A Brownfield Investment refers to an investment made in an existing active project or even an inactive project with an existing developed facility or infrastructure. Such investment is made when an organization or a firm wants to expand its capacity using the existing infrastructure, thus entails fewer approvals as against a greenfield investment. The regulation requirements and high cost of starting new businesses make investments in brownfield projects highly lucrative.
For brownfield investment purpose, a company can enter into Merger and Acquisition (M&A) or can farm-in to invest in existing facilities or infrastructure. Brownfield investments are the safest way to invest in a new territory and to understand the market sentiments. A company or firm can invest in an existing business to learn and gain experience prior to going for its own greenfield projects.
The greenfield projects are capital intensive and always carry a risk of project failure. The brownfield projects, on the other hand, involves lower capital cost and have tested market segment.
Since the new entrant in the market need not invest a lot of time and money for a new facility or infrastructure, the company could enter and have access to the market really quick. Operations could be started from the existing setup or a little tuning as per the product specifications.
The existing firm may have a well-established channel of vendors and suppliers that could eliminate the risk of searching the dependable source of raw materials. The new company could use the existing distributor channel for taking a product to the market with the help of existing supply chain systems.
Due to various environmental regulations and many countries trying to meet their respective carbon emission levels targets, getting regulatory approvals can be really a herculean task.
Apart from the environmental, there are many bureaucratic approvals required to set up any facility. In a brownfield project, it is a possibility that the existing facility may have already all approvals required for the project. It will save both time and money.
The brownfield projects have required infrastructure which can be put to use immediately, eliminating the need for excessive capital. The facilities may require little modifications or tuning to get started.
Payment for regulatory approvals and fee for procurement of specific licenses are also not required. The existing facility may have all approvals and permits. Setting up new market networks and logistics may not be required as the existing facilities may have them all.
It is also a possibility that the project or the facility may have existing well trained and experienced staff for the project. The company need not have to hire fresh staffs and bear training and inductions expenses.
The M&A or takeover of existing high-end technology firm can help gain access to the technology which may be expensive to develop group up. One such example is the acquisition of Jaguar Land Rover Limited by Tata Motors.
The acquisition helped Tata Motors to take over the working facility of the Jaguar Land Rover. Tata Motors gained access to high-end technology of luxury cars along with the well-equipped facility to manufacture those cars.
Some of the recent brownfield investments are:
HP acquired Cray for US$ 1.3 billion in order to make inroads into the world of supercomputing. The acquisition could enable HP to perform better in the digital environment.
The acquisition allowed Walt Disney to get more advanced technology for animated movies and at the same time removed competition also.
Tata Motors also got commitments from the dealers who were eager to work with the JLR brand and were incurring losses at the time of acquisition. Tata Motors was once World’s largest manufacturer of buses and trucks. They had a stronghold in the Indian car market but did not have experience and technology in high-end luxury cars.
Brownfield investments have some drawbacks which can be listed as below.