A brownfield investment normally occurs when an organization wants to begin operating in a new country without incurring the expensive start-up costs associated with a greenfield investment. For the purposes of this article, a greenfield investment is one where a new production facility is constructed from scratch. A brownfield investment is the lease or purchase of a pre-existing production facility in a foreign country.
Understanding a brownfield investment
A brownfield investment is a form of foreign direct investment which makes use of existing infrastructure by either merging, acquiring, or leasing that infrastructure. That is, the foreign company or individual invests in a business already established in another country. For the business entering a foreign country, this approach reduces costs and shortens the time to production.
While a brownfield investment is a low-cost, developed asset, it may still require ongoing capital expenditure. Many brownfield investments are associated with considerable development or construction as part of expansionary, enhancement, or retro-fitting programs.
Brownfield investment examples
To understand how a brownfield investment plays out in the real world, consider these examples:
The British telecommunications company acquired a majority stake in Hutchison Essar, India’s fourth-largest mobile operator. The multi-billion investment saw Vodafone gain a controlling interest in the company. In the process, Vodafone established itself in the Indian telecom market through an established player.
Indian automotive manufacturer Tata Motors acquired fellow British manufacturer Jaguar in 2008. The all-cash deal, worth $2.8 billion, gave Tata the right to establish a manufacturing plant and two design centers in the United Kingdom.
In 2006, The Walt Disney Company acquired computer animation studio Pixar in a deal worth $7.4 billion. In acquiring Pixar, Disney gained access to advanced animated movie technology. The company also inherited Pixar’s unique culture and creative team, which it admitted was responsible for “some of the most innovative and successful films in history.”
Advantages and disadvantages of brownfield investments
Quick access to a new market
Since much of the infrastructure is already provided, the company can enter a foreign market in a relatively short space of time. What’s more, the existing firm may have an established network of vendors, suppliers, and distributors.
Similarly, an existing firm with environmental or bureaucratic approvals in place means the acquiring firm can begin operations sooner and save time and money. This advantage is likely to grow over time as environmental approvals become increasingly difficult to obtain.
As we saw in the Disney acquisition of Pixar, some brownfield investments allow the controlling company to benefit from a skilled and productive workforce. In fact, it may be the sole reason a company makes such an investment in the first place.
There is always the risk that a brownfield investment requires a major infrastructure upgrade. In some cases, the cost of the upgrade may be comparable to the cost of a greenfield investment.
Some countries impose restrictions on how much profit can be taken back to the home country of the acquiring company.
No matter how good the investment appears on paper, it is unlikely the acquiring company will find a facility with the type of capital, labor, equipment, and technology that suits its needs completely. The discomfort arising from buyer’s remorse must be prepared for and accepted if the business is to succeed in a less than ideal foreign market.
- A brownfield investment is the lease or purchase of a pre-existing production facility in a foreign country. Many such investments are associated with expansionary, enhancement, or retro-fitting programs.
- An example of a brownfield investment is the Vodafone acquisition of Hutchison Essar to enter the Indian telecommunications market. Another example is Disney, which acquired Pixar to inherit its advanced computer animation studios and a team of creative designers.
- Brownfield investments may help an organization enter a new market more efficiently with regulatory approvals, infrastructure, and a skilled workforce in place. However, there is a risk the acquired infrastructure is costly to maintain or replace. Some countries also enforce restrictive profit laws.
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