The Indian manufacturing sector has gone through a major transformation steered by significant reforms announced by the government in recent times. At present, the manufacturing sector is emerging as one of the core growth sectors in India, targeting both local and global markets.
Striving towards operational excellence, manufacturers are adopting a range of strategies and practices including Total Quality Management (TQM), Automation & Virtual Integration, Flexible Manufacturing, etc. Manufacturing companies are also evaluating and adopting flexible business operating models to manage their internal processes more efficiently and to minimize the capital expenditure and operational costs to abate the risk associated with huge capital investments.
Capital Expenditures (CAPEX) business model
The Capital Expenditures (CAPEX) model is the most common business model within the manufacturing sector in the country. Under this model, manufacturers bear the entire capital expenditure of the manufacturing project/unit. In the recent past, the CAPEX model has slowly started losing its ground as it is not viable for small and medium enterprises that are cash-strapped and those unable to secure funding. However, large enterprises are adopting this model due to its flexibility, benefits, and saves time that is required for acquiring land, obtaining necessary approval and construction of the facility, etc.
Operating Expenditures (OPEX) business model
The Operating Expenditures (OPEX) model is emerging over the Capital Expenditures (CAPEX) model as many manufacturers are giving more attention to Cash flow optimization, as it is a better alternative to buying land and building the facility. It is flexible in terms of payment models and is economically viable. The operating expenditures include ongoing costs incurred in the operation, maintenance of the production facility, and expenses incurred in the day-to-day operations of the business.
OPEX vs CAPEX
| Capital Expenditure (CAPEX) | Operating Expenditure (OPEX) | |
|---|---|---|
| Description | Capital expenditures refer to investments in physical assets. | Operational expenditures refer to ongoing, month-on-month expenditures that are used to run the business. |
| Purpose | Buy assets with useful life greater than a year. | Ongoing costs to run the business. |
| Acquisition and Construction timelines | Land acquisition and construction of the facility will take 25-35 months depending on the size of the facility. | Can start operations within 3-4 months in a ready to move in facility or 15 -20 months in a Built to Suit (BTS) facility. |
| When Paid | Upfront | Monthly or Yearly |
| When accounted for | Over useful time. | In the current month or year. |
| Listed as | Property | Operating Cost |
| Tax Treatment | Deducted over time as asset depreciates | Deducted in the current tax year. |
| Flexibility | Heavy investment on land and building restricts manufacturers to change strategy very quickly | The occupier can change strategy quickly in case of ready to move-in /BTS facility. |
| Benefits | The organization owns the fixed assets (land, building, and equipment) once it has been paid off. | No need to deploy large amounts of capital. Scalability is easier and more cost-effective. |
Future of Operating Expenditures (OPEX) model in India
The OPEX model proves to be hassle-free and economically viable in comparison with the CAPEX model. It is a better alternative, enabling optimization, flexibility in payment models, and permits to quick-start operations.
Manufacturing companies in India are increasingly seeking the OPEX business model, especially in sectors such as solar energy, pharma R&D, electronic appliance manufacturers, auto component manufacturers, small and medium scale enterprises and start-ups as there is no upfront investment in fixed assets.
Given the rising trend for OPEX business models, increasingly driven by new firms, this will foster more entrepreneurial businesses in the manufacturing sector in India. On the other hand, property developers, product specific Special Economic Zones (SEZs), Free Trade and Warehousing Zones (FTWZs), government and private industrial parks are offering Built to Suit (BTS) and ready to move in facilities for the manufacturing companies to boost the operations without investing on land and building of the manufacturing facility.
We foresee CAPEX business model gradually losing to the OPEX model as there is an increased demand for ready to move in and Built to Suit (BTS) manufacturing facilities across the manufacturing sector in India.
The chart below illustrates the ready to move and built to space available for manufacturers across the states of the country in government and private industrial parks/clusters, product specific SEZs, FTWZs and in government facilities such as BHEL.
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