Introduction
No wonder that modern day businesses are always keen on coming up with new and innovative methods and strategies to scale up faster effectively and efficiently, however, with the fast advent of new technologies and democratization of the world wide web right since 1990’s has given birth to many alternative models of operations, including the concept of going Asset Light.
Understanding the terms:
Asset-Light Model & Asset-Heavy Model:
Companies go asset light by owning fewer capital assets compared to their operational assets. By reducing the number of capital assets such as land and building, plant and machinery, cars and computers, companies stand to gain a significant advantage when compared to their competitors who are asset heavy. Put simply, capital assets could potentially weigh down a company, but investing in technology and talent allows entities to scale up faster and compete with existing players in record time.
Asset heavy is a broad based term used to describe business model of companies which typically own a lot of their fixed assets outright which are utilized to generate income for the company.
Here are some of the lucrative asset-light business models in different segments that we all have come across:
Asset-Light Business Model:
Online Grocery Hospitality Ride Sharing Online Food Delivery Cloud Kitchen
Grofers Oyo Rooms Ola Cabs Swiggy and Zomato Fasoos
Changes in the current scenario:
Causes:
-Easy availability of specialized skill sets in many parts of world,
-Lack of funds to compete with established business houses
-Eagerness of new age entrepreneurs preferring shorter payback periods & quick returns
Effects:
Focus has been shifting towards access, not ownership and therefore when Uber entered the scene, many people wondered how can you have a taxi company with no cars? The strategy to shift from owned properties to leased assets and drive revenue growth through income will definitely pay-off. By doing this, companies stand to gain a significant advantage when compared to their competitors who are well-established players in the market. A company with high fixed costs relies on revenues to cover those costs. Here, profit depends on capacity utilization. Whereas, asset-light companies’ costs are more variable relative to their revenues, so profits are less volatile. Similarly, companies with lower levels of asset ownership are able to respond faster to changing demand, technology advancements, and new market opportunities. These companies are more agile. Finally, this model also has an advantage of delivering a better return on capital.
Sector wise analysis of research conducted by BCG few years back for 2,687 of largest companies revealed that more asset-light companies on average earned greater returns on assets than their peers did.
Sr. No | Industry Type | Average Annual return on Operational Assets (%) | Business Model |
1. |
Retail | 32.00 | Asset Light |
11.00 | Asset Heavy | ||
2. |
Chemicals | 19.00 | Asset Light |
9.00 | Asset Heavy | ||
3. |
| 24.00 | Asset Light |
8.00 | Asset Heavy | ||
4. | Food and Beverages | 23.00 | Asset Light |
12.00 | Asset Heavy | ||
5. | Steel | 23.00 | Asset Light |
9.00 | Asset Heavy |
Further, many companies are shifting towards adopting Asset Light Business Model. One such example is Indian Hotels Company Limited (IHCL). IHCLs EBITDA in the first nine months of FY 20 jumped to 650 basis points year-on-year to 24.40%. The strategy to shift from owned properties to leased assets and drive revenue growth through income from managing hotels, is paying off.
Another example is many companies are cutting on their rent cost by shifting to co-working space that offers flexibility and an environment that caters to improving work-life or leasing space for various events like conferences, seminars or community-based workshops. Cost saved through these measures is in turn utilized for retaining valued staff through good bonuses & pay structure.
| Asset Light Model | Asset Heavy Model |
Pros | This model is very helpful to move faster and to get long-term sustainability.
| Monopolistic conditions which arise due to limited number of player courtesy the high entry barrier. |
It helps an organization to start operation by outsourcing any resources from the different firm and helps to get brand value fast.
| Have higher margins due to their exclusive nature. Yes, the margins compensate the businesses for the additional risks taken. | |
Cons | You need to take outsourcing tie-ups from reliable sources without compromising on the quality or it could lead to failure. | In the initial period, huge capital expenditure is needed which means you need deep pockets to start and succeed. |
If the franchise is unable to fulfil your business requirement in terms of customers and value, it is the biggest decision mistake. | A failure in a project, plant or a new venture means you end up with significant losses. |
Conclusion:
Check if your company fulfils the characteristics mentioned below required to adopt an Asset Light Business Model strategy:
Sr. No. | Characteristics | ✓/ X |
1. | Investing in cutting edge technologies such as software , systems and sub-systems. |
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2. | Exploring cost-effective measures such as sharing resources with other entrepreneurs thereby ensuring that companies pay for these assets only when needed and thus, saving on maintenance costs. |
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3. | Taking less risks i.e. less capital-intensive investment, equipment and real assets. |
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4. | Choosing to buy cloud space rather than invest in data centres & servers through outsourcing which allows companies the flexibility to update and adapt quickly. |
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5. | Licensing in the form of patents, copyrights, trademarks enables companies to concentrate on their core strength. When companies license out their products to manufacturers, they stand to win big financially while continuing to innovate further. |
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For detailed evaluation whether your business is an Asset Heavy or an Asset Light Model, you can contact us on the below mentioned mail IDs.
Disclaimer: The views and opinions; thoughts and assumptions; analysis and conclusion expressed here are those of the authors and do not necessarily reflect any legal standing.
Authors:
CA Aakash Mehta
Partner, MASD
E-mail ID: aakash.mehta@masd.co.in
Poojan Joshi
Associate Consultant, MASD
E-mail ID: poojan.joshi@masd.co.in