceeded in terms of financial performance. It’s exceeded in terms of the human relations we’ve developed with the people.

I mean, it was — I told you it was a terrific acquisition a few years ago. It’s been a dream acquisition, and I know Charlie wants to add to that. (Applause)

CHARLIE MUNGER: Yeah. I would say that the short answer is that, while we don’t like inflation because it’s bad for our country and our civilization, that we will probably make more money over time because there is inflation.