A subsidiary of a major company has been diversifying over the past two years. They established a dedicated business unit, purchased equipment, and built production lines. However, the new products fell far short of expectations, and sales were tepid. Consequently, the subsidiary faced a cost-heavy situation: high R&D investment in a technology-rich industry; high labor costs due to the large number of specialized personnel; and high fixed costs due to the heavy asset investment. These high costs and expenses were unbearable for the parent company, which began considering closure, mergers, and acquisitions. The subsidiary was in a state of panic, and the future was filled with uncertainty.

For the case study company, developing new products in the technology sector requires a team of engineers with PhDs and Masters degrees, shouldering significant R&D costs. But for manufacturing, does this mean they lack suppliers and must invest heavily in-house? The answer is that they can use contract manufacturers. While it’s difficult for a contract manufacturer to handle the entire product, the modular design of the product makes it easy to find multiple suppliers to manufacture the different modules. So why invest tens of millions of dollar in-house, purchasing so much capital-intensive equipment, and building their own production lines? A major reason is money—money from the parent company.

I’ve been in Silicon Valley for nearly 30 years and have witnessed the rise and fall of many high-tech companies. Silicon Valley tech companies generally start out with a light asset approach: a group of talented engineers find an office, develop a prototype for a new product, hire a contract manufacturer to build it, and after successful validation, either drive the contract manufacturer to increase production capacity (with less specific fixed assets) or build more in-house capacity (with more specific fixed assets). Why wouldn’t they, like this company in this case, go heavy on assets from the start? The reason is simple: lack of money.

Silicon Valley’s emerging companies rely heavily on venture capital for financing. Every Silicon Valley VC is a shrewd individual, having spent their entire lives in the tech world. If they don’t understand how to introduce new technologies and products, they’re likely to fail. The more someone works on the edge, the more they prioritize risk management; otherwise, they’d be dead long ago. Silicon Valley VCs are just that: they have money, but they hold it very tightly. While not all of them are “unprecedented,” they rarely throw money around without even a hint of rabbit. You’ve all heard jokes about how some now-successful companies raised tens of millions of dollars in a matter of minutes. 

Looking back at the past few years in China, there was an overabundance of hot money, leading to reckless investment. Large enterprises, driven by innovation and ample financial resources, often made large investments, employing heavy assets to wage a war of position. This became a common practice. For example, a large state-owned enterprise recently acquired a small but successful technology company and was ready to move quickly, introducing new products and expanding its one product line to nine. The second phase of the factory expansion was also underway, with the building already completed. This state-owned enterprise operates in a traditional industry, and many are conservative. On the one hand, they feel unsure about the work of others, and on the other hand, they don’t want to see the profits go to outsiders, so they invested heavily in their own assets. As it turned out, even though there were no products in the nine product lines, they had already acquired a large amount of heavy assets.

Why wasn’t this small, beautiful tech company so asset-heavy before the merger? Because they’ve been around for years and are well aware of the risks involved in introducing new technologies and products. Some might say, “I understand, but business opportunities are fleeting, and relying solely on suppliers with a light asset base would be too slow to respond.” True, suppliers will naturally be cautious with heavy assets, and capacity expansion may be slow. However, my point is that many people are accustomed to exploiting a sense of urgency, using the so-called “fleeting time” as an excuse to make rash decisions. To put it another way, if you truly want to build a century-long business, you can’t rely on fleeting business opportunities as your foundation.

This also reveals a problem with the innovation mindset of large enterprises: new technologies and products are like guerrilla warfare, requiring light equipment, rapid trial and error, and quick correction. Large enterprises, however, habitually approach this with a positional mindset, with heavy asset management being a prime example. This is another reason why innovation is difficult and the success rate is low for large enterprises.

There’s also a common abnegation mentality among large companies: An asset-light approach reduces risk and saves money, and no one credits the supply chain with its efforts. However, if a product is developed but the supply chain can’t deliver, the consequences are felt. Consequently, the supply chain department often champions heavy asset management. When assets become idle, the blame is often placed on R&D and marketing, who are responsible for failing to develop quality products and secure sufficient orders. R&D and marketing, on the other hand, naturally blame the market, customers, and national policies. But who can truly control the market, customers, and government?

As a result, driven by a sense of urgency and a sense of impunity, asset-heavy decisions are made hastily. After all, it’s the company’s money, and everyone would rather spend money and not get anything done than take the risk of saving even a little money and not getting anything done. This is a common problem among large companies and has little to do with the company’s nationality or ownership.

In essence, this highlights the common blame game within companies when assets lie idle, often pointing fingers at R&D, marketing, the market, customers, and government policies. Consequently, rushed asset-heavy decisions are made due to a combination of urgency and a lack of accountability. This phenomenon transcends company size and ownership structures.

Consequently, rushed asset-heavy decisions are made due to a combination of urgency and a lack of accountability, perpetuating a cycle of blame within companies. This phenomenon transcends company size and ownership structures, emphasizing the universal nature of the issue.