Warren Buffett seems to be be tapping his inner Futurist and raising the bar for applying strategic foresight in the world of finance and business.
The decision by Berkshire Hathaway‘s CEO to buy Fort Worth Texas-based Burlington Northern Santa Fe demonstrates his understanding of deep structural changes in the world economy and the strong defensive position (and flexibility) rail could apply even with major disruptions to the world of freight infrastructure.
Berkshire’s move to pay a premium for BNSF shares has made headlines around the world for both the clear ‘bet’ on the future health of the US economy and for its unique bridge between 19th century industrialism and 21st century financial investments.
Berkshire had been BN’s largest shareholder (owning 22%) and Buffettologists are quick to point out that Buffett has been a student of the railroad industry and freight sector for many years.
It is clear that Buffett expects BNSF to provide a steady stream of cash for Berkshire shareholders in the decades ahead. But what might he see as the core drivers of change and likely disruptions that can be leveraged by BNSF management?
How might BNSF’s leadership navigate 21st century challenges with a 19th century platform? Here are a few thoughts:
- Railroads in an Interdependent Global Economy
- Rail & Multi-modal Integration
- Railroad Titans in the Knowledge Economy
- The Really Long View: Land & Corridor Connectivity
- Transportation: Information Technologies (LBS & Autonomous Vehicles)
- Transportation & Energy Efficiency
- Rail and Politics of Coal
1) An Interdependent Global Economy
Buffett’s ‘bet’ is not only on the ‘US economy’ as much as it is a validation on the continued integration of the global economy and the role North America will likely play in the future as a producer and consumer of raw materials, commodities and finished products.
Buffett understands that the non-material fundamentals driving globalization – namely capital and information flows – inevitably end up pushing some form of material good from place to place.
He obviously believes that North America will continue to play an elevated role in the flow of rail’s most important products: raw resources / commodities and industrial products manufactured or consumed in the US, Canada, and Mexico.
What is Warren Buffett’s inner Futurist saying?
Trade is the backbone of the world economy and despite all the rhetoric for energy or commodity independence, it is economic and cultural ‘interdependence’ that is likely to drive the future. Add a few more billion consumers by 2050 and rail will have plenty of growth on the upside for freight transportation.
2) Rail’s Best Hope? Multi-modal Integration
Integrate Rail (Corridors) + Truck (Roads) + Shipping (Ports) + Air Freight (Inland Ports)
Despite being our oldest industrial era mode of transportation rail is largely misunderstood by the public.
Rail is a corridor-based platform supporting major industry sectors: raw materials, commodity agricultural products, consumer and industrial products, and energy (e.g. coal).
It does not exist in a vacuum or operate against the trucking or shipping industries. The reality that rail is already tightly integrated into all forms of freight transportation modes: trucking, shipping and air freight. Industry veterans are quick to quote that the ‘trucking business is the rail road industry’s biggest customer’.
The future for Berkshire’s BNSF is multi-modal freight integration from seaside ports, to inland air freight hubs, to rail-trucking transit depots. Railroads provide the fixed corridors for long-haul and then tap the unique advantages of trucks, ships and planes to fill in the gaps on low cost and/or fast delivery time.
Buffett knows that rail is part of a much larger ecosystem that supports our global supply chains that stretch from raw materials to finished products. And this freight provider ecosystem has one mission: reducing costs and ensuring more growth in global trade.
Growth will come from more seamless integration of all forms of transport, not direct head-to-head competition.
What is Warren Buffett’s inner Futurist saying?
Rail’s growth depends on tight integration of ‘multi-modal’ transportation systems. We know our strengths and weaknesses. And we will welcome trucking, shipping and air freight partnerships that helps reduce costs for global customers.
3) Railroad Titans in the Knowledge Economy
Railroads are likely to find a valuable role in the 21st century knowledge economy as a main aggregator of market information and insights that stretch far beyond pure commodities and raw resources.
Forget about the rail cars, it’s the information and insights that matter most. The short-term and long-term market insights that emerge from the freight industry analysts and forecasters is second only to the market studies conducted by energy producers like Exxon, Shell and BP.
