Walk into any modern factory, port facility, or telecommunications hub, and you’ll encounter billions of dollars worth of machinery, infrastructure, and equipment humming away. These capital-intensive businesses—manufacturing plants, shipping companies, utilities, airlines—form the backbone of the global economy. Yet despite their importance and massive scale, many are barely profitable. The culprit? A toxic combination of crushing debt loads and the relentless cost of servicing that debt in an era of elevated interest rates.
The relationship between debt and thin margins in capital-intensive industries isn’t immediately obvious, but it’s fundamental to understanding modern business economics. These companies need enormous upfront investments to function. A semiconductor fabrication plant can cost over twenty billion dollars. A single modern container ship runs two hundred million. A renewable energy farm requires hundreds of millions before generating a single kilowatt. Unlike software companies that can scale with relatively modest additional investment, these businesses must continuously pour capital into maintaining, upgrading, and expanding their physical assets.
For decades, historically low interest rates made this model workable. Companies could borrow cheaply to finance their operations, and the interest payments represented a manageable slice of revenue. But the world has changed dramatically. Global debt levels have exploded across developed and developing economies alike. According to the International Monetary Fund, global debt reached over three hundred trillion dollars in recent years, representing roughly three hundred and fifty percent of global GDP. This isn’t just government debt—corporate borrowing has surged alongside it.
When interest rates were near zero, as they were throughout much of the 2010s, companies could refinance regularly at negligible cost. The interest expense line on their income statements was almost an afterthought. But as central banks worldwide raised rates to combat inflation, that calculus shifted violently. A company that could borrow at two percent suddenly faced refinancing at six or seven percent. For a business carrying ten billion dollars in debt, that’s the difference between two hundred million and six hundred million in annual interest payments—money that comes straight out of operating profit.
Capital-intensive businesses face a particularly cruel squeeze because they can’t easily adjust their cost structures. A shipping company owns its vessels whether they’re profitable or not. An aluminum smelter must run continuously or face catastrophic damage to its equipment. A telecommunications company can’t simply abandon its network of cell towers and fiber optic cables. These fixed costs create operational rigidity that prevents the kind of rapid margin improvement possible in asset-light businesses.The situation compounds because these industries often operate in commodity or near-commodity markets where pricing power is limited. An airline can’t charge significantly more than its competitors for the same route. A steel manufacturer must sell at roughly the global market price. A power utility faces regulated rates. When your revenue per unit is largely fixed by market forces or regulation, and your interest costs suddenly double or triple, profit margins evaporate.
Consider the current state of global shipping as an illustration. Container shipping companies took on massive debt to build new vessels during the boom years, anticipating continued growth in global trade. Those vessels take years to build and decades to pay off. When demand softened and fuel costs remained elevated, these companies found themselves trapped—committed to debt service on assets that weren’t generating the returns originally projected. Even as shipping rates fluctuate, the interest payments remain constant and unforgiving, turning what should be profitable quarters into break-even or loss-making periods.
The energy sector tells a similar story. Traditional oil and gas companies carry enormous debt loads to finance exploration, drilling, and refining infrastructure. Renewable energy companies, despite being supposedly cleaner and more modern, face even more daunting capital requirements with longer payback periods. Solar farms and wind installations require such large upfront investments that the cost of capital becomes the dominant factor in their economic viability. When that capital becomes expensive, projects that penciled out at three percent interest rates suddenly look questionable at seven percent.
Manufacturing faces its own version of this crisis. Modern factories incorporate increasingly sophisticated automation and robotics, driving up initial investment requirements. A car manufacturing plant might represent a five billion dollar investment before producing a single vehicle. The debt service on that investment creates a break-even point that requires the plant to run at high capacity for years. Any slowdown in demand—and global manufacturing has faced plenty of those recently—means fixed costs including debt service eat up whatever margin the business might generate.
The telecommunications industry exemplifies how debt burdens strangle capital-intensive businesses. Companies spent hundreds of billions deploying 5G networks, money borrowed against the promise of future revenue growth. But consumer willingness to pay more for mobile service hasn’t materialized as hoped, and competition remains fierce. The result is that telecom companies globally report modest single-digit profit margins despite providing essential infrastructure, because so much of their revenue goes to servicing the debt incurred building that infrastructure.
What makes this situation particularly intractable is that companies can’t simply choose to stop being capital-intensive. A utility can’t become a software company. A shipping line can’t transform into a consulting firm. These businesses are structurally committed to their asset-heavy models, which means they’re structurally committed to carrying substantial debt. In previous eras of higher inflation and nominal growth, this might have been manageable—revenue grew fast enough to outpace debt service costs. But in an environment of elevated real interest rates and slower global growth, that escape hatch has closed.
The ripple effects extend throughout the economy. When capital-intensive businesses struggle with thin margins, they defer maintenance, cancel expansion projects, and cut research and development spending. This creates a vicious cycle where the productivity improvements that might help them compete get postponed, further pressuring margins. It also means less employment in traditionally well-paying industrial jobs and reduced investment in communities where these facilities operate.
Governments face difficult choices in responding to this situation. Some have considered industrial policy interventions, offering subsidized financing or direct support for strategic industries. But this approach risks creating zombie companies that survive only through state support, misallocating capital that might be better deployed elsewhere. The alternative—allowing market forces to rationalize these industries—means bankruptcy, consolidation, and economic disruption that politicians understandably want to avoid.
The fundamental problem is that the global economy has locked itself into a high-debt equilibrium that punishes exactly the kinds of businesses we need for physical production, energy generation, and infrastructure provision. We’ve created a financial architecture that rewards asset-light, high-margin businesses like software and services while systematically disadvantaging the capital-intensive enterprises that build the tangible foundations of prosperity. As long as debt levels remain elevated and interest rates stay meaningfully above zero, this tension will persist, keeping margins compressed and making it increasingly difficult for these essential industries to generate the returns that would justify continued investment in them.
