Buffett’s Van Tuyl Auto Dealership: Starfish Vs Spider and Any Wide-Moat Asian Starfish?
“Well, Larry Van Tuyl talked to me six or seven years ago. I understand the business and I think that it is a decent business overall and I think the way Larry runs it is extraordinary. He has these partners in 78 dealerships and so he works on a partner basis. He’s got a terrific record over the years, and you know, it is something that we will own for 100 years. It really fits Berkshire – it’s the kind of business we can expand a lot because there are 17,000 dealers in the country and we are buying 78 of them through this means. So we will get a lot of opportunity to expand the business. This will be a big business for Berkshire. The Van Tuyl Group fits perfectly into Berkshire Hathaway from both a financial and cultural viewpoint. Larry Van Tuyl along with his father, Cecil, spent decades building outstanding dealerships operated by local partners. The Van Tuyl Group enjoys excellent relations with the major auto manufacturers and delivers unusually high volumes at its 78 locations.”
- Warren Buffett commenting on Berkshire Hathaway’s acquisition of Van Tuyl Group, the fifth largest auto dealership firm in the U.S. with $8 billion in sales, at an undisclosed price estimated at around $3 billion
“One thing that business, institutions, governments and key individuals will have to realize is spiders and starfish may look alike, but starfish have a miraculous quality to them. Cut off the leg of a spider, you have a seven-legged creature on your hands; cut off its head and you have a dead spider. But cut off the arm of a starfish and it will grow a new one. Not only that, but the severed arm can grow an entirely new body. Starfish can achieve this feat because, unlike spiders, they are decentralized; every major organ is replicated across each arm.”
- Rod Beckstrom and Ori Brafman in their 2008 book “The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations”
Starfish and Spiders seem to have crawled over the phenomena from Hong Kong’s “leaderless” protests to Buffett’s purchase of Van Tuyl’s network of 78 auto dealers, most of them located in the Southwest and Midwest.
Using the metaphor of “Spider” to depict traditional, top-down organizations and the “Starfish” to represent groups that lack structure, leadership and formal organizations, authors Rod Beckstrom and Ori Brafman in their book “The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations” presented a thought-provoking view on how “Spider” organizations are increasingly being challenged and defeated by the “starfish”. Decentralized organizations exploiting strong networks are creating a wide-moat competitive advantage over conventional, centralized operations and they are incredibly resilient. Power and knowledge is disseminated across the “starfish” organization, and individual units can respond quickly to the increasingly complex internal and external forces of today.
Van Tuyl has a unique operating structure in which general managers of the individual dealerships typically retain a stake in their local business. The Van Tuyls commented: “I believe in people, people, people. There is no substitute for good people who really care and do a good job. We cut all of our people in on ownership because we believe that’s the way to go. We’re waiting to get more guys ready for general manager and partner. If they’re part owner, they’re going to look after business a little bit better.” Thus, the starfish organizations like Van Tuyl recognize that in today’s fast-changing and competitive environment, it’s the folks on the ground who have the best real-time information on how the battle is shaping up. They build an environment that respects their opinion, which seeks to make sure they understand the mission, and simultaneously empowers them to take the fight to the enemy in a way that optimizes their chances of success in whatever conditions they might find themselves.
Because each of Van Tuyl’s 78 dealerships is itself a partnership, a separate legal entity, like a starfish, the details of Berkshire’s acquisition took many months. Buffett added: “I like the Van Tuyl people enormously. But if I had had to deal with the contract’s complications, I probably wouldn’t have lasted it out.” The accounting for partnerships and joint ventures is also complicated by the IFRS 11 Joint Arrangements accounting standard. Under the US GAAP, JVs are accounted for using the equity method. Before IFRS 11, JVs may be accounted for under either the equity method or proportional consolidation but now IASB requires the use of equity method to bring about comparability of financial statements on a global basis.
