Economies of scale contribute to value creation mainly by improving the operating margin and optimizing the use of capital employed, which increases economic profitability (ROCE) and, consequently, the value of the company.

The mechanisms detailed in the documents include:

1. Reduction of unit costs (Effect on EBITDA and EBIT)

Economies of scale make it possible to spread fixed costs over a larger volume of production, thus reducing the unit cost.

• Mechanism: By producing more, the company better amortizes its fixed costs (factories, overheads, R&D). This directly improves the operating margin (EBITDA or EBIT).
• Impact on value: An improvement in the margin increases the Free Cash Flow (FCF), which is the basis of the company’s valuation.
• Competitive risk (Game theory): However, there is a significant risk. If a company uses economies of scale to lower its prices in order to gain market share, its competitors may respond by lowering their prices as well. If the entire industry invests to reduce costs but prices fall at the same time, the overall margin can remain stable or even decrease. In this case, “the big winner is the customer, the big loser is the shareholder”.

2. Optimization of Capital Employed (Size Effect)

Economies of scale do not only concern the income statement, but also the balance sheet.

• Investment synergies: In the event of an acquisition or consolidation, synergies make it possible to avoid duplication of assets (logistics, IT systems). This improves asset turnover, a key component of ROCE.
• Tolling effects: In the case of an industrial project, mobilizing existing excess capacity within a group (tolling) rather than building a new plant allows significant economies of scale to be achieved on the initial investment (Capex). This reduces the capital employed and mechanically boosts the profitability of the project.

3. The impact on market valuation (Multiples)

The market values companies that can generate sustainable economies of scale positively.

• Critical size: Large companies often benefit from a valuation premium because their size gives them a competitive advantage (barriers to entry) and stronger resilience (lower beta).
• Profitable growth: Growth only creates value if it generates economies of scale that maintain or increase margins. If growth takes place without economies of scale (simple addition of variable costs), it does not create additional value per unit, or even destroys it if it complicates management.

4. Limitations and points of vigilance

The sources point out that the pursuit of economies of scale has limits:

• Loss of flexibility: Building huge factories to maximize economies of scale can reduce the company’s flexibility in the face of variations in demand. In an uncertain environment, it is sometimes better to have smaller, flexible units (optional approach) rather than a “cathedral” optimized for a volume that may never materialize.
• Quality and the customer: Seeking to reduce unit costs at all costs (in particular through massive outsourcing or pressure on suppliers) can degrade the quality of the product and damage the company’s reputation, ultimately  destroying value (the case of Boeing or Kraft Heinz).

In summary, economies of scale create value as long as they increase the gap between ROCE (via margin and turnover) and WACC, without sacrificing strategic flexibility or customer satisfaction.