Understanding Capital Intensity: Definition & Implications for Businesses

Certain industries or companies are considered capital intensive. Here are the basics of what it means to be capital intensive and what it means for businesses in the industry.

Capital Intensive

A capital intensive industry is one that requires a significant amount of money to get involved. Businesses or industries that are capital intensive typically require a substantial amount of infrastructure before any profit can be made. Therefore, companies that choose to get into these industries may have to invest millions or billions of dollars before they ever see a dollar of revenue.

Some examples of capital intensive industries are oil companies and telecommunications companies. In order for an oil company to make any money, they have to spend millions of dollars setting up oil rigs, oil refineries and other infrastructure in order to bring in oil. Telecommunications companies must set up a network of phone lines, fiber-optic lines and other equipment in order to bring on customers.

Impact on Companies

For capital intensive industries, many new companies are prevented from getting involved. You will typically have to be involved with some very powerful companies or lenders in order to get in the market. Therefore, it limits the amount of competition that can occur in these industries.