A Guide to Brownfield Investments

Any company looking to expand operations overseas or invest in any foreign assets can opt for two routes - portfolio investment or direct investment. Both of these routes come with their own flairs. Brownfield investments use the portfolio route, in which corporations or companies can invest their money through the securities market.

In this guide, we will take you through what brownfield investments are, and if they are suitable for your company.

A brownfield investment, in simple terms, is a purchase of an already existing asset overseas by a company or an organization. It is a form of foreign direct investment (FDI). Through brownfield investments, companies can invest in existing facilities in a country (company, manufacturing plant, research center, etc.) to launch their own operations in that country.

The main objective of a brownfield investment is to open the gates for a business to enter competing in a foreign market through already established entities in that market. It can be achieved through various ways, such as buying stocks of an entity with controlling stakes, mergers, or acquisitions. Companies can either directly purchase or lease facilities to achieve this.

Brownfield investments are a crucial component of FDI and enable companies to enter new markets by acquiring and repurposing existing facilities. Instead of taking the approach of building the business from scratch in a new land, this approach of direct investment can help companies significantly cut down on set-up costs and accelerate market entry.

Usually, companies go for existing facilities that are either not functioning at full capacity, or no longer in use. This allows them to repurpose the facilities for newer operations or additional production. While the new set-up may require additional equipment or modifications to the existing equipment, this method of direct investment is more cost-effective than other methods.

This is why greenfield investments have grown in importance and gained such significance over the years.

1. Reduced Costs & Faster Entry into New Markets

   Using existing facilities means that there is a lower fixed cost for companies taking this approach to start operations. It also comes with the added advantage of the existing asset already having a network and infrastructure which can help companies in entering the market at a much faster pace.

2. Leveraging Existing Infrastructure

   Existing infrastructure means that companies won’t have to build their facilities from the ground up. While some new equipment and maintenance of old equipment may be required, it is still more cost-saving than buying it all in the first place. Additionally, the facilities already established in accordance with the local governance and laws also reduce the burden of investing in the construction of the facility.

3. Quick Integration

   With already existing operations, acquiring or leasing facilities leads to much faster integration into the local markets. This helps companies in reducing the time needed to establish a brand image and presence in the region.

• Limited Control Over Design

  Since the asset already exists, the buying company does not have control over its initial design and structure, which leads to increased investments. The asset might need some upgrades or modifications, but the buyer needs to accept it as it exists.

• Potential for Outdated Facilities & Inefficient Processes

  The asset being leased or bought may be outdated and require higher upkeep and maintenance costs. Moreover, the operational processes that exist may be inefficient for the acquiring company and need to adapt to newer production standards and demands. This might lead to initial scalability issues till the newer processes are adapted fully.

For companies looking to expand into new and foreign markets rapidly, brownfield investments are a more advised approach to direct investment than greenfield investments . This approach offers more cost efficiency with existing infrastructure, network, and equipment and reduced regulatory hurdles that can help companies adapt to the new market much faster.

All of this going right depends highly on having a comprehensive financial reporting process. Financial reporting can help companies in assessing the local market risks and feasibility of the demands, survey infrastructure to mitigate risks, analyze the state of equipment, and much more. While you may be acquiring existing facilities, you can still lack preparing for the effects of currency fluctuations, local economic fluctuations, and regulatory changes or updates. A robust financial reporting strategy can help you in mitigating all these risks and more.

Some effective strategies for a greenfield investment include:

1. Comprehensive Due Diligence - Conducting assessments of the existing infrastructure, network, and other assets to identify any potential risks. This can provide the new operations with opportunities for improvement.

2. Modernization - Upgrading and repurposing existing facilities and equipment to enhance overall productivity and introducing cost-efficient processes for boosting profits

3. Location Analysis - Choosing locations with easy accessibility to skilled labor, supply chains, and access to relevant markets can maximize operations and profits for acquiring companies.

This can be achieved by conducting project appraisals to learn the most about the existing assets. These strategies also fall under the purview of financial reporting, which can help companies make their final decision about acquisition or leasing.