Introduction to the asset-light model
The asset-light business model has proven to be an increasingly adopted strategy by companies in various sectors, including temporary energy. In this model, companies prioritize renting assets instead of acquiring them, which brings a series of competitive and financial advantages.
What is the asset-light model?
The asset-light model is a business strategy where companies outsource assets that are not essential to their core business. Instead of owning expensive assets, such as power generators, these companies choose to rent them from specialized suppliers, like Tecnogera.
Examples of asset-light companies
- Hotels that do not own the properties where they operate
- Airlines that do not own their own aircraft
- Industries that rent specific equipment for one-off projects
- Companies that use temporary energy as energy insurance
Advantages of the asset-light model
1. Reduction of fixed costs
By choosing to rent assets instead of acquiring them, companies can transform fixed costs into variable ones, providing greater financial flexibility.
2. Greater operational flexibility
Companies adopting the asset-light model can adapt more quickly to market changes, scaling their operations up or down as needed.
3. Access to cutting-edge technology
By renting equipment from specialized suppliers, companies have access to the latest technologies without needing to invest in constant upgrades.
4. Focus on core business
Outsourcing non-essential assets allows companies to focus their resources and efforts on their main activities.
Asset-light vs. Asset-heavy
The traditional business model, known as asset-heavy, involves owning physical assets. While it may seem advantageous to have full control over assets, this model presents several disadvantages compared to asset-light.
Disadvantages of the asset-heavy model
- High maintenance costs
- Asset depreciation over time
- Difficulty in technological updates
- Less flexibility for market changes
Asset-heavy model in the use of temporary power generators
In the case of using energy insurance, asset-heavy companies would have difficulties adapting to changes in energy demand. If production needed to be increased and, consequently, the power of the generators increased, the company would face problems.
It would need to sell the used, old, and less powerful generator to obtain only part of the resources to purchase a new generator that meets the new demand.
The opposite would also be a problem. If there was a need to decrease power, the company would have to choose between wasting fuel by maintaining the current, oversized generators or selling this generator to acquire new equipment more suited to the current scenario.
If the company opted for an asset-light model, these problems would not exist. A simple conversation with the generator supplier would suffice for the exchange of equipment and adaptation to the new scenario, in a practical and quick manner.
Boston Consulting Group comparative study
The Boston Consulting Group conducted a survey in 2014 to compare the Return on Investment of assets of companies using both the asset-light and asset-heavy models. The result clearly shows that asset-light provides a better return in all economic segments.
Nearly three thousand companies were analyzed. The consultancy separated the Return on Investment on the assets of companies with more own assets and compared it with those with fewer own assets. See the result by segment.
Comparison of annual ROI on own assets
- Retail: Asset-light: 32% | Asset-heavy: 11%
- Automotive industry: Asset-light: 22% | Asset-heavy: 4%
- Chemical industries: Asset-light: 19% | Asset-heavy: 9%
- Mining Companies: Asset-light: 29% | Asset-heavy: 10%
- Electric Utilities: Asset-light: 17% | Asset-heavy: 5%
- Food Industry: Asset-light: 23% | Asset-heavy: 12%
- Medical Equipment: Asset-light: 44% | Asset-heavy: 10%
- Pharmaceutical Industry: Asset-light: 37% | Asset-heavy: 16%
- Telecommunications: Asset-light: 27% | Asset-heavy: 6%
- Electricity Generation: Asset-light: 13% | Asset-heavy: 5%
- Airlines: Asset-light: 17% | Asset-heavy: 5%
- Fast Food: Asset-light: 24% | Asset-heavy: 13%
- Media: Asset-light: 45% | Asset-heavy: 9%
- Steel Industry: Asset-light: 23% | Asset-heavy: 9%
- Hospitality: Asset-light: 24% | Asset-heavy: 8%
- Alcoholic Beverages: Asset-light: 32% | Asset-heavy: 7%
- Oil Companies: Asset-light: 17% | Asset-heavy: 7%
In all these industries, the asset-light model provides better asset returns, lower profit volatility, greater flexibility, and greater economies of scale.
Case Study: Hospitality Sector
The shift from asset-heavy to asset-light, which has been happening more frequently across all sectors, was particularly strong in the 2000s in the hospitality sector, serving as a case study.
The hospitality sector has significantly reduced asset ownership since the beginning of the century, selling most of its properties and, in many cases, using the capital obtained to expand its business into developing countries, where demand for beds was growing more consistently than in developed countries.
Example of the Accor Network
Consider the example of the Accor hotel network. Between 2005 and 2010, the network sold about four billion euros in properties, but at the same time retained the right to use these same properties. Instead of owning these buildings and lands, the network began paying rent to the new owners. The rent, in turn, is based on a percentage of the profits obtained by the hotel.
Flexibility and Sustainability
The new “normal” in the business world is change. And with the asset-light model, adaptation to changes can happen more quickly, as demonstrated in the example of industries needing to increase or decrease temporary energy supply.
Li & Fung Case in the Avian Flu Crisis
There are several real examples of companies that were “saved” during times of crisis thanks to the use of the asset-light model. In 2003, a logistics company, Li & Fung, became a success story in the use of asset-light due to the way it handled the avian flu crisis in Asia.
Li & Fung provides logistics, production, and transportation services for various clothing brands, without actually owning any factories or distribution centers. It outsources all services while maintaining strict control over the work of its suppliers.
Most Common Asset-light Models
Outsourcing
Outsourcing involves contracting services or purchasing products from other companies. Nike, for example, outsources much of its manufacturing, making its products in China while retaining brand rights and intellectual property of those products.
In Brazil, even energy concessionaires and thermoelectric plants outsource the service of temporary energy supply to reduce their costs.
Advantages of generator rental
Renting an electric generator, besides being extremely simple and budget-friendly, offers agility in management. They are ideal for new ventures where professionals lack expertise on the subject, when the company does not have the budget to invest in purchasing – or wants to prioritize investments for core activities.
Asset sharing or pay-per-use
Another widely used asset-light model is asset sharing. Telephone companies, for example, share assets – electricity poles – with companies in the same sector and with energy concessionaires.
Marketplace
A marketplace is a platform where a company sells third-party products as if they were its own. Casas Bahia and Amazon are examples of marketplaces. Companies sell thousands of products on their websites without needing to manufacture or even store them.
The importance of a trusted partner
Despite all the benefits provided by the asset-light model, many companies that attempted to adopt this strategy failed. The main reason for failure lies in choosing the wrong partners.
In the case of energy insurance, there is no room for errors. Thus, when opting to rent generator sets instead of committing the company’s capital to acquiring this type of equipment, the choice of supplier needs to be very well thought out.
Prefer companies with extensive experience and market recognition, that have worked with equally renowned clients, that offer 24-hour technical assistance and have national coverage.
Digital transformation and asset light
As you have seen, the asset-light model was not invented now, but it gained strength in this century thanks to the facilities and new technologies that emerged with the strengthening and popularization of the internet.
Disruptive examples
- Uber: Revolutionized the transportation sector, expanding possibilities, service quality, and reducing prices. All this without hiring a single driver and without owning any vehicles.
- Airbnb: Became a giant in the hospitality industry, with units in practically every city in the world, without needing to buy or rent any property.
Is your company prepared for this new world, or are you still tying up your capital prioritizing ownership over access? Break out of this vicious cycle and adopt the asset-light model for your energy insurance needs. Talk to a specialist.
