CapEx vs OpEx: Changing the paradigm of automation financing

Introduction

As industries look to excel in an increasingly complex environment, business leaders are seeking innovative ways to solve their challenges. COVID-19 related disruptions and rising labor costs—in combination with global trends like shorter product lifespans, smaller-batches, and frequent changeovers—are intensifying the need for cost savings and operational flexibility in production.

For many, the answer to these challenges lies in the growing promise of automation and robotics, however, costs continue to weigh on implementation. 88% of industry executives surveyed by McKinsey believe the investment outlook for both robotics and automation are increasing despite all players citing the cost of robots as one of the primary challenges to adoption.¹

Large enterprises can often tolerate the upfront cost of these investments, whereas small enterprises don’t even attempt to. Yet, just as cloud-based software gave rise to SaaS, innovations in automation have led to the rise of Robots-as-a-Service (RaaS). This revolution will make automation more affordable, effective, and flexible for organizations, no matter their size.

Capex vs OpEx

To understand how companies can unlock value through automation and robotics, the differences between capital expenditures (CapEx) and operating expenses (OpEx) needs to be defined.

CapEx refers to the money an organization spends towards fixed assets, in this case: automation, robots, and associated equipment. These one-time, upfront purchases are intended to benefit the organization over time, sit on the organization’s balance sheet, and are usually depreciated over time.²

OpEx are the funds that support day-to-day business activities. OpEx purchases impact profit and loss statements immediately rather than depreciating over several years.²

There are usually important accounting and tax implications when using OpEx vs CapEx. At Vicarious, a variety of potential structuring options are available to ensure that the OpEx model has a competitive tax impact as a CapEx model, if that is desired.

Traditional Capex purchasing model prevents wide diffusion of automation

Historically buying robots through CapEx (the only available purchase model at the time) only made sense for specific, repetitive tasks, where the high price of the specialized robot would be amortized over a long-term horizon and high volumes. This is the reason why most robots were deployed in automotive factories, and not in higher-mix, shorter batches environments. “Robots’ formerly high costs, as well as the relatively limited and static application possibilities, used to make achieving a positive return on invested capital a barrier.”¹

Total cost of ownership (TCO) accounts for all expenditures related to a CapEx purchase. This includes obvious costs, such as purchase price, delivery, installation costs, and training on the system. Even when large 5- and 10-year scheduled maintenance and overhauls are included, research has shown these costs account for only 60% of the actual TCO. As for the other 40%, an Association for Advancing Automation (A3) poll shows that the top two hidden costs of ownership are unscheduled downtime and scope creep.^4,5

Unscheduled downtime includes all interruptions in production outside of scheduled maintenance. “According to the most recent research on the reliability of robot automation published in the International Journal of Performability Engineering, the average reliability of a robot is 88%. In other words, 12% of the time the robot is not working. Even more striking, the average time of these failures is 87 minutes.”^4,7 Further, the Mean Time Between Failure (MTBF), a figure used to measure when the failure rate begins to increase, is 4.6 years. Thus, as time goes on, the robot will fail at an even greater rate than the 12% cited.

Scope creep is created by shorter product lifespans and frequent changeovers. A robot that is perfectly capable of handling today’s issues may not have the speed and flexibility to handle a new task tomorrow. Operations are optimized for one robotic system, and the owner of that system needs to pay for any modifications, up to and including replacing the entire system.

OpEx, Robots-as-a-Service, is adapted to high-mix, short-batch, frequent changeover production runs

However, with the advent of artificial intelligence software layered on top of robotic hardware, automation systems have become significantly more versatile, and can adapt to the higher-mix, short-batch, frequent changeover production runs that characterizes many industries today.

But advances in technology are not sufficient by themselves to ensure customers can get access to automation benefits. They also need the relevant purchasing model.

With OpEx, the risks associated with a CapEx purchase are mitigated. Large upfront costs are replaced by volume-dependent payments. The risks associated with ownership are removed as a Robots-as-a-Service (RaaS) vendor owns and maintains the system. Further, service level agreements (SLAs) ensure incentives are aligned and enforced. In turn, RaaS vendors charge based on volume of goods produced, usually with volume-based discounts available.

The normal argument against recurring OpEx is that after a few years, CapEx purchases will be more cost effective. However, when TCO is taken into consideration, this assumption does not hold except for with the most basic, repetitive robotic functions that barely change over long time-horizons (e.g. 10 years).

Additional benefit of RaaS: hedging against new technology risk

Shifting the risk of ownership to the RaaS vendor is another benefit of the OpEx model. “From a technology user perspective, RaaS vendors are de facto service vendors: they supply the value-add extracted from robotics, and consequently, they remain responsible for technological considerations about the deployment and running of the systems.”⁷

With advancements in technology, organizations must maintain flexibility to adapt their workflows when needed. Research from IDC has shown, “it is a necessity to apply technology to balance effectiveness, flexibility, and business visibility throughout operations. This translates into the need for the continuous and critical execution of flawless, uninterrupted, managed, and yet increasingly variable processes and workflows.”⁷

Further, the alignment of incentives helps mitigate issues raised by TCO (total cost of ownership). As referenced earlier, average unexpected downtime of an industrial robot is 12% with an average downtime of 87 minutes.”^4,5 Because RaaS vendors usually charge based on the volume that passes through their system, they are incentivized to ensure the line does not fail. For example, Vicarious’ system has an average unexpected downtime of 5% and average downtime of 18 minutes.⁸

The risk of scope creep is also mitigated as a company can dynamically scale its operations with the RaaS vendor. If an operation needs to be expanded, the RaaS vendor can design and implement a new solution that matches the new need.

Conclusion

For business leaders looking to differentiate themselves from their competition, choosing the proper financing model for their purchase decisions are critical. Historic purchasing habits are not only unnecessarily expensive, but also hinder the adaptability and flexibility of operations. Favoring OpEx over CapEx through partnership with a RaaS vendor reduces costs, mitigates risks, and ensures operations stay current.

Sources

1. Teulieres, Marc. “Industrial robotics – insights into the sector’s future growth dynamics”, McKinsey & Company, 2019.
2. “CapEx vs OpEx in 2020: An Introduction.” BMC Blogs, 2018, www.bmc.com/blogs/capex-vs-opex/.
3. “Capital Expenditures – Definition, Overview and Examples.” Corporate Finance Institute, 22 Nov. 2019, corporatefinanceinstitute.com/resources/knowledge/accounting/capital-expenditures/.
4. “The Fake News about Robots and Their Reliability.” Robotics Business Review, 3 June 2019, www.roboticsbusinessreview.com/ai/the-fake-news-about-robots-and-their-reliability/.
5. Beretta, Jim. Total Cost of Ownership and Automation. A3: Association for Advancing Automation, 16 June 2020.
6. Asari, Rashidi. 2018. “Automotive Industrial Robot – Total Cost of Ownership”. 10.13140/RG.2.2.35965.41445.
7. Remy Glaisner. “Robotics as a Service for Value Creation: Beyond Regular Operational Asset Management”, #US45556919, IDC Research, 2019.
8. Vicarious Internal Data