A proposal to buy major equipment or build a facility often rests on a competitive argument rather than an economic one: we will be the only business in the region that can do this, and competitors will take years to catch up. Somewhere in the numbers, “years” quietly becomes an assumption about pricing power and payback, and the approved return depends on it.
The question rarely asked is how long that exclusivity actually lasts, and whether it outlasts the money that bought it. Equipment can be bought by anyone with capital. Operators can be hired. Know-how leaks through both. A competitor with finance and a willing equipment supplier can often match a new capability in the time it takes to deliver a machine. The loan, the fixed costs and the risk of under-use, meanwhile, last for the life of the asset.
If the advantage is short and the burden long, the logic of the investment changes. The durable position is often not being the only one with the asset, but having the lowest sustainable cost per unit through it. The fastest route to that is high utilisation, which, where your own demand cannot fill the asset, may mean selling capacity to others, including businesses you compete with. This article explains how to think about that choice, the risks involved and how to structure shared arrangements so they last.
Utilisation sets unit cost
For equipment and facilities with high fixed costs, the cost of each unit produced depends heavily on how much the asset is used. Fixed costs such as finance, depreciation, insurance, minimum staffing and maintenance are spread across every unit. An asset running at 40% of its efficient capacity carries more than twice the fixed cost per unit of one running at full capacity.
There is a sizing dilemma. An asset sized for the whole market is rarely sized for your share of it, while one sized for your share is usually too small to be efficient. The second error is harder to see, because the balance sheet looks disciplined while unit costs quietly lose to anyone operating at volume.
Differentiating and enabling assets
It helps to separate two kinds of asset:
- Differentiating assets create something customers specifically value and pay for: a protected process, a unique location or output nobody else can produce.
- Enabling assets do necessary work that customers never see: coating, testing, storage, transport, calibration, computing.
For enabling assets, ownership is mainly a cost question. A blunt test helps: would a customer pay more knowing we own this exclusively? If not, exclusivity is something the business pays for and customers do not value.
Common misreadings
- Owning the asset is the advantage. Customers notice throughput, quality, turnaround and reliability, which come from how the asset is run. Those are harder to copy than the asset itself.
- Replication time is an engineering question. The relevant question is how long a competitor with finance and a willing supplier would take. Often, not long.
- Exclusivity converts into higher prices. More often it converts into volume at similar prices, because customers benchmark and rarely pay extra for something they never see.
- The choice is build alone or do nothing. Proposals often leave out building jointly, buying access from someone else, or building and selling surplus capacity.
Options for closing the utilisation gap
When your own demand cannot fill an efficient asset, there are a few options:
- Grow your own demand, which takes time the financing may not allow.
- Build smaller, accepting higher unit costs.
- Buy access from someone else, giving up ownership.
- Sell surplus capacity to others, including competitors.
Only the last keeps the scale and repairs unit cost at the same time. It also meets the most resistance.
The information risk
A competitor using your facility can learn things: your volumes, your seasonality, your cost drivers, your reliability, even who your customers are. Some of this can be designed out: an independent operator or scheduling person, published standard prices, no sharing of job details, separate handling of customer information and clear confidentiality terms. Some cannot. The judgement is whether the information you might give away is worth less than the unit cost you would recover. Make that judgement explicitly rather than assuming the risk away.
Competition law matters
Arrangements between competitors, such as shared facilities, joint purchasing, capacity swaps or exchanging information, can raise issues under Australian competition law, particularly around price fixing, market sharing and information exchange. Design matters as much as intent. The ACCC can authorise some cooperative arrangements that would otherwise be risky, and publishes guidance for small businesses. Take legal advice before entering any arrangement with a competitor.
Make shared arrangements hold together
Shared assets fail more often on governance than on economics. Settle the recurring questions before money is committed:
- Price of access: how it is set, reviewed and published.
- Priority: whose work goes first when capacity is tight.
- Expansion: who funds more capacity if demand grows.
- Quality and service levels: what external users can expect.
- Exit: how a party leaves, with what notice and at what value.
An arrangement that depends on continuing goodwill will decay when capacity tightens and interests diverge. One in which each party’s own interest supports the behaviour the others need is far more durable. The article on designing incentives that enforce themselves covers how to build that in.
Financing customers’ capacity
A related idea applies where customers need equipment to use what you sell but cannot afford it. In that case, your market is limited by their balance sheets rather than their needs. Helping customers finance equipment, through vendor finance, leasing arrangements or partnerships with financiers, can expand demand for your products or services.
This is a real growth tool and a real risk. Distinguish financing that genuinely expands the market from financing that simply brings forward a sale you would have made anyway. Assess credit as carefully as a lender would, because your exposure is likely to be linked to conditions in your own industry. Watch concentration: a financed customer book that mirrors your sales book doubles one risk rather than spreading two. Offering credit can also bring legal and regulatory obligations, so take advice.
Selling capacity is a business in itself
Selling surplus capacity to others means serving external customers, which requires more than spare hours. It needs published prices and terms, reliable scheduling, service levels that external users can depend on, invoicing and credit control, and an operating approach that serves outside customers without disrupting your own work. Decide in advance how internal and external jobs will be prioritised when the asset is busy, and communicate that clearly. Treating external capacity sales as a sideline usually disappoints both sides. Treating them as a small business line, with someone responsible for it, gives the arrangement a chance to succeed.
