Therefore, such industries need an optimized volume of production to give a sufficient ROI. It additionally implies that little changes in sales can prompt huge changes in profits and return on invested capital. Capital intensive is the processes or industries that need enormous capital investments in plants, tools, machinery, etc to create products or services in high volumes and keep up with optimum levels of net revenues and ROIs.

1.4.1 Production and Productivity (AQA Economics)

Prof. Harvey Leibenstein, Paul Baran, Rostow, Hirschamn Maurice Dobb and Mahalanobis are the chief advocators of capital intensive technique. They consider that this technique is indispensable for accelerating the process of growth. Prof. Paul Baran has the strong opinion about the necessity of using the capital intensive in less developed countries. Capital-intensive firms generally use a lot of financial leverage, as they can use plant and equipment as collateral. However, having both high operating leverage and financial leverage is very risky should sales fall unexpectedly. For example, if a capital intensive technique refers to company spends $100,000 on capital expenditures and $30,000 on labor, it is most likely capital-intensive.

Labour and Capital Intensive Techniques (With Diagram)

If you are a software supplier, you will be supposed to make programming products and sell them for a profit. You will just need to hire engineers and hence, the main upfront expenses will be their compensations or salaries. Automated productions is when the production process is mainly carried out by machinery/robots and is mostly controlled by computers. Some of the common examples of such industries can be transportation sectors such as airways, railways, waterways that need loads of investments in purchasing the transportation medium or creating the transportation medium.

In case you are a utility service provider who wants to set up a plant for offering electricity, then for this, you will be required to build either wind, coal, or nuclear power stations. Additionally, such industries can prompt lower costs and higher wages that cause an optimized interest for a more assortment of services. Nonetheless, the growth of more capital-intensive industries creates new types of job opportunities like jobs in AI, software design, marketing, etc.

• Investment in technologically complex devices or materials, as well as assets like real estate, also creates a capital-intensive environment.
• A capital-intensive business often requires a higher volume of capital investments, which can impact the cost of production and profitability.
• Also, it will more often than not have a high ratio of fixed costs to variable costs.
• Such sorts of huger investments require adequate reserve funds or savings or the ability of firms for financing the investments.

GGSIPU (MS Legal Aspects of Business

• However, having both high operating leverage and financial leverage is very risky, should sales fall unexpectedly.
• With optimized capital intensity, there come laborers who work with the machines with adequate abilities and skillsets.
• Companies in capital-intensive industries are often marked by high levels of depreciation.
• More capital intensive methods enable increased output and higher living standards.
• Capital intensity, as well as labor productivity, are crucial in deciding economic growth in the long run.

More than $65 billion is for different plant property and equipment types. It means PG&E has spent a lot to set up its plants and uses only a fraction of it as working capital. These industries stand in the market due to the services they give, labor efficiency, maintenance of the assets, risk factor, productivity, and many other factors. To put it plainly, in case the capital expenditure is substantially more than the labor expenditure then the business would be capital intensive. This is the inverse of the asset turnover ratio, an indicator of the efficiency with which a company is deploying its assets to generate revenue. Capital intensive production requires more equipment and machinery to produce goods; therefore, require a larger financial investment.

Does capital intensive production cost jobs?

Multiple reasons and decisions go into whether the company should be capital intensive. There are businesses where initial high capital is not a choice (utilities, power, automobiles), and there are businesses where high capital intensive nature is a choice (streaming, software, etc.). Looking at the current companies, the power they hold, and their ability to keep the market share, one can decide how capital intensive his company or project should be. While deciding whether a business or company should go for capital intensive setup or not, a few reasons or decisions go in the process.

Capital Intensity

The term “capital intensive” refers to business processes or industries that require large amounts of investment to produce a good or service. As a result, these businesses have a high percentage of fixed assets, such as property, plant, and equipment (PP&E). Companies in capital-intensive industries are often marked by high levels of depreciation. Examples of capital-intensive industries include automobile manufacturing, oil production, and refining, steel production, telecommunications, and transportation sectors (e.g., railways and airlines). Examples of capital-intensive industries include automobile manufacturing, oil production and refining, steel production, telecommunications, and transportation sectors (e.g., railways and airlines).

Capital-intensive businesses require significant amounts of capital to operate successfully. By using EBITDA, a non-cash expense, instead of net income in performance ratios, it is easier to compare the performance of companies in the same industry. Increased investment in capital can help to increase labour productivity (output per worker). This capital intensity and labour productivity play an important role in determining long-run economic growth. More capital intensive methods enable increased output and higher living standards. Capital intensive refers to industries or businesses that require significant amounts of capital to produce goods or services.

For all such requirements, there will billions of USD dollars needed as upfront costs that will be included as assets in the balance sheet of the company. Capital intensity, as well as labor productivity, are crucial in deciding economic growth in the long run. The capital-intensive methods can be key reasons behind optimized output and everyday comforts. By using EBITDA, rather than net income, it is easier to compare the performance of companies in the same industry.

Before formulating any decisive opinion on the important question, let us study the arguments for and against each of these techniques. When it comes to capital-intensive firms, it is important to understand they utilize a great deal of financial leverage, as they can involve plant and equipment as the collateral. In any case, having high operating leverage as well as financial leverage might be very risky in letting sales fall deals fall surprisingly. Capital-intensive firms generally use lots of financial leverage, as they can use plant and equipment as collateral. However, having both high operating leverage and financial leverage is very risky, should sales fall unexpectedly. Another way to measure a firm’s capital intensity is to compare capital expenses to labor expenses.

Labor intensive refers to production that requires a higher labor input to carry out production activities in comparison to the amount of capital required. This technique fulfills two objectives of capital formation and skill. It raises agriculture production through the use of minor irrigation, better seeds, manure, implements and the introduction of short duration crops. Labour intensive technique has been illustrated with the help of diagram I. In this diagramme, isoquant Q shows the initial level of output which is being produced by using OL labour and OC amount of capital. With the adoption of new technology a higher level of output is represented by the isoquant Q1; can be produced by the same amount of capital i.e.

Such types of costs have to be paid in any event no matter industry is going through a recession or not. Capital-intensive industries tend to have high levels of operating leverage, which is the ratio of fixed costs to variable costs. As a result, capital-intensive industries need a high volume of production to provide an adequate return on investment.

Capital-intensive businesses need significant profit margins in order to remain operational. Examples of Capital Intensive industries include oil refining, automobile manufacturing, and steel production. These industries need heavy equipment and machinery, making them Capital Intensive. Capital Intensive refers to the business processes or industries that require large amounts of investment to produce a good or service and are typically characterized by high levels of depreciation of plant and machinery. For example, manufacturing, utilities, and transportation are often considered capital-intensive industries since they require large facilities, expensive machinery, and equipment. Investment in technologically complex devices or materials, as well as assets like real estate, also creates a capital-intensive environment.

Such a production process will have a moderately low proportion of labor input and will have higher labor productivity. Also, it will more often than not have a high ratio of fixed costs to variable costs. While winding up this post, it is clear that capital intensive refers to those businesses or companies that invest more in capital resources or assets. In general, seventy to eighty percent of total assets comprise fixed assets, machinery, and plants. Capital-intensive businesses will quite often have higher degrees of operating leverage that can be understood as the ratio of fixed costs to variable costs.