Berkshire Hathaway’s Two-Pronged AI Strategy: Powering Data Centers and Investing in Google

BECKY QUICK: Welcome back, everybody.

Berkshire Hathaway first invested in Japan's five main "trading houses" just over six years ago, and it consistently increased its position. Berkshire now owns more than 10 percent of each of the top five.

And the company's CEO, Greg Abel, is in Japan right now.

He joins us for a business update and what he's seeing there. And, Greg, it's great to see you. Thank you for joining us.

GREG ABEL: Good morning, Becky. Great to be on "Squawk Box".

BECKY QUICK: Good morning. Although I — I see it's evening there in Japan as we would anticipate.

Greg, let's talk a little bit about what you're doing there, why you're in Japan right now.

GREG ABEL: Yeah. It really serves a couple of great purposes.

First of all, upon arriving, I was able to go visit Tungaloy. It's one of our operating units here based in Japan. It's part of IMC, a company that makes tool bits. So spent the afternoon up in Fukushima with our team there.

And it's really amazing story. We acquired it back in 2008. And over that period of time, really built a business from — from scratch.

It came out of Toshiba, but a relatively small company and three, so a number of significant plants up in Fukushima. So spent the day there touring it.

We have 15 hundred employees in Japan and really, just really unique.

Here's a company that has just under $240 million of sales in Japan and an incremental $400 million internationally.

So, very small group just doing remarkable things. And it's a — it's a great way to start a trip.

And then, obviously, been visiting with our — each of the five trading houses and Tokio Marine.

BECKY QUICK: That purchase we first found out about six years ago, I think the purchase of those five trading houses that you all originally bought into.

At the time when we found out, I think it was around 5 percent that you owned of each of the trading houses.

You had made a deal with them, you and Warren Buffett, that you wouldn't buy more than 9.9 percent without their permission.

I think all of those houses have appreciated having Berkshire as a shareholder. You now own more than 10 percent in each of them.

A lot of that's been because those companies have been buying back shares, too.

But what — what is your long-term plan for these trading house positions? And what kind of partnership do you have with these companies?

GREG ABEL: Yeah, you're absolutely right. It goes back to six years ago.

We actually announced it U.S. time. It was Warren's 90th birthday. And the next day it was announced in Tokyo and in Japan that we had acquired just over 5 percent.

And at that time, we communicated, it was really a long-term proposition, that we saw this as a long-term holding. And we looked forward at that moment to building a relationship with each of the five companies.

Three years later, we attended — were here in Tokyo — in 2023, and we met with each of the companies. And that was part of building the relationship because, one, we were very pleased with the underlying investment at that time.

At that point in time, our investment percentage had clicked over the 7 percent. And — and the businesses were performing well.

As you highlighted, they were purchased — really managing their capital well, purchasing shares back in, increasing their dividends, and their overall performance continued to improve.

And then, you're absolutely right. We — we highlighted and requested their approval that we — could we go over 10 percent?

Because up to that point, we'd always highlighted we would stay below 10 and only exceed it if the five management companies — or the five trading companies — agreed to us exceeding the 10 percent.

And then upon receiving their approval, we went above 10 percent.

And it's really, one, a long-term investment that we intend to hold for many decades.

And then, secondly, we've been building really strong relationships with each of the companies, and looking at other opportunities here in Japan, and for that matter, abroad.

And those are just exceptional discussions that each visit, we continue to build on the prior discussions and look at incremental opportunities.

BECKY QUICK: And, Greg, I'll bring up the relationship with Tokio Marine and the percentage that you've bought into that.

There have been some reports recently suggesting that the Japanese insurer is on the look for a purchase, maybe even looking at Australia's Suncorp or Canada's IAG as a potential purchase acquisition.

These reports suggest that they would do this with Berkshire's balance sheet backing it up.

Can you tell us anything about what may be happening with some of those talks, and whether Berkshire would back, financially, those acquisitions, potentially?

GREG ABEL: Yeah. The — we have a — right before our annual meeting, we announced the transaction with Tokio Marine.

