Setting up your own factory in India: here's how to avoid the most common pitfalls

If you want to start manufacturing in your own factory in India, you cannot simply copy-paste your European set-up. During the process, you need to take into account possible adjustments to your original plan so that your factory complies with Indian regulations and fits well with local practices. We will guide you through each step of the process and share pitfalls that many European companies fall into in India.

Finding the suitable location

As with finding a suitable producer, location choice when setting up a production facility is also very important. We often see European companies choosing a particular location because other companies within the industry or competitors have previously chosen that location.

No thorough location analysis is done in such a case to examine whether the necessary infrastructure is in place, whether the state or cluster has the right raw materials and semi-finished products, and whether enough and suitable personnel can be found. Choosing the wrong location can lead to irreversible problems in the long run, resulting in a departure from India.

This mistake can be easily avoided by engaging local experts who will conduct a location analysis across the country based on your needs and desires. It is important during this process to put aside any preferences and prejudices you may have and evaluate as objectively as possible the selected locations from the analysis.

After establishing a top three locations that meet your requirements, you can let your preferences factor into choosing the actual location and work with your local partner or consultant to find a suitable piece of land or existing facility that you would like to take over.

Brownfield investment

If there is a desire to establish one's own production site, but not to incur the high start-up costs associated with a greenfield investment (building one's own facility), then an existing facility can be sought to lease or purchase.

Such a brownfield investment is often done through an acquisition (M&A) of a local business. If this is chosen, the aforementioned location analysis can be expanded to include a partner search and due diligence once a potential partner is found.

There are interesting advantages to a brownfield investment:

• costs are lower on average due to the use of existing facilities, infrastructure and personnel already employed,

• it allows it to take over existing approvals and permits, saving a lot of work and time.

But there are also things that can work against it and should always be checked carefully before signing any potential agreement:

• In India, production facilities often look "simpler" than in Europe, which does not mean that they produce lower quality as a result. If an acquisition is chosen, however, it must be carefully checked that the location meets European standards.

• It is also important that the site has the proper permits to allow the facility to scale up or expand; you obviously want to avoid the possibility that you would not be able to adapt the facility to new production needs over time.

Therefore, if you choose to make a brownfield investment, it is important that you seek proper advice from a local expert with knowledge of your industry and Indian laws and regulations.

Purchasing land for a factory in India

If a greenfield investment is chosen, the establishment of its own production site, a suitable piece of land can be sought based on the result of the site analysis.

This was always a considerable challenge in India, but the Indian government is working hard to make industrial zoned land available making the search less time consuming these days. Still, it is very wise not to have a hard deadline for finding a suitable plot as it generally takes more time than expected.

In addition, the price of lots in clusters and other popular destinations can be high, making European companies decide to specifically look for cheap land. Watch out for this; there can be very nasty snags in this.

Often in these types of deals, it is said that the land has an industrial destination, but this is not the case. If a lot is purchased that later turns out to be agricultural or private zoning, it is almost impossible to get it changed and another option will have to be sought.

We therefore recommend that you look specifically for industrial lots offered by the government. Finding suitable options listens closely in India and help from a local expert in this field is therefore not a luxury.

Prepare well for setting up your production in India

Many of our clients, before making the decision to set up production in India, want to have a good understanding of what is involved in setting up a production site in India. IndiaConnected has therefore compiled all the tips and advice in a special guide on setting up your own production site in India or finding the right Indian manufacturing partner.

Outsourcing production to an Indian party - here's how to find the right partner

India has become one of the world's leading manufacturing centers in the past decade. The Indian government has invested heavily in developing the industrial sector with the result that India's automotive, aerospace, IT and pharmaceutical (think vaccines) sectors now produce for the entire world. In addition, India offers access to a wide availability of raw materials and costs are lower than in China. The country therefore offers a lot of interesting opportunities for European companies looking to outsource their production.

Finding the right production site in India

Many companies see India as one country, but India is incredibly large and diverse. India is better approached as a continent, like Europe. Therefore, to find a good producer, it is smart to do or have a thorough location analysis done. India has manufacturing clusters in which companies of a specific sector are located. Several clusters of each sector exist in the states where the best materials, infrastructure and personnel can be found for this industry. For example, the auto industry has four major clusters in Gujarat and around the cities of Chennai, Pune and New Delhi.

Companies should not focus on these clusters, but look at all options across India. Sometimes the options outside these clusters are more advantageous because, for example, wages are lower outside the cities. Once it is determined which locations meet the needs, a list of potential suppliers and manufacturers in these regions can be made.

