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What Is Capital Intensive?

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  • Written By: Alexis W.
  • Edited By: Heather Bailey
  • Last Modified Date: 14 September 2014
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Capital intensive refers to an endeavor or project that requires a great deal of capital to undertake. A project or business that is capital intensive often has much more risk, since a larger investment of cash or tangible assets is required. Generally, many businesses or projects that produce tangible goods require more capital than service businesses; although certain endeavors even within these businesses are more capital intensive than others.

One example of an especially capital intensive business is a business that involves drilling for oil. Huge amounts of money must be spent to undergo such a product. Land or oil rights must be purchased, and drills, rigs and other expensive equipment must be bought. This requires a large expenditure of cash.

Compare this, for example, to an individual starting a business as a project management consultant or as a freelance writer. In such a business, the individual offering the service needs little equipment and little start-up capital. He may, for example, need to buy a computer or business cards or create a website. This generally adds up to a few hundred dollars; nowhere close to what it would cost a business to engage in an oil drilling endeavor.

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Often, in a capital intensive business, economies of scale exist. This means that the vast majority or bulk of the large capital investment is required simply to get the first unit of goods or to get the business off the ground. The actual cost of the project generally is reduced the more a product or units are produced.

In the oil drilling example, the large investment is the initial purchase of the land and drilling equipment. This large investment was made before the first drilling began. Once oil is struck on the piece of land, it will cost very little additional money to continue to extract the oil; the same drilling equipment and the same land is used to do so. Thus, the more of the good produced by the initial investment of capital, the lower the actual cost of the investment turns out to be.

Generally, a new business that is more capital intensive is far more risky. Since it can be difficult to know how much of a good the original heavy investment will result in producing, there is a chance the large initial investment could be lost. Thus, when investing in a start-up company or when beginning your own, the amount of capital needed to get started is an important factor to consider.

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Izzy78
Post 4

@jmc88 - In America, the biggest company is Walmart. I don't know how it would be classified, though. They certainly have to buy all of the products before they open a store, but there are also a lot of employees to pay each week. I don't think it would be called capital intensive just because once the store is open, it's not guaranteed to keep making money without a lot of input.

Car companies are also high on the top revenues list, but I think they would be considered labor intensive industries, too. I don't think the most successful companies are limited to capital intensive ones, I think it just depends on the idea.

jmc88
Post 3

I think it would be safe to say that a business or industry that is very capital intensive also has the potential to make the most money. Whether it is oil, computer games and operating systems, or real estate, it seems like there is much more money to be made by taking risks. I'm trying to think of examples of companies that aren't capital intensive, but still make a lot of money.

Along the same lines, though, if you invest millions of dollars in a new company and it fails, you are in a bad situation. Does this relate to venture capital? Isn't that when there is an investor or group of investors who think a product will succeed so they funnel money into the project hoping to make a big return?

JimmyT
Post 2

@stl156 - Good example. I know with some of the video game consoles, the companies may never break even from selling the product itself. The years that go into the design and manufacture of the product along with the hardware costs force the companies to sell the consoles near or below their cost.

What they lose from that part they make up from the millions of copies of games that are sold on the systems. With the internet age, consoles now can make money by offering online play and other features.

stl156
Post 1

Other businesses I can think of that are very capital intensive is anything involved with technology.

When one of the major software companies comes out with a new operating system, there is no chance for profit until the system is finally released. Even then, it takes tens of thousands of units sold until the company even breaks even on their investment. The good part of this, though, is that once that point is met, every unit sold after is almost pure profit. The same rules would apply for things like video games, too.

Does anyone know any more about what some of the pros and cons are of forming labor intensive versus capital intensive businesses?

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