One way of measuring capital intensity is to calculate the physical capital spent per worker. Automobile production, for example, requires purchasing and maintaining expensive equipment for the use of every worker on the assembly line.
The operations of capital-intensive businesses require investments in high-priced items, such as facilities, infrastructure, and major manufacturing equipment. In addition to the auto industry, energy, transportation, and semiconductors are near the top of the list.
Key Takeaways
- Capital expenditures are major purchases, such as facilities and equipment, that companies make to maintain or expand their operations.
- Automobile manufacturing, energy, transportation, and semiconductors are all industries with large capital expenditures.
- Companies gradually recover the cost of capital expenditures by depreciating the assets over time.
- The total for capital expenditures, often abbreviated as CapEx, is listed in every company's quarterly and annual financial statements.
Capital Expenditures
Capital expenditures are major investments by definition. They include the facilities and equipment that companies need to maintain or expand their operations.
Because these are assets that provide value and usefulness over several years, companies gradually recover the cost of these acquisitions by depreciating the assets over time on their tax returns.
Generally, businesses are not allowed to deduct the full costs of capital expenditures in the year the expenses are incurred. Therefore, purchases requiring a substantial outlay of capital are carefully planned out, usually years in advance.
As of January 2023, the auto and truck industry had capital expenditures of $33.4 billion, compared to the advertising industry, which had capital expenditures of $1.4 billion.
For these companies, proper management of capital expenditures is crucial for survival and growth. Effective management requires striking the right balance between the need for resources in the future and the ability to generate profits in the present.
Many business expenses do not qualify as capital expenditures. Most obviously, any money spent on employee salaries and hourly pay is a labor expense rather than a capital expenditure. Human capital spending, such as employee training, also does not qualify.
Energy Firms
The energy industry is one of the most capital-intensive industries. Energy companies can be subdivided into companies that produce energy and those that supply it. Oil, gas, and coal firms are among the most well-known producers.
Energy companies explore, retrieve, and refine energy sources. Power companies deliver energy to businesses and individuals. Power companies are sometimes categorized in a separate utility sector, particularly if they are heavily regulated businesses.
In any case, both parts of the energy sector must regularly make substantial capital investments. Oil and gas producers must purchase the equipment required for retrieving and refining natural resources. Power companies invest in the massive infrastructure necessary to deliver energy.
Transportation
The transportation sector also has consistently high capital expenditures. This broad industry category includes airlines, railroads, and trucking.
Airlines must eventually replace their fleets of aircraft, railroad companies need new locomotives, and trucking firms must buy trucks from time to time.
Airlines are the most capital-intensive companies in the sector. Even an older commercial airliner can easily cost a few million dollars depending on the type, which far outweighs the crew's salaries. A new semi-truck might cost between $70,000 to $160,000, which is still more capital per worker than in most businesses.
Semiconductors
Semiconductor manufacturing demands substantial capital expenditures. New processor factories can be multibillion-dollar investments in equipment and manufacturing facilities.
Intel's capital expenditures over the past five years peaked in July 2023 at about $26.5 billion. The average for its fiscal years from 2018 to 2022 was about $18.2 billion.
Furthermore, these facilities must be replaced or extensively upgraded every few years to keep pace with technological changes. Although other semiconductors are generally less expensive to produce than Intel's latest processors, the upgrade cycle keeps capital expenditures high throughout the industry.
What Are Examples of Capital Expenditure?
Common capital expenditures include property, plant, and equipment, including machines, trucks, factories, office furniture, computers, computer software, and warehouses.
These are all costs that a company must incur to operate its business.
Capital expenditures also include the money spent on sustaining these assets.
What Is an Example of a Capital Intensive Industry?
Capital-intensive industries include automotive, airline, oil and gas, mining, manufacturing, and real estate. The companies in all of these industries have to spend money on expensive assets such as factories or airplanes, and they have to spend more money to maintain them and, eventually, replace them.
Is Amazon a Capital-Intensive Business?
Yes, Amazon is a capital-intensive industry. It owns a vast network of warehouses to store, package, and deliver orders. A separate network of facilities supports its cloud services subsidiary, Amazon Web Services.
Its capital expenditures have grown quarter by quarter as it expanded those facilities. For the quarter that ended June 30, 2023, its capital expenditures totaled $10.4 billion. For the quarter that ended June 30, 2020, the number was $6.6 billion.
The Bottom Line
Capital expenditure is the money that companies spend on assets that are required to run their business.
Some businesses are capital-intensive by nature. Companies that operate in the energy, transportation, and semiconductor industries are some of the most capital-intensive, given the costly assets they need to buy, maintain, and, from time to time, replace.
