Greenfield vs brownfield investments
If you have gone through annual reports or investor presentations of manufacturing companies or any Capex heavy companies, you might have crossed paths with companies investing in greenfield projects or brownfield projects.
However, let's know what is the difference between the two. Well, greenfield investments are those, which are done for the projects starting from scratch, for example, building a completely new manufacturing plant. On the other hand, brownfield refers to the leasing or purchasing of the existing project, for example, taking over a plant that is already functioning by another company. Let us see this through the investment perspective and what implications it may bring. Greenfield and brownfield investments are the two types of foreign direct investments.
Greenfield investments
The term green in greenfield can be considered a metaphor for ‘new’. Suppose a company wants to expand its business overseas, and for that purpose, it opens a subsidiary on foreign soils. It can do so by acquiring a similar type of business in a foreign country, which adds synergy to its goals. Or it can buy a piece of land and construct completely new facilities as required, which is referred to as greenfield investment. It might include manufacturing units, offices, accommodation for staff & management as well as distribution centres. A primary reason behind initiating this is to enjoy flexibility along with efficiency to meet the dynamics of the project. The maintenance cost is also low since new equipment and machinery is in place. On the other hand, constructing a fresh facility involves heavy Capex. Also, it is time-consuming. Various legal restrictions and local factors can affect in unfavourable manner for the company.
Brownfield investments
Brownfield investments are relatively simpler than greenfield investments with regard to the cost and time required. However, finding a strategically located and functioning facility can be tedious. It involves finding the one that is compatible with the current business model. If the existing facility is clear on the compliance front and possesses the licences or other requirements, it may be advantageous for the acquiring company. The biggest advantage of this investment is the time. Since the operations can be readily started, it saves time for the construction of a new facility. However, a company might have to bear higher maintenance costs since the facility might get weathered by previous use. In an advancing technological environment, the equipment might get outdated soon and may demand purchasing new ones, losing the benefit of making brownfield investments.