[NEWS ANALYSIS] Tesla won't build 'gigafactory' in Korea, experts say

Industry

Published: 05 Jun. 2023, 16:49 Updated: 05 Jun. 2023, 16:56

[NEWS ANALYSIS] Tesla won't build 'gigafactory' in Korea, experts say

President Yoon Suk Yeol, right, chats with Tesla CEO Elon Musk during their meeting at the Blair House in Washington on April 26. [JOINT PRESS CORPS]

Korea may be chasing rainbows to attract Tesla's so-called "gigafactory" with its subpar incentive plans and labor market conditions compared to contenders like Indonesia and Thailand.

With Tesla CEO Elon Musk putting up a few countries on his candidate list for a new gigafactory site, experts say that Korea has a slim chance of beating others unless it sharply cuts the corporate taxes and takes on the unions.

"Gigafactory" is a term Tesla uses to describe its large-scale manufacturing plant.

A senior Tesla delegation is reported to have met with Indian government officials in New Delhi last month, according to an Indian media outlet, signaling that India remains one of the top priorities for Musk.

The reports came a week after Bloomberg reported that Tesla scrapped its plan for India after a year-long tariff conflict with the local government.

The news is a blow to Korea's growing expectations as Musk also mentioned Korea as one of the strong candidates during his meeting with President Yoon Suk Yeol during Yoon's state visit to the United States in late April.

Yoon then invited Musk to build a factory in Korea, handing a brochure introducing 38 locations for a potential Tesla factory and the incentives Korea is willing to offer, including tax benefits and location support.

Tesla's Shanghai "gigafactory" [REUTERS/YONHAP]

Tesla currently runs five gigafactories worldwide, three in the United States, one in China and one in Germany. It recently announced plans to build a new one near Monterrey, Mexico.

Musk said it will soon announce the location of its second gigafactory in Asia.

Under Korea's so-called K-EV Act, big companies will get a tax credit of up to 15 percent of their EV-related investments. An additional 10 percent will be granted for the amount increased compared to the previous three years' average.

Cash grants for foreign investment are also up to 50 percent of the investment.

Under the Foreign Investment Promotion Act, a foreign company can lease a site owned by the country, local government or public institutions for up to 50 years.

However, the up-to-25 percent credit only applies to this year's investment, and the rate goes down to 15 for investments made after this year.

The extent of cash grants is also limited as the Korean government has set aside around 50 billion won ($38 million) for the grants in its budget, which is to be shared by around 10 companies annually.

"Korea [has a comparative disadvantage] in terms of tax system including corporate tax, one of the factors companies are serious about when building plants," Yang Ji-won, a researcher at the Korea International Trade Association, said.

"In terms of foreign investment incentives, Korea is just focused on limited cash grants instead of tax exemption," Yang added. "It is essential to form a special district to offer unconventional incentives to foreign companies to attract their investment," Yang added.

Tesla CEO Elon Musk speaks at the groundbreaking ceremony for Tesla's gigafactory in Shanghai on Jan. 7, 2019. [YONHAP/REUTERS]

Indonesia, however, offers a tax holiday of 100 percent of the corporate tax for up to 20 years, depending on the investment amount. After the end of the holiday, companies are granted a 50 percent of tax reduction for two years.

Indonesia has also lowered its value-add tax on electric vehicle sales to 1 percent from 11 percent.

Global automakers like Volkswagen and China's BYD are considering building plants in Indonesia, with Hyundai Motor already operating a $1.55 billion factory there.

Thailand also offers a corporate tax exemption for a maximum period of eight years and a 50 percent reduction after the holiday expires.

India announced a $2 billion incentive pack for manufacturing to offer cash back for manufacturers on sales of locally made goods that exceed an annual target for up to six years.

Labor unions in Korea are known for their militancy, which is also a minus factor in attracting Tesla.

Auto workers in Korea often go on strike and stage large-scale rallies, demanding pay increases and better working conditions.

Musk has been a vocal opponent of labor unions, with Tesla remaining the only major U.S. automaker without a union.

Multiple American media outlets reported that Tesla in February fired at least 18 employees at its Buffalo plant in New York for attempting to form a union, though Musk denied that the layoff was due to their poor performance.

Tesla's Model 3s are being manufactured at its plant in Shanghai, China. [REUTERS/YONHAP]

Musk even tweeted in 2018, "Nothing stopping Tesla team at our car plant from voting union, but why pay union dues and give up stock options for nothing?" adding that the plant's safety record is two times better than when the United Auto Workers represented its workers.

A U.S. appeals court ruled in March that Musk violated federal law by saying that employees would lose stock options if they joined a union.

"A General Motors factory was the last plant to be built in Korea by a foreign automaker in 2017, which implies that Korea is not a suitable location for car manufacturing," Lee Ho-geun, an automotive engineering professor at Daeduk University, said. "For foreign companies like Tesla, they have no reason to pick a country with militant labor unions when there are so many alternatives."

"Musk's remarks are just no more than lip service," Lee added.

Lee also cited high labor costs as one of the biggest disadvantages of Korea attracting foreign investment.

The monthly income of manufacturing workers in Korea was, on average, $3,313 as of 2020, according to the Korean Statistical Information Service, compared to $464 in Thailand and $605 in Malaysia.

It's even higher than Japan, whose number stood at $2,794 the same year.

Rendered image of Tesla's "gigafactory" in Mexico [SCREEN CAPTURE]

"High labor cost has been selected as one of the three biggest disadvantages in Korea when foreign companies are considering Korea as their manufacturing base," Yang said.

Yang interviewed 300 foreign companies that have bases in Asia.

Korea's car production volume has been on a fall since 2011. It produced around 4.1 million vehicles in 2017, but that fell to 3.5 million in 2021.

Korea's auto market is considerably small compared to its competitors, with it registering a total of 1.68 million vehicles last year, according to the Korea Automobile Manufacturers Association.

India sold 4.73 million new vehicles last year, the world's No. 3 market after China and the United States.

Indonesia sold 1.05 million cars during the same period but has a high growth potential. About 10.2 percent of Indonesians own a car, while the number is 41.1 percent in Korea.

Indonesia has the world's biggest reserves — 21 million tons — of nickel, one of the key materials needed to make a lithium-ion battery, according to data from the U.S. Geological Survey.

BY SARAH CHEA [chea.sarah@joongang.co.kr]