Industrial capital expenditures are often difficult to evaluate for a variety of reasons. They are large one-time commitments that either pose significant cash burden or ongoing debt obligations. Their value is tied particularly to the demand they respond to (which can also be unpredictable). Their resale value can be subjective since the equipment used may not apply to a large number of other firm’s needs. And, after all those tough-to-crack reasons, they still also rely on the costs of labor, materials, energy and more to determine whether they are even profitable as investments in the long term. 

Because of all these conditions, industrial firms can be particularly conservative with capital expenditures or any fixed costs. As a result, they can often be more comfortable relying on higher variable costs of production because, in a state of emergency, those costs can be quickly eliminated if production must fall. All of this means that capital expenditures that do make it to a plant floor are usually the true cream of the crop – ones about which a return has no doubt. 

So, in evaluating the range of possible capital expenditures your firm can choose from, it’s important to understand a few key traits of each possible investment. These include (1) your ability to move or offload the asset purchased at a good price, (2) the ability of the asset to adapt to a variety of different needs, (3) the ability of a CapEx acquisition to rapidly contribute to your underlying business model. What you’ll see is that while even lean operations can be highly siloed, the new adaptability that is coming to the machines used in industrial manufacturing can fundamentally open up the way you think about CapEx going forward. 

The Industrial CapEx mix in the United States skews heavily towards equipment when it comes to the manufacturing sector. While structure expenses are unavoidable, the right equipment is so often where the most value is added. Source: US Census Bureau.

Property & Plant

Property & Plant expenses are in two ways the most essential industrial capital expenditure and also the riskiest. You can’t really have an operation without some real estate and the facilities to actually conduct your activities safely (with the bare minimum being businesses started in a garage), but as a company invests more in these needed facilities, they’ll often be less able to directly resell and recover their investment if it ends up being short on profitability.

Traditionally as capital expenditure goes, PP&E are lumped together to include Property, Plant and Equipment – in our case, we want to separate out equipment because investment there can differ tremendously depending on what a manufacturer offers. The variety of equipment used by a manufacturer is also much larger than the variety of types of facilities they use, which means the risks that come with an equipment purchase can vary even more.

The Property & Plant expenses used to acquire real estate and develop or prepare a building are not fungible (meaning interchangeable with an equivalent good). This means that getting rid of real estate or structure investments is difficult, even if the land value might appreciate over time. Overall, manufacturers tend to wait for significant surges in demand before they can justify the risks involved in opening a new facility, so this investment is difficult to “de-risk” at any given point in the business cycle.

Equipment & Specialized Machinery

Cell-based equipment and specialized machinery can be split out on its own because it does not affect the global result of a product, but is typically process-specific. Examples of this kind of specialized machinery could range from laser cutters to press brakes, stampers, bending machines, laser marking or deep welding machines. Basically, anything needed to modify parts and components or to process discrete unfinished goods into final products.

At the same time, skilled labor or articulated robot arms might require specialized equipment or applicators/end effectors (in the case of robots) in order to conduct welding, painting, assembling, heating/drying or any other sort of process you could think of. 

In all of these cases, these machines will cost a few hundred thousand dollars, if not millions for a set of multiple machines or series of machines in different cells along a factory floor. The more specialized a machine is to a manufacturers needs, the less likely it is to retain high resale value, given that specialized can equate to a limited market. With low interest rates, we know that the risk/reward calculation on a new capital expenditure doesn’t need to be outstandingly favorable, but the challenge in managing risk is really in ensuring resale value and limiting depreciation. If it somehow happens that you can’t use a machine to its full potential, who’s to say that someone else will?

The rule of thumb for most machinery is about 20% in markdown sfor the first year and 10% per year thereafter. Other depreciation schedules may apply, but given effective lives of 10 to 15 years, machinery needs a very definitive payback case in order to justify a purchase because they can lack flexibility in resale and they can be more prone to acquire wear depending on the intensity of the machining process involved.

Gross Fixed Capital Formation- effectively the amount of productive capital expenditure domiciled in the United States – has trended lower relative to GDP. In many ways, this is due to the absence of systems better-designed to help grow US Manufacturing. Source: World Bank. 

Robotics and fungibility

While the standard depreciation calendar on a robot will advocate much the same schedule as that of a CNC machine, robotics can prove an exception depending on who you buy from and for what purpose. For instance, FANUC commits to offering 25 years of spare parts support as long as a robot is in service. There are even scenarios in which robots bought 40 years prior are still in operation. While robots may often have a financially “defensive” depreciation schedule, they’re not necessarily realistic in terms of the value retained by an organization that purchases one.

At the same time, a simple look at a couple reports on the average life of robots makes one thing clear: the range and variety of applications that a robot can be used for – both now and in the future – are far greater than that applied to specialized machines. Given that they retain so much value to such a diverse range of companies – and there are even marketplaces for used robots – the amount of risk taken on with a robotics purchase is far less than is found with other capital expenditures. 

This means that robots retain value and have reduced risk relative to other capital expenditures. On top of that, the output provided by robots isn’t capital intensive but capital efficient. This has such a broad effect that robotics firms themselves are even more cash-flow positive – relative to capital expenditure – than even biotech firms. The point is this: the total productivity generated by robotics expenditures is so high that it makes the risk of investment minimal relative to most of the other possible investments an industrial firm can make.

The relative effect of robotics on assets and liabilities creates more security for firms in the long run. Source: IEEE Spectrum.

Making Your Business CapEx-Fluid

Ultimately the ability to incorporate robotics will fundamentally change the capital structure of your business. Theoretically speaking, the more you can get done through robots and the more processes robots can address, the less risk your business has to its capital structure and the more flexible you can be in your forward-going operations. 

Ultimately, this can bring you in line with an Autonomous Manufacturing approach: getting the same set of machines to do everything and anything, and making painting, welding, assembling, packing and shipping as simple as plugging instructions into a CNC machine. In the future this means machines themselves may become more of a commodity, but also that for the time being you can limit risk by focusing your expenditures on equipment with the highest possible degree of versatility.

Omnirobotic doesn’t just support autonomous manufacturing approaches, it creates them through Shape-to-Motion™ Technology. This technology enables any industrial robot to autonomously perform surface spray and non-contact finishing processes (like painting, sandblasting or powder coating) without any manual programming or jigging. How is this accomplished? Through a combination of 3D vision and AI that effectively means the robot does the job for you while your team oversees operations and stays out of harm’s way.

The best part? This is a process and robot-agnostic technology, meaning that the more your firm and others use it, the more applications will emerge to address new processes with the same or similar equipment, meaning that you get even more CapEx flexibility in the long run while still being able to improve the quality of the products you offer and differentiate yourself from other firms.

Omnirobotic provides Autonomous Robotics Technology for Spray Processes, allowing industrial robots to see parts, plan their own motion program and execute critical industrial coating and finishing processes. See what kind of payback you can get from it here.