The answer to your question is in Buffett’s 1985 letter to shareholders [1]. The extract below is great demonstration of his business acumen, clarity in writing, humour, and fairness.
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> The domestic textile industry operates in a commodity
business, competing in a world market in which substantial excess
capacity exists. Much of the trouble we experienced was
attributable, both directly and indirectly, to competition from
foreign countries whose workers are paid a small fraction of the
U.S. minimum wage. But that in no way means that our labor force
deserves any blame for our closing. In fact, in comparison with
employees of American industry generally, our workers were poorly
paid, as has been the case throughout the textile business. In
contract negotiations, union leaders and members were sensitive
to our disadvantageous cost position and did not push for
unrealistic wage increases or unproductive work practices. To
the contrary, they tried just as hard as we did to keep us
competitive. Even during our liquidation period they performed
superbly. (Ironically, we would have been better off financially
if our union had behaved unreasonably some years ago; we then
would have recognized the impossible future that we faced,
promptly closed down, and avoided significant future losses.)
> Over the years, we had the option of making large capital
expenditures in the textile operation that would have allowed us
to somewhat reduce variable costs. Each proposal to do so looked
like an immediate winner. Measured by standard return-on-
investment tests, in fact, these proposals usually promised
greater economic benefits than would have resulted from
comparable expenditures in our highly-profitable candy and
newspaper businesses.
> But the promised benefits from these textile investments
were illusory. Many of our competitors, both domestic and
foreign, were stepping up to the same kind of expenditures and,
once enough companies did so, their reduced costs became the
baseline for reduced prices industrywide. Viewed individually,
each company’s capital investment decision appeared cost-
effective and rational; viewed collectively, the decisions
neutralized each other and were irrational (just as happens when
each person watching a parade decides he can see a little better
if he stands on tiptoes). After each round of investment, all
the players had more money in the game and returns remained
anemic.
> 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. After the investment, moreover, the foreign competition
would still have retained a major, continuing advantage in labor
costs. A refusal to invest, however, would make us increasingly
non-competitive, even measured against domestic textile
manufacturers. 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.”
[1] http://berkshirehathaway.com/letters/1985.html