Railroad leaders pay attention to everything: weather patterns and their impact on grain, the price of energy (e.g. portable fuels), highway congestion and infrastructure investments, labor union dynamics at major ports, peak production of conventional oil supplies, et al. They monitor most major sources of economic uncertainties and the most fundamental socio-economic trends driving globalization.
Beyond the market insights, railroads also play a key role in the stock and flow of raw commodity distribution. BNSF is heavily invested in food and agricultural products both in terms of transportation and storage in massive grain storage facilities. Making key data elements more visible to customers on both sides of the agricultural commodity value chain might be a lucrative offering for a Berkshire-owned BNSF.
What type of partnerships might we expect? IBM and Cisco stepping in to provide BNSP with capacity for embedding sensors and adding software as service to BNSP customers.
What is Warren Buffett’s inner Futurist saying?
We need to embed sensors and software along our entire value chain. And then we will be able to transfer these on the ground market insights into Berkshire’s other businesses! I am getting gratis global market insights along with my massive set of railroad cars.
4) The Really Long View: Land & Corridor based Connectivity
Berkshire has become owner and leaser of a sizable corridor-based infrastructure footprint second only to the federal national highway system. Not bad for $44 billion.
Who can say what the future of rail cars will bring in twenty or thirty years?! Will it be ‘steel on steel’ or lighter advanced composites and concrete? Will it be highly scheduled long chains of trains or a more dynamic ‘river’ of smaller connected train lines that operate autonomously?
But land will always be land. And these corridors will remain major points of connectivity between major urban hubs in North America will only increase in value.
What is Buffett’s inner Futurist saying?
We now own infrastructure based on corridor real estate and urban-to-urban connectivity that could connect major points in three major economies of the world (Canada, Mexico and US). We will wait out the looming federal, state and private sector investments in upgrading our aging highways. But in due time, these corridors could be transformed with the right vision (and steel on steel is not our only path forward!).
5) Transportation & Situation Awareness / ‘Smart’ Information Technologies
Berkshire is likely to hold BNSF for many decades, and leaders will soon confront the technological revolutions occurring in transportation sector and world of ‘smart infrastructure’ where sensors, software and ‘situation awareness‘ are bring greater transparency and control.
Information technology is transforming all notions of vehicle design, user interactions, traffic flow management, electric power train management, in-car entertainment, autonomous vehicle operation, et al.
Nothing in the world of transportation will go untouched by information technology. And 2010-2030 is likely to be a very disruptive period for transportation technologies.
But what matters most to freight infrastructure?
Location-based services (LBS) are likely to bring tremendous value to supply chain management and transit decision making for freight providers. Freight transport providers will have a real-time pulse check on every object floating at sea, flying in the air, or traveling across one of the world’s connected roadways. Buffet must see the upside for rail in this future of real time dynamic modeling of freight transportation. The low cost offering of long distance rail coupled with just-in-time delivery via air (inland ports) or trucking could be a profitable proposition to customers.
And this is only the beginning.
Autonomous vehicle systems are the great disruptor!
Semi-autonomous (Driver Assistive) and fully autonomous vehicles are no longer distant dreams imagined by Hollywood producers. We are entering the first phase of commercialization. The 2010 Ford Taurus will help to mainstream the notion of conversation-based command and control interfaces with our vehicles via Sync. (Forget about today’s generic voice interface and relatively low quality of service; in the near future, services like Sync and OnStar will mean that our cars will have agent-based personalities that help manage our experiences on the road and on the go)
The 2010 Ford Taurus is also raising the bar for Adaptive Cruise Control which allows the vehicle to follow the proceeding vehicle based on a desired ‘distance’ not a static ‘speed’. Slowly drivers will be exposed to experience and safety benefits of vehicles with total situation awareness.
Yes, the transition will take years to unfold, but we have begun. And we can start to see the roadmap towards widespread adoption and the overcoming of our initial fears of ‘robotic cars’ that currently exist.
Beyond 2025, who can say what the future of autonomous systems will bring to the trucking industry. Semi- and fully-autonomous vehicles could change the cost structure for long distance transport and regional distribution hubs.
In a decade or two, a single long-distance truck driver could, with a back-end support team, conceivably haul several cargo beds with the aid of sensors, software and autonomous technologies. Transforming the image and role of trucks on the road from single disconnected vehicles, to long connected streams of cargo and you could see some real competition to the corridor model.
