The saying, “You have to spend money to make money,” rings true when it comes to handling in-house production. Having up-to-date equipment is a key aspect to ensuring your SMT assembly process is the best it can be, and that requires a level of capital expenditure. Trying to avoid this expense will likely cost you more in the long run. Equipment downtime, slowed-down production, damaged PCBs, and more can be the result of not investing in the future of your equipment. By investing in machine upkeep and, when needed, equipment upgrades from reputable suppliers, you will experience fewer issues and better returns.
What Is Capital Expenditure and Why Is It Important?
Capital expenditure is the money your company spends to buy, maintain, or improve its assets—such as equipment. Now more than ever, companies with in-house production should safeguard their futures by upgrading equipment as needed. Also, companies currently outsourcing production will greatly benefit from transitioning to an in-house production model. As factory automation and customer demand push the boundaries of assembly capabilities, owning machinery—and periodically investing in new machinery—may become necessary for your company to continue being competitive in the marketplace.
Choosing to start in-house production is certain to reduce your overhead by an average of 35–40%. And by adding select equipment to your assembly line through strategic capital expenditures, you can always stay ahead of the curve. However, you should exercise caution, always making sure that what you are adding to your production line through capital expenditure will truly be a long-term investment that will be helpful for years to come.
Key points on capital expenditure:
- A capital expenditure is the money your company uses to purchase, upgrade, or extend the life of SMT equipment (and/or other assets)
- Types of capital expenditures include purchases of equipment and software updates
- Your capital expenditures should only be made on assets that will last for a year or more, making them investments for your company
Bringing Production In-House
If you don’t already own and operate your own SMT line, choosing to purchase equipment can be a great investment. Looking at an SMT equipment purchase from a total cost vs. savings standpoint, there will be a quick payback period and the benefits to business operations and overall cost savings will be so substantial that the cost of equipment will be small compared to continuing with alternate expenses.
In light of these savings, what companies should make absolutely certain is that they don’t underspend when it comes to installing their first SMT assembly line. Nothing is more frustrating than trying to produce a high-quality product with equipment that isn’t up to the task. There’s certainly no need to overspend either. The key is to purchase the best equipment that will get the job done effectively, while keeping an eye toward future needs and upgradeability.
Upgrades to Equipment
In the manufacturing industry, even high-quality SMT equipment needs repairs and upgrades. If you are working with a reputable equipment supplier, there should be warranties in place to help with software upgrades and replacement parts; on average, you can expect these warranties to last one to three years, depending on the machine. But the time will come when the warranties expire, or the needs of your company change, and it is time to invest in your line again. It is important to keep up to date with the available technology, or you may risk a loss of customers, reputation, and even key employees.
When it is time to purchase new equipment, companies may decide to finance their upgrade. By choosing financing, you can achieve a better equipment line-up without egregious spending, breaking up payments over a span of time.
Financing your Equipment Upgrade
Owning an SMT line could be easier than you think; by taking advantage of lower financing rates that are currently available, you could save big over an 18-, 48-, or 60-month leasing period. Depending on the company you go with, there may be special deals available (such as 0% APR for the first year), so it is always good to ask. There may also be a minimum purchase requirement (such as a $50,000 expenditure or more) and first and last payments will likely be required up front. Make sure to investigate the details and ask questions throughout the process to ensure you understand the requirements and to ensure you get the best deal possible.
Bonus Tip: If you have working equipment in-house, keep what you have, fixing and upgrading it along the way. It is more profitable to have it out on the floor than collecting dust. It is good to have slower machines running in the background, and then have newer, high-speed equipment in the forefront. Also, if customers and visitors come to see your manufacturing set-up, there will be a larger range and bulk of equipment for them to view.
Tax Advantages of Upgrading Equipment
During your company’s profitable years, purchasing new equipment and investing in existing equipment can open you up to tax advantages. You can retain cash and save on taxes by writing off equipment purchases through Section 179. Since Section 179 was updated in 2018 to allow for a 100% first-year deduction, even a single invoice of a machine purchase or lease during this tax year can lead to a full write-off for your company. Taking advantage of this opportunity can help reduce your overall capital expenditure and make your next equipment upgrade an even more profitable investment.
Moving Forward: Equipment as Investment
Overall, deciding to bring production in-house or deciding to upgrade your existing equipment are both examples of capital expenditure done well. This short-term expense is a long-term investment in your company’s future. Like any effective capital expenditure, it will ensure that spending a little now will result in saving a lot later. If you are looking to get started with your own production—or have noticed that an equipment upgrade may be in order—don’t wait. Shortages worldwide are making lead times longer, so it is best to ensure you have what you need when you need it by ordering early. Current lead times for new equipment are 16 weeks or longer on average. As a final point, repair the machines you own and invest along the way, purchasing before the upgrade you need becomes critical.
This column originally appeared in the October 2021 issue of SMT007 Magazine.