Six tests before buying exclusively
| Test | Question | Points to sharing | Points to owning alone |
|---|---|---|---|
| Customer visibility | Would customers pay more knowing we own it exclusively? | No | Yes |
| Replication time | How long would a funded competitor need to match it? | Shorter than payback | Longer than payback |
| Utilisation gap | How much of efficient capacity can our own demand fill? | A persistent gap | Full use from the start |
| Information exposure | What would a co-user learn and use against us? | Little, or it can be separated | Sensitive costs, customers or processes |
| Governance | Can price, priority, expansion and exit be agreed now? | Yes | Not without ongoing goodwill |
| Reversibility | What does it cost to stop? | Owned assets are hard to exit | Certainty is worth the rigidity |
If a competitor could match the asset faster than it pays for itself, set any exclusivity premium in the business case to zero and test the investment on cost, utilisation and reversibility alone.
A worked example
This is an illustration. A regional fabrication business sends its powder coating to a contractor 200 kilometres away, adding days to lead times. It is considering a $750,000 coating line of its own. The proposal argues that it would be the only fabricator in the region with in-house coating, giving it an edge over competitors.
The line could efficiently coat about 100 units a week, but the business’s own work would fill only about 40. The line’s fixed costs, including finance, depreciation, minimum staffing, energy and maintenance, are estimated at about $260,000 a year, with variable costs of about $40 per unit, over 48 working weeks.
At 40 units a week, about 1,920 units a year, fixed costs come to about $135 per unit, for a total of about $175 per unit. That is not obviously cheaper than outsourcing, and the exclusivity argument does not hold up well: customers care about lead time and finish quality, not who owns the coating line, and competitors can still send work to the distant contractor.
The owner considers selling surplus capacity to other fabricators in the region, including two competitors, at a published price of about $150 per unit. If outside work adds about 45 units a week, total throughput rises to about 85 units a week, about 4,080 units a year. Fixed costs per unit fall to about $64, for a total of about $104 per unit. The outside work contributes about $110 per unit above variable cost, roughly $237,600 a year, covering most of the line’s fixed costs.
To limit information risk, the business appoints a dedicated scheduler for the coating line, publishes standard prices, does not share job details or customer names across work streams and includes confidentiality terms in coating agreements. It takes legal advice on the arrangement with competitors before proceeding. The line is approved on the basis of cost and lead time, not exclusivity.
How this applies to a small Australian business
Regional and small businesses often face the sizing dilemma: their own demand cannot fill efficient equipment. Practical steps:
- Separate differentiating from enabling assets before investing.
- Test exclusivity claims against how quickly a competitor could match the asset.
- Calculate unit costs at realistic utilisation.
- Consider selling surplus capacity, sharing an asset or buying access instead.
- Design out information risk where you can.
- Take legal advice on any arrangement involving competitors, and check ACCC guidance.
- Agree governance terms before committing capital.
- Approach customer financing carefully, with proper credit assessment and advice.
The articles on changing the control logic before adding capacity and putting a dollar value on equipment losses cover related capacity decisions.
Signals worth watching
- The time between your new capability and the first competitor equivalent.
- A utilisation gap that is not closing.
- An exclusivity premium that has quietly become a volume story.
- Equipment suppliers offering finance or shorter lead times to competitors.
- Arrears or idle equipment in any financed customer book.
- Changes in competition law guidance affecting cooperation.
Common mistakes
- Assuming exclusivity lasts as long as the asset.
- Sizing assets for your share and accepting high unit costs without question.
- Comparing only building alone with doing nothing.
- Ignoring information risk when sharing with competitors.
- Relying on goodwill instead of agreed governance.
- Entering competitor arrangements without legal advice.
Frequently asked questions
Is it ever right to own an asset exclusively? Yes, when it genuinely differentiates what customers buy, when competitors cannot readily match it, or when information risks of sharing are too high. The point is to test those claims rather than assume them.
How do we price capacity sold to others? Start from your full cost at expected utilisation, consider what users would pay elsewhere, including transport and time, and publish clear, consistent prices.
Does this apply to small equipment as well as facilities? The logic applies whenever an asset has high fixed costs and your own demand cannot keep it busy, whether a specialised machine, a test rig, a vehicle or a storage facility.
What if a competitor becomes our largest external customer? Treat it like any concentration risk. Diversify external users where possible and agree notice periods so a sudden withdrawal does not leave the asset stranded.
What if competitors refuse to use our facility? Then the utilisation case rests on your own demand and on non-competing users, such as businesses in adjacent industries. Test interest before committing, ideally with letters of intent or trial orders.
Could we share ownership instead of selling capacity? Sometimes. A jointly owned asset with an independent operator can work well, but it needs careful legal structuring and clear governance from the start.
Questions to ask
- How long has exclusivity actually lasted for similar assets in our industry?
- Would customers pay more knowing we own this asset exclusively?
- Which of our past investments would still have been approved without the exclusivity premium?
- If a competitor offered to buy our surplus capacity at a price that lowered our unit cost below theirs, what would stop us?
- Where are customers’ own capital limits holding back our demand?
Bringing it together
Exclusivity is a wasting asset. The capital that buys it is not. Test how long exclusivity really lasts, separate assets that differentiate from those that merely enable, calculate unit costs at realistic utilisation and consider sharing, selling surplus capacity or buying access. Where sharing makes sense, design out information risk, settle governance before committing money and take legal advice. The question worth asking before any major investment is not only whether you can be first, but what will still be true about the asset when everyone else has one too.
Source: KEVOS notes. Examples and figures in this article are illustrations. This article is general information, not legal or financial advice.
