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FINANCE IN PRACTICE
❱ What would be included on your list of growth
industries that have transformed people’s lives over
the past century? One obvious candidate is the auto-
mobile industry. Sales of vehicles in the United States
have grown from almost zero 100 years ago to more
than 16.5 million a year today. Many companies fore-
saw this rapid growth and concluded that it offered a
likely source of juicy profits. Wikipedia lists 1,800 car
manufacturers that were established at some point in
the United States, with exotic names such as Ben Hur,
O-We-Go, and Motor Bob. Almost all of these compa-
nies blossomed briefly and then withered. Only three
U.S. car companies remain today, two of which filed
for bankruptcy in 2009 and had to be rescued by the
U.S. government.*
An equally profitless growth industry has been
the aviation sector. Since 1948, the number of pas-
senger miles flown by U.S. airlines has multiplied
nearly 300 times. Yet since that date, airlines have in
aggregate made an operating loss, and over 150 have
entered into Chapter 11 bankruptcy, with some com-
panies filing two or three times.† While a number of
smaller airlines continue to operate, the sector today is
dominated by just four companies – American, Delta,
United, and Southwest.
A third and more recent example of a growth indus-
try is the manufacture of computers. With the exception
of IBM, the giants of the industry today barely existed in
the 1970s. At that time investors in the industry referred
to Snow White and the seven dwarfs. IBM was Snow
White, and the seven hefty and well-respected dwarfs
were the other major mainframe manufacturers – Bur-
roughs, UNIVAC, NCR, Control Data, Honeywell,
General Electric, and RCA. In addition to these major
producers, there were a number of glamorous dwarflets,
such as Amdahl, Wang Laboratories, Data General, and
DEC. As the role of the mainframe changed, only Snow
White survived as a major force, while the dwarfs and
most of their smaller brethren either no longer exist or
have exited computer manufacturing.
Do these cautionary stories mean that companies
should seek out stagnant or declining industries? Of
course not; other things equal, it is better to operate in
a growth industry than a declining one. The problem
is that the prospect of rapid industry growth attracts
competition. And, if the industry is also characterized
by rapidly changing technology or consumer taste, then
competitive advantage is likely to be less persistent.
Think, for example, of Nokia and Blackberry, whose
phones once dominated the smart phone market until
they were quickly overtaken by Apple’s iPhone and
Android phones. The message, in Warren Buffet’s
words, is that ”the key to investing is not assessing
how much an industry is going to affect society, or how
much it will grow, but rather determining the competi-
tive advantage of any given company and, above all, the
durability of that advantage. The products or services
that have wide, sustainable moats around them are the
ones that deliver rewards to investors.”‡*Profitless growth in the auto and aviation industries is the subject of an
insightful and entertaining article by Warren Buffet. See C. Loomis, “Mr.
Buffet on the Stock Market,” Fortune (November 22, 1999, pp. 110–115. ©
1999 Time Inc.
†Wikipedia lists nearly 450 US airlines that are no longer operating. See https://
en.wikipedia.org/wiki/List_of_defunct_airlines_of_the_United_States
‡See Loomis, op.cit.Cautionary Tales
When Marvin announced its expansion plans, many owners of first-generation equipment
took comfort in the belief that Marvin could not compete with their fully depreciated plant.
Their comfort was misplaced. Regardless of past depreciation policy, it paid to scrap first-
generation equipment rather than keep it in production. Do not expect that numbers in your
balance sheet can protect you from harsh economic reality.