The most valuable assets in your factory are the ones you can’t see

14.11.2018 Michael Masterson

“Manufacturing” conjures up images of machines, production lines and products. In the past, the value of a manufacturing company lay primary in its tangible assets such as land, buildings and equipment. However times have changed. Today, the real value of a manufacturer is more likely to lie in its intangible assets such as the industrial know-how, systems and processes that keeps such organisations running safely, efficiently and competitively.

In 1975, intangible assets accounted for just 17 per cent of company value. Less than 40 years later in 2015 this had rocketed to 87 per cent. Virtually all value is now in intangible assets. This shift has been so rapid many companies are still grappling with the fact that their most valuable assets are invisible and often no longer appear on their balance sheet. Many continue to invest far more time and money maintaining machinery, tracking stock and protecting physical assets than significantly more valuable but less obvious intangible assets such as data, confidential information and brands.

What is an intangible asset?

Fixed assets are relatively easy to identify and most organisations assiduously maintain a fixed asset register. But few identify, much less catalogue, the intangible assets which are both a repository of value and the primary drivers of company performance and growth. Too often they are lost, stolen or simply ignored. Consider the role these play in your business – and the potential impact of their loss.
  • Your brand – the reasons why customers chose you over your competitors
  • Your databases of customer and supplier information & order histories
  • The systems, processes and industrial know-how that enable you to manufacture your products
  • Your unique product and packaging designs
  • The software that controls machines or monitors production
  • Your presence on the internet – your website and social media sites
An easy test: ask yourself how long could your business operate without using any of these assets – the answer in most cases is “not very long”. Machinery and factories can be replaced: customer databases, brands, critical manufacturing knowledge is not so easy.

The importance of protection

Just like machinery, intangible assets need to be protected and maintained. They can be easily lost or stolen. Here are three recent examples of companies we have encountered, regrettably, only after things had gone badly wrong.
  1. When a leading sales person left an innovative manufacturer to work for a competitor he was able to take highly valuable details of the manufacturing process and key products as well as the customer database. The manufacturer had chain link fences, security guards and alarms but had never thought to protect critical intangible assets. The transfer of value to the competitor was in the millions.

  2. A major high-value manufacturer created an innovative product and outsourced the production of a key component to a small European contractor. Without realising the impact a middle-tier engineer supplied the specifications and designs for the entire product so that, once the contractor completed the project, they formed a new company and begin manufacturing the same product based on the information they had received. They went on to shut the Australian company out of a $100 million market.

  3. A manufacturer created a very successful product, however when they launched it in the United States, they were promptly sued by a company that had filed a patent on the technology some years earlier. The matter was settled but only after the Australian company paid $15 million in legal fees almost destroying them in the process.
All three of these companies did not realise that the real value lay in the intangible assets essential to design, produce and sell the products rather than the act of manufacturing.

Accounting Standards Perpetuate the Misfocus

Unfortunately accounting standards, designed for the 19th century industrial world of factories and machinery depreciation tend to perpetuate the focus on tangible assets. Today balance sheets often bear little relationship to how the company generates revenue or the real value of intangible assets such as product designs, research and development or brands.

What Next – Questions to Ask

The correct strategy to ensure your company’s valuable intangible assets are properly identified, assessed, utilised and protected will depend on your company’s stage of development. Asking yourself the right questions will point you in the right direction. Here are some key questions to ask depending on where you are in the business cycle.

1.Initial Concept & Start Up

  • Who owns the intangible assets you are developing?
  • How will you stop your new idea from being copied the moment you reveal or sell it? If you can’t protect it you are effectively donating it to your competitors.
  • Will your product infringe third party intellectual property or another company’s intangible assets? Are you sure no-one beat you to the punch?

2.Emerging Business

  • Have you identified all of your intangible assets including data, know how, designs, copyright, innovations and brand?
  • Have you developed an intangible asset strategy and is it linked to your business, research and development and investment plans?
  • Do your contracts with people such as suppliers, clients and employees include protection for your intangible assets?

3.Expanding business

  • Will you infringe another company’s intellectual property or intangible assets in the new markets you are entering?
  • Have you developed a branding and trademark strategy?
  • Are you managing your intangible assets to minimise costs and reduce risks?

4. Mature, successful business

  • Have you identified the intangible assets that drive your market share and profit margin?
  • Have you valued your intangible assets?
  • Is your intangible asset strategy linked into your innovation and research & development strategy?
  • Are you taking the value of your intangible assets into account when you consider major transactions such as a merger or acquisition, initial public offering (IPO) or significant investments?
  • If you are considering an exit, is the value of your intangible assets clear to potential buyers?
Summary: intangible assets may be invisible but they are the most important and valuable assets in your factory. You need to maintain and manage them just as you would your most valuable piece of equipment.
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