“It’s easy to mistake starfish organizations for spiders,” the authors warn. Both have the appearance of multiple “legs” or divisions/units. So what are the distinctive characteristics of these “starfish”? There are five legs to a decentralized organization that can help it take off: (1) circles, (2) the catalyst, (3) the pre-existing network, (4) an ideology, and (5) a champion. Circles are essentially independent, autonomous groups that function on the basis of some implicit norms. The catalyst is the person who initiates a circle and then cedes control to its members, developing the idea, sharing it with others, and leading by example. Ideology is the glue that holds people together within such circles. Without access to the culture of trust prevalent in a pre-existing network, it is almost quixotic to attempt to build a decentralized organization. There is a champion who promotes the idea relentlessly. Instead of command and control through rational, powerful, directive instruments to organize and bring about order, the catalyst is a peer connecting people, who show: a genuine interest in others, a desire to help, a tolerance for ambiguity, and the ability to map new connections, to meet people where they are, to inspire others, to let go.
So is the starfish really undefeatable? The starfish can disintegrate quickly once the indestructible intangible ideology or trust is weakening. For instance, if the HK student protesters start to be aware that their actions have caused tremendous distress to the livelihoods and rights of the ordinary citizens that they are fighting for, confusion strikes the starfish about the legitimacy of its ideology and the terrifying strength starts to fade away. Similarly, the introduction of wealth and tangible rules and rights into the starfish may disperse the power of the starfish. The U.S. government finally bested the Apaches, for instance, when it provided its leaders with cattle, a form of wealth that reshaped the amorphous, nomadic tribes into easily manageable hierarchies. As the authors put it, “The moment you introduce property rights into the equation [be they intellectual, physical, or otherwise], everything changes: The starfish organization turns into a spider.”
Having got a clearer understanding about starfish organizations, are there any Asian starfish? From our Bamboo Innovator Index of 200+ companies, we think … have qualities of the starfish just like Van Tuyl, Jim Pattinson Auto and O’Reilly Automotive.
Asian Wide-Moat Starfish #1 and #2 - Stock Price Performance
“When you give people freedom, you get chaos, but you also get incredible creativity”. Starfish organizations are incredibly resilient and powerful because they work on the fundamental premise that their employees and business partners are good, can be trusted and wish to contribute. However, the powerful forces of the starfish can be abused like in the case of the “leaderless” terrorist networks al-Qaeda and ISIS. German philosopher Friedrich Nietzsche said, “One must still have chaos in oneself to be able to give birth to a dancing star.” To this, we add, “One must cultivate ‘emptiness’ as a Bamboo Innovator to be able to give birth to a resilient and positive dancing Starfish.”
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- Buffett’s Van Tuyl Auto Dealership: Starfish Vs Spider and Any Asian Starfish? Oct 6, 2014 (Moat Report Asia, BeyondProxy)
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|P.S.1 Here is a little more about my background:
KB Kee has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company.
He holds a Masters in Finance and degrees in Accountancy and Business Management, summa cum laude, from Singapore Management University (SMU) and had also published articles on governance and investing in the media, as well as published an empirical research paper Why ‘Democracy’ and ‘Drifter’ Firms Can Have Abnormal Returns: The Joint Importance of Corporate Governance and Abnormal Accruals in Separating Winners from Losers in the Special Issue of Istanbul Stock Exchange 25th Year Anniversary Best Paper Competition,Boğaziçi Journal, Review of Social, Economic and Administrative Studies, Vol. 25(1): 3-55. KB has also presented his thought leadership as a keynote speaker in global investing conferences. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic, industry trends, and detecting accounting frauds in Singapore, HK and China, and had taught accounting at the SMU where he is currently an adjunct lecturer.
P.S.2 Why do I care so much about doing The Moat Report Asia for you?
My personal motivation in embarking on this lifelong journey has been driven by disappointment from observing up close and personal the hard-earned assets of many investors, including friends and their families, burnt badly by the popular mantra: “Ride the Asian Growth Story!” I witnessed firsthand the emotional upheavals that they go through when they invest their hard-earned money – and their family’s – in these “Ride The Asian Growth Story” stocks either by themselves or through money managers, and these stocks turned out to be the subject of some exciting “theme” but which are inherently sick and prey to economic vicissitudes. They may seem to grow faster initially but the sustainable harvest of their returns is far too uncertain to be the focus of a wise program in investment. Worse still, the companies turned out to be involved in accounting frauds. Their financial numbers were “propped up” artificially to lure in funds from investors and the studiously-assessed asset value has already been “tunnelled out” or expropriated. And western-based fraud detection tools and techniques have not been adapted to the Asian context to avoid these traps.
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