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(Practical Solutions for Difficult Problems) Should I build a plant? - Jeremy Gray

6/6/2021

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Building a plant in a foreign country is a significant undertaking in terms of capital, time and effort. The decision should not be taken lightly as the cost will not be recoverable in the short term. If not successful the costs will be high but can be a first step in moving your company to a multinational corporation.

We will look at whether you should build a plant in your target country?

Building a plant is a significant investment whether green field or using an existing building. It is a long term investment. The initial investment will not be recoverable in the short term. If you go greenfield you will have the land and buildings that you can sell. But you will be extremely lucky if you can sell the plant for more than scrap value. If you have rented a building there will be clean up costs and make good costs.

A tip: in many Asian countries many demolition contractors will pay you to demolish your plant.

The options that may be open to you will be:

Supply products from your home country
Find a toll manufacturer in your target country
Lease an existing building where you can install your plant
Find a developer who will build to suit
Go the green field route, buy a piece of land and build a plant to your design.

Understand restrictions on foreign ownership

Economics will play a large part in your decision making process but there are soft factors:

Customers perception of your commitment to the country (security of supply and switching costs)
Employee’s belief in security of employment. More likely to attract people looking for a career.
Government support Financial and non-financial
Your personal view and risk profile.
Supply products from your home country:
Lowest investment but probably lowest return
Use a distributor? or agent?
Set up your own warehouse?
Is it economically feasible? Freight costs, import duties, delays, distributor, or agents commission.
Are you willing to accept a small profit or even a loss as you test the concept?
Could avoid creating a Permanent Entity with tax and reporting implications.
Toll manufacturing
A toll manufacturer is a company who takes raw materials supplied by you and converts them into finished goods.
Could be an option if your products do not require specialised manufacturing processes.
Quality control needs to be maintained. You will not be the toll manufacturers only customer
Private labelling.
Can be used in conjunction with importing and own manufacturing.
Supply from home and toll manufacturing options can be accomplished without in-country employees. Other options will require hiring your own employees.
Need to understand labour laws. Some countries employees are protected and gain rights over time.
Some industries need appropriately qualified staff. QC, safety and environmental positions.
Use of temporary staff is an option.
Hiring locals or foreigners
Resident directors
Employees will trigger permanent entity provisions – tax and reporting. Check DTA arrangements

Whether you lease an existing building, find a developer for built to suit or go greenfield you will need to understand the permitting process required to be allowed to construct your plant. This can be lengthy. When I was planning plant construction in Vietnam we based our timeline on a 15 month permitting process. The process for the plants I built in China and Thailand were faster but still around a year or so.

Before you make any commitment do a groundwater and soil contamination check. This may or may not be legally required but although not cheap, it is vital.

If you are renting an existing building or having a developer build to suit the landlord or developer will take care of the construction permits. If you are building your own plant the construction company can probably assist you in getting the necessary construction permits. But to operate your plant you will need operating permits. Requirements will vary by country and industry but almost certainly you will need an Environmental Impact Assessment.

This will include:

Details of raw materials used and quantities
Production processes
Waste generated and how treated
Any intermediate products generated during production
Finished products formulations
Close inspection of any dangerous or hazardous goods can be expected
Standby processes such as generators

Understanding local regulations can be challenging and is often open to interpretation by local officials. Use an expert to help you.

Plant construction and installation should be overseen by a competent engineering company.

Ensuring compliance with anti corruption legislation.
If you construct a manufacturing plant, look for ways to maximize your return.