What is Buffett’s inner Futurist saying?
I’ll be long gone before these robotic cars hit the road, but Berkshire is still in a strong position. Even in an age of autonomous vehicles, rail’s fixed route corridor is the perfect platform for more futuristic freight transporter concepts. We could be a test-bed for autonomous systems in Ports and along railroad lines.
6) Rail & Energy Efficiency
Despite commentary from the blogosphere, Buffett is not betting on the ‘End of Fossil Fuels’. But he is betting that today’s current liquid fuel model (e.g. no substitutability) for transportation fleets is likely to work in favor of electrification and higher efficiency modes of transportation in the short-term.
I’m guessing he has studied the IEA and EIA-based forecasts of peak production of conventional oil and implications for the cost structure confronting oil producer and consumers.
Oil is not going away, but it is not getting cheaper.
Yet much of the hype of rail’s cost advantages via efficiency is overstated in the long-term. Yes, in the short term 10-20 years rail could do quite well in a world of higher oil prices. But in the end, fleet electrification for trucks could negate all ‘efficiency’ advantages currently held by rail.
7) Rail and the Politics of Coal
Buffett appears to be a pragmatic environmentalist at heart. He knows that coal has a future, but that it isn’t the future.
BNSF is heavily invested (per tonnage) in the transport of low-sulfur coal from Wyoming’s Powder River Basin which is better suited in a carbon constrained world compared to Appalachian region coal. But he continues to state publicly the long-term shift away from coal as an expected trend for the US.
I’m not as convinced and believe coal is going to be around for a very long time as biologically-based carbon utilization strategies (e.g. algae bioreactors) emerge in the years ahead. Coal is the world’s fastest growing fuel and the US utility sector is likely to bend, but not break in its dependency on this fuel source. Even with carbon pricing schemes, coal-based power plants control the grid line connections to our factories, offices and homes.
And few analysts are accounting for a disruptive biotechnology platform that neutralizes carbon. Algae and bacteria-based bioreactors that bind carbon dioxide with hydrogen could silence critics by taking the emissions question out of the equation. That would leave only those who are opposed to coal’s negative impact during mining. Translation: BNSF is not going to take coal off its future revenue list anytime soon.
What is Buffett’s inner Futurist saying?
Downplay coal. Pray for algae-based capture. (Maybe make an investment or two in bioindustrialism). And hope the cash cow continues without adding carbon to the atmosphere.
Challenges Ahead
Of coure, Buffett is not expecting an easy journey ahead.
Despite all these potential upsides to growth, Berkshire has stepped into a capital intensive industry when it comes to major infrastructure upgrades!
Rail in its current ‘steel on steel’ model is not cheap to maintain or expand. But looking beyond 2025, what about carbon-composite trains, tracks or even wheel to ‘concrete’ corridors that open access to everyone?! If I have one potential wildcard for rail is that the industry abandons steel in favor of wheels to concrete in a massive overhaul circa 2030-40.
Beyond capital costs, finding new corridor real estate opportunities for expansion is not easy (making it highly dependent on integration of trucking, air and shipping in the future). There is no more ‘frontier’ and several cities remain locked in battles with railroad companies over control of future corridors and reduction of ‘at grade’ crossings that have an impact on road traffic.
And Berkshire’s management will continue to navigate challenges with federal, state and city governments who have a challenging relationship with rail in areas related to suburban expansion, urban redesign, and of course the potential ‘monopoly’ attacks.
Buffett BNSF: Video of mainstream / short-term / ‘baseline’ future analyst view from Morningstar
Image: Bribirto, Flickr CC License Attribution Share alike
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Awesome insights here. Makes me see rail in a whole new light. My one-sentence takeaway is that Buffet sees currently clunky rail infrastructure as the increasingly intelligent, multimodal, adaptable complement to transport infrastructure. It’s lucrative connective tissue that will be put to higher use.
Alvis– Thanks for the comment. I think you’re summary sentence would have saved me a lot of time writing the post! You hit it on the target! It’s important for us all to see that layers can be added to seemingly dated platforms to bring new value. This is very important in the age of sensors and web connectivity. Maybe Buffett will have one more trick up his sleeve? Buying a big stake in GM maybe?