An asset-light model can apply to a company struggling with costs or simply, a successful company looking to focus on core competencies, improve profits and grow.
Some reasons for pursuing an asset-light model include:
- A strong focus on cutting costs and releasing capital.
- Introducing greater agility by removing complexity.
- Determining which assets are core to customer satisfaction.
The outcome can range from outsourcing certain operations or entering into JV’s. A challenge of an asset-light company is finding partners who will consistently deliver according to quality standards, client ethos, brand values, and the risk of leaked IP.
Typically, the switch from an asset-heavy to asset-light model involves replacing CAPEX with agile operating expenses or OPEX. The tax-deductible depreciation of CAPEX is generally less than OPEX. The impact on the balance sheet must be understood.
Asset-Light models are used by some of the world’s top brands.
- Apple outsourced manufacturing but embedded its engineers in its partners operations.
- McDonalds owned or leased properties used by its franchisees.
- Cathay Pacific and DHL shared aircrafts.
On the other hand, Zara has an integrated model which does pretty well for them! The reasons why they do not favour an asset-light model is that they are a disruptor in the fashion industry. Zara went against the industry flow by not vertically integrating their supply chain to lower-cost factories in Asia because they have to react instantaneously to emerging fashion trends. Their ‘fast fashion’ model dictates that the product moves from concept to store in less than three weeks!
An asset-light approach could not work for Zara.
Apart from understanding the impact of an asset-light model on the balance sheet, this model does mean some loss of control which also needs to be understood and weighed-up. In some instances, a hybrid-type model can work.
The benefits of an asset-light strategy are compelling but getting there successfully requires a lot of smart thinking, trade-off’s and brand risk management.
Luhann van Zyl
Head of Asset Division.
Operating as an integrated team, MUBESKO AFRICA’s Financial Accounting and Asset Accounting & Modelling specialists provide key skills such as model stress-testing, viability studies, financial planning, supply chain support and asset accounting and modelling expertise to manage a transition to an asset-light model.