Finance in Asset-Light Management

December 26, 2022
by Noriyuki Morimoto

A company should hold only those assets that are necessary for the conduct of its business. Stocks of subsidiaries that have little relevance to the core business, stocks held for policy purposes, large amounts of cash that have no clear use, and real estate with little relevance to business purposes may well be called unnecessary or non-essential assets.

Today, it is possible to run a business without even holding assets that are indispensable to the business, let alone those deemed unnecessary or non-essential. Here, I am referring to an asset-light management strategy. For example, it is not necessary to own airplanes to run an airline, and in fact, many LCCs lease aircraft instead of owning them.

A company that owns assets bears the risk of asset deterioration and obsolescence. But with an operating lease, that risk is transferred to the leasing company, and with rental, the risk of asset utilization can also be transferred to the rental company. Although this results in higher real financial costs, with the aim of optimizing the balance between cost and risk, the use of leases and other instruments is expanding in a wide range of sectors, including the airline industry.

From a financial standpoint, we can look at LCCs as an example of ongoing changes. While a large number of LCCs exist, and they are growing as a whole, fierce competition means that the probability of individual companies going bankrupt is not low. From a risk-management perspective, the reality is that it is often difficult to extend loans to such companies, which makes them turn to leasing.

In an era where the opportunity for volume growth is disappearing, and the only way to grow is through structural transformation and innovation, the financial function needs to undergo a major transformation as well. For example, the advancement of the sharing economy will rationalize the social holding of goods, which will in turn reduce the absolute quantity of goods, and a decrease in production will lead to a decrease in manufacturing facilities, thereby reducing the demand for funds needed to hold such facilities.

However, contraction of volume can be linked to qualitative growth. This shift from quantity to quality is precisely what is required of finance today. For example, even if there is no more financing for LCCs, it would be fine if financing for leasing companies grow to compensate for that loss.

 

[Category /Deconstruction of Finance]