Berkshire Hathaway Textile Operations
Company Overview
Berkshire Hathaway began its corporate life as a New England textile manufacturer — not an investment conglomerate. Its roots trace to the Hathaway Manufacturing Company, founded in 1888 in New Bedford, Massachusetts, and the Berkshire Fine Spinning Associates, founded in 1889 in Pittsfield, Massachusetts. The two companies merged in 1955. When Warren Buffett's partnership acquired control in 1965, Berkshire employed approximately 2,300 workers across seven mills, producing cotton and synthetic fabrics for apparel and industrial uses.
The textile operations represent one of the most instructive chapters in Berkshire's history — not for their success, but for their failure and what that failure taught. Over twenty years, despite able management, continuous capital investment, cooperative labor, and genuine managerial effort, the textile business could never earn adequate returns on capital. The root cause was structural: cotton fabric is an undifferentiated commodity, buyers purchase on price alone, and Berkshire's New England cost structure was permanently disadvantaged against southern U.S. mills and, later, against foreign producers paying a fraction of U.S. minimum wage.
In July 1985, Buffett announced the closure of the textile operations. The machinery was auctioned early in 1986. The shutdown drew an admission from Buffett that remains one of his most candid self-criticisms: "I should be faulted for not quitting sooner."
Investment Story
1962–1965: The "Cigar Butt" Acquisition. Buffett began accumulating Berkshire Hathaway shares in 1962 after identifying the stock as statistically cheap relative to working capital — a classic Graham-style "cigar butt" investment. By May 1965, Buffett Partnership controlled enough shares to assume operational oversight. He installed Kenneth V. Chace as president, a capable executive who would manage the textile operations with integrity and energy for nearly two decades.
1965: One-Year Recovery, Structural Problem Intact. Under Ken Chace's leadership, 1965 results showed dramatic improvement — earnings of approximately $2.3 million versus $125,000 the prior year — largely due to the shutdown of least-productive plants. Buffett recognized the improvement as a one-time restructuring benefit, not evidence that textiles had become a good business. The structural disadvantage remained intact.
1967: Pivotal Capital Redeployment. In early 1967, Buffett began redirecting cash generated by the textile business toward better uses. The insurance industry beckoned. Cash from textile operations and reduced textile working capital funded the acquisition of National Indemnity Company for $8.6 million — the first step in Berkshire's transformation from textile company to diversified holding company. This proved to be the most consequential capital allocation decision Buffett ever made with Berkshire's resources.
1969–1976: Modest Returns, Continued Operation. The textile business generated modest but real cash flows throughout the early 1970s. Buffett kept the operation running, citing the importance of the mills to their communities, the honesty and effort of management, and the cooperative attitude of labor. He acknowledged from the beginning that returns were inadequate — but chose social responsibility over pure economics.
1975: Waumbec Acquisition. Berkshire acquired Waumbec Mills with expectations of "important synergy." Buffett later reflected on the acquisition with characteristic wry honesty — noting that "synergy" is a term widely used in business "to explain an acquisition that otherwise makes no sense." The Waumbec acquisition did not change the terminal economics of the textile business.
1978: The Economics Stated Plainly. The 1978 letter contains Buffett's clearest pre-closure articulation of why textiles could never earn adequate returns — and why he was keeping the operation running anyway despite knowing the economics were poor.
1980: Final Efforts. The textile operations continued through 1980–1984 with losses deepening in difficult years. Each capital investment proposal looked individually rational but proved collectively self-defeating as competitors made identical investments, driving prices lower industrywide.
1985: Closure. In July 1985, Buffett made the decision to close the textile operations entirely. The closure was completed by year-end 1985. The machinery auction, held in early 1986, drove home a final lesson about the gap between book value and economic value: equipment that had cost millions to install sold for cents on the dollar.
Buffett's Own Words
The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed. Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital.
We hope we don't get into too many more businesses with such tough economic characteristics. But, as we have stated before: (1) our textile businesses are very important employers in their communities, (2) management has been straightforward in reporting on problems and energetic in attacking them, (3) labor has been cooperative and understanding in facing our common problems, and (4) the business should average modest cash returns relative to investment. As long as these conditions prevail - and we expect that they will - we intend to continue to support our textile business despite more attractive alternative uses for capital.
In July we decided to close our textile operation, and by yearend this unpleasant job was largely completed. The history of this business is instructive.
I should be faulted for not quitting sooner. A recent Business Week article stated that 250 textile mills have closed since 1980. Their owners were not privy to any information that was unknown to me; they simply processed it more objectively. I ignored Comte's advice - "the intellect should be the servant of the heart, but not its slave" - and believed what I preferred to believe.
A textile company that allocates capital brilliantly within its industry is a remarkable textile company - but not a remarkable business.
Thus, we faced a miserable choice: huge capital investment would have helped to keep our textile business alive, but would have left us with terrible returns on ever-growing amounts of capital... I always thought myself in the position described by Woody Allen in one of his movies: "More than any other time in history, mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray we have the wisdom to choose correctly."
Investment Lessons
Good management cannot overcome bad industry economics. The textile experience is Buffett's most direct proof that industry structure matters more than management quality. Ken Chace was a genuinely excellent operator — resourceful, energetic, honest in reporting. But no amount of managerial excellence could compensate for the structural reality that textile fabric is a commodity, buyers purchase on price alone, and Berkshire's cost structure was permanently higher than competitors'. As Buffett later generalized: when a great manager meets a terrible business, it is the business's reputation that prevails.
Capital investment in commodity industries destroys value collectively even when it makes sense individually. Every capital expenditure Berkshire evaluated in the textile business looked individually rational on a return-on-investment basis. Yet when all competitors made identical investments, the resulting cost reductions simply became the new baseline for lower industrywide prices. The capital was consumed without creating any lasting competitive advantage — like everyone in a crowd standing on tiptoes to see better. The lesson extends to any industry with undifferentiated products and low barriers to imitation.
The opportunity cost of trapped capital is enormous. The cash that flowed through the textile business from 1965 to 1967 funded the National Indemnity acquisition. That $8.6 million investment was the seed capital for Berkshire's insurance franchise, which generated billions in float and enabled all subsequent acquisitions. Every dollar Buffett had kept locked in textile working capital instead of redeploying into insurance would have destroyed an extraordinary multiple of its face value. This is why Buffett's definition of "capital allocation" — choosing where to direct the next dollar — is the most important management skill.
Exit timing is a capital allocation decision. Buffett acknowledges he delayed the textile closure by several years beyond what pure economics warranted. His reasons — loyalty to employees, admiration for management, reluctance to harm communities — were understandable and even admirable. But they were enormously expensive. The lesson he drew: emotion is a legitimate factor in human decisions, but it must be acknowledged explicitly as a cost, not rationalized as a mistake by others. The 250 mills that closed before Berkshire's had the same information Buffett had; they simply acted on it faster.
Book value of fixed assets in a commodity business is almost completely meaningless. The 1986 auction of Berkshire's textile machinery sold equipment for a tiny fraction of book value. Equipment carried on the balance sheet for millions fetched almost nothing. This was not a surprise — it was predictable from the economics of the business. A commodity business that cannot earn adequate returns on capital cannot sustain asset values, because the assets' value depends entirely on their earning power, not their replacement cost.