India: Emerging as a Manufacturing Powerhouse

India is the world’s fifth-largest economy by gross domestic product and the third-largest economy by purchasing power parity as of 2024, and with its rapidly growing population comes lucrative and diverse opportunities for companies on a global scale. India has attracted significant interest as a manufacturing hub, particularly for key sectors like automotive, engineering, chemicals, pharmaceuticals, and consumer durables.

The Indian manufacturing sector is projected to be one of the fastest-growing sectors in the local economy. With programs like Make in India, the Indian government is seeking to drive forward the country’s manufacturing presence by providing local manufacturers with government incentives. Various state governments also actively compete with each other to attract new manufacturing units to their states and offer a range of incentives. The focus has not only been on manufacturing for export. There is also an emphasis on local production and expansion within India, as the rate of consumption in the country has increased significantly over the last decade.

OPTIONS FOR ENTERING THE MANUFACTURING SECTOR

For US companies looking to enter the manufacturing space in India, there are several options to structure the entry. The preferred options include an equity joint venture (JV) with an existing Indian entity, a form of strategic alliance that is usually a contractual relationship between the US company and a manufacturer in India, or a wholly owned subsidiary set up in India to carry out manufacturing operations. We take a brief look at each of these options below and raise some important considerations.

Equity Joint Venture

JVs are a popular option employed by US companies looking to set up manufacturing in India. With this route, the US company enters into a JV partnership with an Indian entity. Having an Indian partner is helpful for understanding the complexities of setting up shop in India, including compliance with various local and federal laws. However, there are some important considerations to keep in mind, such as the legal form of the JV, the lead time to setting up in India, and the level of investment permitted for the specific sector for the proposed JV.

Considerations

Additionally, key considerations in this structure include framing the governance rights of the JV and how the US partner can adopt practical measures to augment its legal rights, such as incorporating information rights and the right to appoint key employees.

Decision-making authority is also usually a key area of focus for the US partner, as Indian law provides JV partners with certain additional statutory veto rights at certain equity percentage thresholds.

Another important factor in structuring an equity JV is driven by tax considerations where, depending on the final structure of the JV, any dividends distributed by the JV will be subject to tax rates under the applicable tax treaty.

Structuring for Exits

However, given the challenges of operating JVs in general, it is also important to agree upfront the manner and terms on which parties can exit the JV, if required, and conduct their business in India following such exit. This can help protect their business interests and provide for an orderly exit in such circumstances.

Typically, we have seen such JVs in India being terminated by having one party buy out the interests of the other. The valuation of such buyouts, the protection of intellectual property (IP) following such buyout, and the noncompete obligations of the parties going forward are among several issues that need to be clearly spelled out upfront to avoid disputes later.

Current State

JVs have become an increasingly popular option in recent years. For instance, in March 2022, leading integrated manufacturing solutions company Sanmina Corporation announced that it entered into a JV agreement with Reliance Strategic Business Ventures Limited, a wholly owned subsidiary of India’s largest private sector company, Reliance Industries Limited (RIL), to create a world-class electronic manufacturing hub in India.

Strategic Alliance

Under this option, a US company would enter into a contractual arrangement with one or more Indian entities that would manufacture products or components of a product. This option can also be limited to just a licensing agreement whereby the US company enters into an agreement to license its IP rights and technology to the Indian partner to manufacture products or components of products for the US company.

Considerations

The advantage of a strategic alliance is that it eliminates the need for the US company to set up or maintain a separate Indian entity. The right to make key decisions is often negotiated up front. However, careful consideration should also be given to how the arrangement is structured, as the process can be complex and can lead to significant time spent by the US entity to oversee the arrangement.

Additionally, careful thought must be given to mitigating any IP rights compliance risks during the term of the strategic alliance and especially after the US entity’s exit.

Other key areas of focus would include how any licensing fee or royalty would be taxable in India and the interplay with the applicable tax treaty. Guardrails should also be put in place to have the right strategies to mitigate the complexity of this option and to take advantage of the Indian partners’ extensive knowledge of the Indian market, without creating reliance on any one partner.

Current State

In recent years, India has seen a significant increase in contract manufacturing. While contract manufacturing in certain sectors, like pharmaceuticals, has carried on successfully in India for decades, lately there has been a sharp increase in contract manufacturing in various other sectors, including electronic equipment. A notable recent example was the establishment of large manufacturing facilities in India by key Apple Inc. contract manufacturers Foxconn, Pegatron, and Wistron—whose facilities have been recently acquired by India’s Tata Group—to produce iPhones.  

Operations Company

Some US companies choose to set up wholly owned subsidiaries in India for their manufacturing requirements.

Considerations

The US entity will have complete control over the governance of the entity and use of its IP rights, and can set the strategic direction of the venture without reference to other partners. However, the US company will be required to incorporate an Indian entity and ensure compliance with various local and federal laws, including labor laws. There will also need to be a strong and experienced management team located in India that can effectively establish and manage operations.

Thought should be given to the tax treatment of any distributions to the US entity, and also to any capital gains taxes on the sale of the subsidiary in the event of the US entity’s exit.

Current State

Operations companies are particularly favored by pharmaceutical companies. A recent example is the manufacturing agreement by Napo Pharmaceuticals Inc., a wholly owned subsidiary of Jaguar Health Inc., for the manufacture of Crofelemer Final in India.

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