An Indian partner with experience

To ensure the desired specifications and quality, a potential supplier must have the right expertise and experience within the sector in which the European company operates. It is also necessary to check whether quality systems are in place, what the annual output is and whether the supplier has enough experience in exporting the product.

If you have little experience doing business in India, it is advisable to hire a local consultant for this step. They know exactly what legal requirements products must meet and what permits are needed to produce and ship your products.

Quality control

From the list of potential candidates, after extensive evaluation, the three to five best options for the industry and product are chosen. With these producers, the European company then goes deeper into the opportunities offered by the producer. In this step, it is advisable to schedule a visit to the production facility, or, if a visit is not possible, to organize a video call to get an even better idea of the process and quality of the products manufactured there. Once the selection is narrowed down to 1 manufacturing company, a quote can be requested so that price and terms can be negotiated.

Keep in mind that a factory in India usually looks different than in Europe. This does not mean that the products being delivered are also of inferior quality. Often factories in India are more simply furnished, and there is no air conditioning, for example, but the machines are of the same caliber as in Europe.

Once there is agreement with the manufacturer on the price and terms, samples can be made. The key here is that the European company has people available in India who can check the manufacturing process and quality before it is checked again in Europe.

If everything is satisfactory, the first batch can be manufactured. Even though the new supplier has already been screened in various ways, it is then advisable to have quality control checks done every year or even more frequently.

Protecting your Intellectual Property

When outsourcing your manufacturing to a partner in another country, you want to make sure your intellectual property (IP) is well protected. India has been a member of WIPO (World Intellectual Property Organization) for nearly 50 years, which means that most intellectual property laws in India meet international standards.

In our IP manual, you will read not only how your intellectual property is legally protected in India, but also what you can do and have documented yourself to protect your IP if you will be working with an Indian partner.

Why the pandemic made India the world's most popular manufacturing location

The COVID-19 outbreak confronted the world with its dependence on China for the production of all kinds of goods. Consequently, newspapers have recently been full of reports of big names moving production to India, or opting for a second location in India. Apple and Samsung opened their Indian factories in August 2020, and pharma giant Johnson and Johnson is moving its operations from China to India. But what makes India such an attractive location to manufacture?

India offers low production and labour costs and a large pool of well-trained workers

Production hub India offers foreign companies interesting advantages. For instance, production and labour costs are still low, but the country's rapid technological development ensures that the quality of production meets high European standards. This was also an important reason for the Amersfoort-based supplier of castings and forgings, Prins, to stop producing exclusively in China after 23 years. "China became too expensive in some areas, for example, the hourly wage has risen considerably in recent years. In India, we found competitive prices and an extensive choice of production methods," Erik Sattler, the CTO of Prins, told us in an interview about setting up their Indian production branch. "On top of that, India is more accessible because of the language, everyone in India speaks English. The lines of communication are short because of this; I am in contact with our suppliers simply via Whatsapp."

Tax breaks and subsidies for those who produce in India

The Indian government is working hard to create a favourable business environment. Cheap land for industrial use is being freed up on a large scale and the country's infrastructure is being improved considerably. An example of this is the successful commissioning of the first double-stack container train by Indian Railways. In addition, the Indian government introduced a lot of favourable financial incentives for companies manufacturing in India. A few of these initiatives are listed below: 

• The corporate tax rate has been reduced from 30% to around 25%. India's corporate tax rate is now the lowest in Southeast Asia.

• Introduction of initiatives like 'Make in India' and 'Skill in India'. These programmes focus on creating employment in the manufacturing sector. Moreover, they also focus on improving skill development to create a large pool of skilled labour.

• The rules for land acquisition have been relaxed.

• Companies and limited liability companies benefit from various relaxations in the Companies Act 2013 and LLP Act 2008.

• Income tax, GST and customs exemptions came in when Lockdown was lifted.

"Opening a factory in India also offers the possibility of winning large government contracts," says Maarten Durville, director of the Indian factory of aircraft component builder Fokker Elmo. "We work a lot with Boeing, for example, and they would like to sell their Super Hornet Fighter to the Indian government. But the Indian government will only make such a large purchase on condition that the company also does something in return for the country. In this case, Boeing can show that through our cooperation it creates jobs in India and thus win a place at the negotiating table."

The Do's and Dont's of setting up production in India

Apart from all the advantages of a manufacturing location in India, there are always a lot of things to consider when starting out in India. We discussed the smartest strategies during our last webinar on manufacturing in India. The COO of Maier+Vidorno, IndiaConnected's partner in India, Shavikesh Goel shared his key tips. Please find below the registration of the webinar: