Warren Buffett Invests in Pete Liegl
The Wall Street Journal has a story about Buffett and the RV industry. I will reprise the full story from the BRK 2024 Letter to Shareholders. Buffett receives a letter from an intermediary, with some data about a recreational vehicle manufacturing business and its founder Pete Liegl who is only interested in selling his business to Berkshire Hathaway. On June 28th, 2005 Warren meets with Pete Liegl, the founder of Forest River, along with his wife Sharon and daughter Lisa. Pete has a price in mind and puts it on the table, a gesture which Buffett admires. Of course, with his analyst’s mind Warren has already talked to local dealers in Omaha about Forest River and its market reputation.
Forest River was acquired for $800 million and Buffett asks about Pete’s expectation for compensation as head of a BRK subsidiary. First, he says that his primary goal in selling to BRK was to assure financial security for his family. Beyond that, Pete says he would feel uncomfortable making more than his boss at BRK, so Pete says $100,000 would be suitable, since he got the number from the financial disclosures. Pete proposes a bonus element, which is 10% of any increase in yearly profitability of the business. Buffett agrees, and makes a comment about having to adjust for acquisitions and any additional capital employed. This is also agreed, but Buffett actually never puts this in writing. The deal is sealed with a fine meal at Omaha’s Happy Hollow Club.
Warren’s comments about how the deal worked out are a testament to the value of this deal worked out through the relationships, acumen, affability and emotional intelligence of Warren Buffett, Berkshire’s co-founder.
Buffett writes, “During the next nineteen years, shot the lights out. No competitor came close to his performance. Every company doesn’t have an easy-to-understand business, and there are very few owners or managers like Pete. Pete Liegl was a natural.”
From the BRK model, with Forest River dividending up so much money over nineteen years to Berkshire for reallocating to higher returning investments, the boost to Berkshire’s book value increase was in the billions, according to Warren Buffett.
The Leadership Transition and Passing of an Iconic Founder
Leadership transitions at large companies rarely go smoothly, and there are always some unexpected consequences. Pete Liegl announced a pseudo-succession plan in 2024, which was just a consolidation of executive duties, while Pete continued to operate as CEO. Pete passed away on November 15th, 2024.
Every year, a representative of Berkshire Hathaway came out to visit Forest River, but Buffett himself never paid a personal visit or had a look at the operations. Considering how this subsidiary was touted for its importance to the parent, this was a mistake. Had Buffett the analyst had a look at operations himself, he would have seen their inefficient and antiquated production, missing and supply chain. He would have quickly made changes. The late Charlie Munger always emphasized about the right incentives needing to be in place to get results, and the compensation system had incentives backwards, emphasizing speed over quality.
When an iconic CEO/founder leaves things are sometimes complicated because the founder hasn’t really given up their influence. In September 2024, Pete Liegl gave his first public statement about his transitioning away, executive portfolio shuffling, and plans for the future. In layman’s language, here are the takeaways:
We are looking to the future.
I don’t have the fire in my belly, like when I was younger.
I am turning things over to my three executive confidantes, consolidating their duties over the product portfolio. They have more fire in their bellies.
We are going to be doing the same things, only better.
I will be staying on as CEO.
Even the local press seem confused, and they ask “Why announce this now?” and “What about the future?”
The Recreation Vehicle Business is Full of Surprises
Eighty percent of the industry’s global output comes from in and around Elkhart, IN, affectionately known as the “RV Capital of the World.” The three largest employers in Elkhart are Thor Industries, an NYSE company and a Top 3 RV manufacturer, Forest River, also a Top 3 RV manufacturer and BRK subsidiary, and Lippert Components, a subsidiary of LCI Industries. Thor employs 13,622; Forest River, 10,000; and Lippert, some 5,500.
In Elkhart County, there are large employers like the Northern & Southern Railroad, as well as specialized manufacturing of components. The unemployment rate is 2.5%, below IN’s rate of 3.1%. Average annual work incomes are around $45,00.
RVs are not cheap, and Forest River has made a living by producing a product line of towable RVs, motor homes, and campers which are all at the lower price points. However, Thor and Winnebago see opportunities for margin expansion by selling feature laden, more customized vehicles in all segments, especially motor homes. Forest River has the number two market share behind Thor, but Forest’s financials, from what we can glean, are more precarious than its two strongest competitors. Pete maximized his wealth accumulation, but it doesn’t seem that he left his company with the kind of brand equity befitting a Berkshire Hathaway Company.
Forest River Is Not Built for Quality or Low Defect Rates
The press writes about defect rates for RVs being so much higher than those of automakers. That’s a red herring. Auto production lines have workers assigned to work stations for repetitive functions from tightening screws to adjusting assemblies; robots are there for bigger items and tasks. I had assumed that RVs were made with similar technology and processes. Not so, because the businesses are very different.
No, the way of making RVs is quite mad. It is built for high defects, inefficiency, and low quality. Watching videos of some RV workers, the RV itself is the “work station.” A worker is seen installing a connection between a microwave and a wall panel, trying to squeeze his hand in while controlling the microwave. In other videos, workers do not have the right size of length of fasteners and go running to find them. A number of customers have had wiring harnesses smoking or starting fires in their vehicles. Since the RV maker probably buys the component from a supplier and then installs it, how is this defect remediated? In others, they see cabinets which are nicked or ill-fitting, but these don’t get attention because they don’t count in registering a complete install to get paid. So these go to an unsatisfied customer, are returned to be fixed, and even if a warranty is honored the customer is without the RV for weeks. Compared to the auto industry, RVs are neanderthals in the marketplace, but these are not inexpensive products.
One Forest RV Camper 2025 model had a MSRP of 167,000, and a dealer price of $125,000. A customer of Forest River is trying to assemble a class action suit made of those who have suffered wiring problems as he has experienced. The company is grinding him down, and he probably won’t succeed. I believe he was financing his RV over 120 months. The CFPB should get after these kind of agreements.
What Should Berkshire Do?
Worker turnover is high for RV makers. The companies don’t see that as a negative, but it is: turnover costs money in one way or another. Companies are able to find people like the retired Air Force mechanic, who wants a job for some extra money and because he likes to fix things; but if she gets tired and leaves that turnover will cost. During the CoVid pandemic, Mercedes, instead of furloughing their best production people, kept them on the payroll and had them come in to solve other non-production issues around the company: they warehoused their labor.
BRK has earned a more than satisfactory return on investment at Forest River over 19 years. Clearly, the current management should be replaced. A compensation system with the right incentives should replace piece work. A supply chain should be made of components from qualified vendors. Workers should be trained and teamed to finish a whole RV together. Post-production inspection, pre-delivery inspection and customer walk through before accepting delivery should be part of the Forest River experience. Solve the long horizon for warranty work. Create a decent financing option. As I understand it, Berkshire’s Auto segment is driven primarily by its curated dealer network and ancillary services. Make the RV experience like buying a Toyota, Honda, or Mazda. The way Forest River is now is not consistent with the descriptions of the Berkshire culture in all the investor letters.