Labour-intensive or Capital-intensive production?
It is important to distinguish between capital-intensive and labour-intensive methods of production.Capital-intensive
- ‘Capital’ refers to the equipment, machinery, vehicles and so on that a business uses to make its product or service.
- Capital-intensive processes are those that require a relatively high level of capital investment compared to the labour cost.
- These processes are more likely to be highly automated and to be used to produce on a large scale.
- Capital-intensive production is more likely to be associated with flow production (see below) but any kind of production might require expensive equipment.
- Capital is a long-term investment for most businesses, and the costs of financing, maintaining and depreciating this equipment represents a substantial overhead.
- In order to maximise efficiency, firms want their capital investment to be fully utilised (see notes on capacity utilisation).
- In a capital-intensive process, it can be costly and time-consuming to increase or decrease the scale of production.
Labour-intensive
- ‘Labour’ refers to the people required to carry out a process in a business.
- Labour-intensive processes are those that require a relatively high level of labour compared to capital investment.
- These processes are more likely to be used to produce individual or personalised products, or to produce on a small scale
- The costs of labour are: wages and other benefits, recruitment, training and so on.
- Some flexibility in capacity may be available by use of overtime and temporary staff, or by laying-off workers.
- Long-term growth depends on being able to recruit sufficient suitable staff.
- Labour intensive processes are more likely to be seen in Job production and in smaller-scale enterprises.
Capital intensive refers to the degree that a company must invest money in physical or financial assets in order to produce a profit.
How It Works/Example:
Airlines, auto manufacturers, and drilling operations are often considered capital-intensive businesses because they require large amounts of expensive equipment and raw materials to make their products. Businesses like web site design, insurance, or tax preparation generally depend on labor rather than physical assets and are thus not considered capital intensive.
Although there is no mathematical threshold that definitively determines whether an industry is capital intensive, most analysts look to a company’s capital expenses in relation to its labor expense. The higher the ratio between capital and labor expenses, the more capital intensive a business is. For example, if Company XYZ spent $10,000,000 on equipment in one year but only $3,000,000 on labor, Company XYZ is probably in a capital-intensive industry.
Why It Matters:
Capital-intensive businesses need a lot of money to keep operations going. Thus, capital intensity serves as a barrier to entry, and existing capital-intensive businesses benefit from this. Having this barrier to entry means it is difficult for new companies to begin operating in capital-intensive industries. For instance, it is highly unlikely a new aircraft firm would begin operations and compete with the likes of Boeing, since it costs billions in capital to begin producing airplanes.
