Setting up your own factory in India: How to avoid the most common pitfalls
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If you want to start producing in your own factory in India, you can’t just copy-paste the setup you have at home. During the process, you need to consider possible adjustments to your original plan so that your factory complies with Indian regulations and fits in well with local practices. We guide you through each step of the process and share pitfalls that many European companies fall into in India.
Finding the right location
As with finding a suitable producer, location selection is also very important when setting up a production facility. We often see that European companies choose a specific location because other companies in the sector or competitors have already chosen that location. In such a case, no thorough location analysis is carried out to investigate whether the necessary infrastructure is available, whether the state or cluster has the right raw materials and semi-finished products and whether there are enough and suitable personnel available. Choosing the wrong location can lead to irreversible problems in the long term, resulting in a departure from India.
This mistake can easily be avoided by calling in local experts who, based on your wishes and needs, carry out a location analysis across the entire country. It is important that you put aside any preferences and prejudices during this process and evaluate the selected locations from the analysis as objectively as possible. After compiling a top three of locations that meet your requirements, you can let your preferences play a role in choosing the actual location and, together with your local partner or advisor, you can look for a suitable piece of land or an existing facility that you would like to take over.
Brownfield investment
If there is a desire to set up your own production location, but not to incur the high start-up costs associated with a greenfield investment (building your own facility), then you can look for an existing facility to rent or buy. Such a brownfield investment is often done through an acquisition (M&A) of a local company. If this is chosen, the previously mentioned location analysis can be expanded with a partner search and a due diligence investigation once a potential partner has been found.
There are interesting advantages to a brownfield investment:
- the costs are on average lower, due to the use of existing facilities, infrastructure and staff already employed,
- it offers the possibility to take over existing approvals and permits, which saves a lot of work and time.
However, there are also things that can work against you, and that should always be checked carefully before a possible agreement is signed. In India, production facilities often look ‘simpler’ than in Europe, which does not mean that they produce less high quality. If a takeover is chosen, it must be checked carefully whether the location meets European standards. Furthermore, it is important that the location has the right permits to be able to scale up or expand the facility, because you want to avoid not being able to adapt the facility to new production needs in the long term. If you opt for a brownfield investment, it is therefore important that you get good advice from a local expert with knowledge of your sector and Indian legislation and regulations.
Buying land for a factory in India
If a greenfield investment is chosen, setting up your own production location, then a suitable piece of land can be searched for based on the results of the location analysis. This used to be a major challenge in India, but the Indian government is working hard to make land available for industrial use, which means that the search is now less time-consuming. However, it is very wise not to have a hard deadline for finding a suitable plot, because it generally takes more time than expected.
In addition, the price of plots in clusters and other popular destinations can be high, which is why foreign investors decide to specifically look for cheap land. Be careful with this, as it can have very annoying catches. Often, in these types of deals, it is said that the land has an industrial destination, but this is not the case. If a plot is purchased that later turns out to have an agricultural or private destination, it is almost impossible to have this changed and another option will have to be found. We therefore advise you to specifically look for industrial plots that are offered by the government. Finding suitable options is a delicate matter in India and help from a local expert in this field is therefore not an unnecessary luxury.