And it's an exceptional opportunity because they are a great partner. And we were absolutely thrilled to be able to reach an agreement with them, where we have 2 1/2 percent of their quota share of their book, i.e., what they're underwriting. We have a 2 1/2 percent interest in the company.

And then we announced a strategic partnership.

But what I would highlight is that strategic partnership is very broad. And either of us can bring ideas back and forth to each other. There's no obligation to act on it.

But if it were to make sense, both for Tokio Marine and for ourselves, of course, we'd love to pursue a transaction with them.

And, as you would guess, we're not commenting on any of the specific companies you noted.

BECKY QUICK: OK.

Greg, one of the things that you all did when you started making these moves into Japanese equities was to start issuing bonds in Japan, yen-denominated bonds.

And I think that's been a pretty profitable position for you all because of where interest rates have been with Japanese bonds.

We are talking this morning about how the Japanese 10-year bond has now yield — is now yielding the highest levels that we've seen in 30 years.

I believe, just according to the latest to the — to the latest filings, that you all have something north of $15 billion worth of Japanese yen-denominated debt.

How does that stand? Will you still issue that debt? What are the maturities on some of those things? And what does it mean to see higher interest rates in Japan?

GREG ABEL: Yeah, it's very — it's very topical, obviously, here in Tokyo and in Japan, in the newspapers.

I will say, Becky, I found it interesting. Not a single one of the trading companies raised it as a fundamental challenge right now.

And because they're still, when you think about, they're talking about the — yeah — but they're still relatively modest when you think about it. I think the 10-year hit, just a 30-year high —

BECKY QUICK: Yeah.

GREG ABEL: And it's, yeah, it went right to three percent as you're highlighting.

So, I think they see it as very manageable.

And then from our perspective, you're right, we — we have a bond — a debt portfolio there in yen that pretty much reflects the cost basis of our investments. And the 10-year — or the remaining life on that debt is a little more than five years.

And so, we still have a significant carry, i.e., the difference between the dividend and the interest we're paying.

But I would highlight that we would envision still raising debt as appropriate in yen.

And at the same time, we do see the underlying companies earning performance growing. We do see an increase in dividends likely over the coming years and continued share repurchases.

So, yes, there's an incremental cost, but clearly within the various trading houses, we do see nice increases in the underlying return on capital they're delivering back to shareholders.

BECKY QUICK: Greg, we spoke with Warren Buffett back in July right here on CNBC and talked to him about a lot of things.

But one of the interesting things he brought up was the Berkshire portfolio.

Obviously, you're running things. He said that you're the decision maker, but that you all talk frequently, almost daily. And that the position that was initiated in Alphabet, he said, was his.

I just wonder if you could talk a little bit about your relationship with Warren, how you all are doing, and how you're managing that portfolio at this point, the stock portfolio for Berkshire?

GREG ABEL: Yeah, great.

Well, a great example of it is Warren turned 96 on Sunday.

So, before I left to come to Tokyo, stopped in, had a — had a great celebration with Warren as he — as he turned 96 with his family and friends. So, we had a very nice afternoon.

After that, flew here to Tokyo. And Warren absolutely loves the Japanese investments and the companies we've invested in. So, I could tell it wasn't easy for Warren that off I went to Tokyo.

But yeah, we have a great working relationship in that we discuss a variety of things on a regular basis.

So, we would had some discussions, even on Sunday, about our Japanese investments.

And I talked to him earlier this morning just to give him an update on — on how each of the meetings went and how the companies are performing.

But it's a — it's a very much a — just a dialogue we've always had.

We love talking business. We love talking about what we're seeing across our portfolio.

And you're absolutely right, relative to the Alphabet position, Warren initiated that probably close to 15 months ago or a little bit more. And so, he initiated the initial purchases in Alphabet.

We continued — or he continued — and we discussed it then and continue to discuss it — initiated a variety of purchases.

And then I want to say, in late May, I received a call on a Sunday morning to see if we wanted to participate in their upcoming equity offering.

Really, no terms or amount were set. And I said, well, I'd get back to them right away.

And very much consistent with how we manage Berkshire, but also how we — the governance around it, I called Warren and I said, we had a significant opportunity to invest in — continue to invest in Google, but in a — in a — with a significant block. Discuss the size.

They hadn't set the size but recommended that we consider 10 billion and Warren talk — Warren and I discussed the size. We discussed the size of discount. And I'd recommended 6 1/2 percent discount. And we were comfortable with that.

And we went back to them and highlighted, we would be interested in a block on those terms and then ultimately consummated the transaction.

BECKY QUICK: Why do you like Alphabet?

GREG ABEL: I think from the — just from a real high level, obviously, we don't discuss the underlying specifics of any of the concepts in — around any of our equity investments.

But the one thing that is unique with Alphabet, and I guess we do see this across our other businesses, but number one, obviously, we all are seeing and feeling the impact of AI.

So, we knew it was going to have a significant impact on America and businesses.

We have a lot of visibility from within our companies as to how we're using AI, what type of benefits it's delivering. So that brought incremental interest.

And then we saw Google as a significant player.

Now, there's a lot more to Google than what I just said and why we like it. But those were the fundamental reasons as to why we took a serious look at Google and now have a significant investment in it.

BECKY QUICK: Well, let me ask you a little more about AI and the data center buildout that's taking place.

You're somebody who spent decades working in infrastructure, building at Kiewit and also at Berkshire Energy. So, you understand one of the key places that's seen as a limiting factor for AI buildout, and that's energy.

Where are we right now in terms of — the terms of that data center buildout? Where do you see opportunities, specifically for Berkshire?

GREG ABEL: Yeah. So, it's really interesting, as they continue to announce all the data centers and data center sites.

I've sort of always had a strong view that energy would be the constraint. I — and there'd be energy. We can produce the energy. It's, do we have a — how long it would take to get the sites prepared and being in a position they could serve the data centers? And I continue to see that as a big constraint.

We'll come to one of the other challenges.

So — and — but we do still see it as a significant opportunity for Berkshire and Berkshire Hathaway Energy, in that, for example, if you look at Iowa, where we have a number of data centers — I want to say last year, approximately 8 percent of our load came from data centers.

And we see incremental load coming on, both customers requesting it and what we can serve.

But we've really operated to some pretty basic principles right from the — from the get-go.

And we've shared that with each of the hyperscalers. We've — and it's really policy we've — we've discussed with our state, our governors, and our regulators.

And we highlighted we are interesting — we are interested in serving these hyperscalers, one, if there was no impact to the rates of our other customers.

And in fact, we've pretty much taken the approach there has to be a net benefit to our customers.

The communities have to understand the impact on water. And that has become much more manageable as they address that, and use, you know, the technologies that are available to minimize water use.

And then, and then lastly, the communities have to be open to having the data center in their community.

We very much believe in the fact that you have to be a welcomed member of the community.

Now, that's a decision the data center has to make. But we can encourage them to seriously evaluate where — the reaction from the communities.

And I know you've had many discussions around it. There is a lot more pushback in the communities across the U.S.

We have not had any specific site rejected to date. We're continuing to move forward on the — on the various sites we have under construction.

And our sites would be the energy infrastructure, not the data center site. But it has to be done on the terms and conditions I just highlighted.

JOE KERNEN: Greg — there — if you don't define a narrative, if there's a vacuum, then other people are going to define it for you.

There's a piece in The [Wall Street] Journal today just — about the data centers— protect the earth, build more data centers.

Their need for reliable power drives innovation, while AI helps develop new clean technology.

It just points out this could be a once in a generation opportunity to clean up the electricity grid and to learn how to improve water quality across the board and accelerate technologies —

GREG ABEL: Right.

JOE KERNEN: — that, you know, that the people that don't like this, they're behind a lot of these technologies and you could act —

There's a need for so much power, it could actually generate the type of change that they're looking for.

But if you don't — if you don't sell it that way, they're going to sell it a different way. I guarantee it.

GREG ABEL: No — Joe, you're absolutely right. I mean, the narrative around these is so critical. And it continues to evolve.

So, it really did start from the impact on rates. And were you impacting other customers?

You can see they've — as you've just highlighted, they've moved on from that narrative.

I would say that the water narrative is very strong coming from the data centers and how they minimize the use.

And now, there's starting to evolve to, you know, other narratives.

I think a very strong narrative on the side, at least in Iowa, where it's still a strong farming community — when we see both the energy infrastructure put in place and a data center put in place in an individual county or community, the tax relief, specifically on property taxes, and also revenues that come into the county to support other services, schools, police, fire. It's very, very substantial.

And that — and that's equally has to be part of the narrative and make sure people recognize the benefits that come with — with that type of development.

BECKY QUICK: Hey, Greg, let's shift gears a little bit and talk about housing, specifically in the United States.

Obviously, since the last time we spoke with you, you all bought — or you bought the — made the acquisition in Taylor Morrison for $6.8 billion.

We also saw in the latest filings that came out, you had increased the stake in Lennar.

So, these are just some of the ways that Berkshire kind of plays into housing.

But you have so many different places that you are kind of measuring how the housing market is doing, from the paints that you sell, from other things that go into housing — building — but also from the real estate portfolio and Berkshire Hathaway real estate that follows through all of that.

What do you see happening in the housing market, particularly as interest rates and mortgage rates are rising in the United States?

GREG ABEL: Yeah, it's really interesting, because it was an important part of the discussions with Taylor Morrison and the discussions I had with Sheryl [Palmer], their CEO, in that when we looked at housing, and housing specifically in North America, we were taking a very long-term view, that — that American dream will continue to exist.

And five years, and 10 years from now, this will be a very strong asset for Berkshire, i.e., Taylor Morrison.

And I'll come back. We did combine, and are combining, some of our operations from Clayton Homes.

We had 15 site — what we call site builders — but home builders — over in Clayton Homes. They're now joining the Taylor Morrison team.

But the conversation we were having, Becky, was that we didn't see any type of immediate recovery or any type of hockey stick there. That we did see it, from Berkshire's perspective, that it was going to be a bumpy road for a while.

And obviously, as you're discussing it with people in the industry, there's — and we've got a great leader in Sheryl and brings great optimism — but you can see as we discuss it.

We don't — we don't envision a quick recovery there. But we do see it as an industry that we definitely want to be invested in, and we're invested in, for the — for the long-term.

BECKY QUICK: And Greg, just when you look at the economy in the U.S., around the world, how are things doing from a business perspective? How is the consumer doing?

GREG ABEL: Yeah, it's really interesting.

I mean, here in Tokyo, incredibly vibrant. You can feel a great deal of energy.

And when I met with the — with the five companies, the trading houses — very strong results they're having and feel very good about their businesses.

And that would be — a number of them are resource based.

But a number of the businesses also have what they call non-resource businesses, and they're performing very well.

If you look across our businesses and our results through the second quarter, again, very strong in our larger businesses, including our manufacturing businesses.

So, you can see there's still — still strong demand.

But I think you do feel the customer — there's a consumer that is still clearly feeling the pain and struggling and having to stretch a lot further to — with that — with that dollar.

And I think that does exist. There's no question when we look at the underlying results.

But at the same time, the fundamentals around the economy, at least from what we're seeing through the — through the second quarter, remain very, very strong.

BECKY QUICK: Greg Abel.

Greg, thank you very much for joining us this morning — this evening — in Tokyo. We appreciate it.

GREG ABEL: Thank you, Becky. Thank you, Joe. Have a great day. Thank you very much.

BECKY QUICK: You, too.

JOE KERNEN: Thanks, Greg.

BECKY QUICK: Again, Greg Abel, the CEO of Berkshire Hathaway.

GREG ABEL: Thank you.