Special Feature: Asset-light vs asset-heavy (Part one)

Companies have been forced to review their business structures, including their asset strategies.

Previously seen as a remedy for underperforming companies, asset-light strategies are now being used by companies to manoeuvre through the market changes caused by the Covid-19 pandemic and to create continued growth.

According to EY’s report, How asset-light strategies and models can boost business growth, “An asset-light strategy or business model involves transferring capabilities, such as people, process and technology, to ‘better owners’ in order to enable companies to transition fixed costs to a variable cost structure, enhance agility, and facilitate a shift of resources that allows a focus on core capabilities”.

It’s often a relationship that best suits both parties, allowing one party to shed unnecessary costs and another to purchase the assets and/or capabilities on offer.

The same report published a poll that held responses from 1,000 C-suite executives. A third (31 percent) said that their asset-light strategies have been considered because of changes in technology, 25 percent said that meeting the changing demands that customers have is a key consideration and 21 percent are dispersing assets and using the capital to fuel economic growth.

While a typical asset-light strategy may take between 12 to 18 months to complete, the financial rewards exceed happier shareholders, according to the EY report.

“For example, another recent EY LLP study found that companies that transitioned manufacturing ahead of a sale were 17 percentage points more likely to exceed expectations on the valuation of the remaining businesses and were more likely to exceed expectations on the price of the divestment.”

SA companies driving asset-light strategies
This strategy is being embraced by businesses in South Africa, who are already realising the benefits. The most notable is mobile companies releasing ownership of cell towers in favour of using the capital to build other capabilities within the business.

Cell C’s new asset-light operating model, says CFO Zaf Mohamed, is focused on building its platform business: “Cell C would need more than R5 billion capex annually to build a comparable network. This would also take several years to implement.”

Instead, the operator is deploying an asset-light infrastructure model and plans to invest capex of R1 billion a year, which includes technologies to support the platform model it is implementing as it evolves to being a technology company.

And the financial gains are starting to show. The group reported a R148 million profit before tax for the six months ended June 2021, compared to a R7.6 billion loss for the first half of 2020.

“Our three most valuable assets that are not on our balance sheet and underpin our transformation journey are spectrum, a loyal and profitable customer base, and a resilient brand,” Zaf explains. “Together with our network strategy, consumer-driven digital products and solutions, as well as our focus on a high-performance culture, we have a sound platform from which to compete and assist us to deliver on our strategic intent.”

You can read the full Special Feature in the first 2022 edition of the CFO Magazine