Tesla Won't Build Gigafactory in South Korea in Near Future, Analysis Shows

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South Korea probably will not be able to attract Tesla to build a Gigafactory. The country has subpar stimulus plans and labor market conditions compared to contenders like Indonesia and Thailand, analysis shows.

Tesla CEO Elon Musk has several countries on his list of candidates for building a new gigafactory and South Korea is on it. However, experts say Korea has little chance of beating other countries unless it drastically cuts corporate taxes and gets to work actively on resolving the union problem.

Although the Korean President met with Musk during his recent visit to the U.S., Tesla likely has another favorite to host its next factory. A high-level Tesla delegation met with Indian government officials, indicating that the country remains one of Musk's top priorities.

Korean President Yoon Suk Yeol invited Musk to build a factory in his country and handed him a brochure outlining 38 potential locations and the incentives Korea is willing to offer, including tax breaks and support. After several meetings with officials from various countries, Musk said that the company would soon announce the location of its second gigafactory in Asia.

Experts believe that Korea has a low chance, according to the Korea JoongAng Daily. 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.

At the same time, Indonesia 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 tax reduction for two years. Indonesia has also lowered its value-add tax on electric vehicle sales to 1 percent from 11 percent.

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.

In addition, Korean unions are known for their militancy. They often organize strikes and rallies, which is categorically contrary to Tesla's values. The company’s employees around the world are not unionized.

“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.”

Lee also cited high labor costs as one of Korea's biggest weaknesses in attracting foreign investment. As of 2020, the monthly income of manufacturing workers in Korea averaged $3,313, compared to $464 in Thailand and $605 in Malaysia, according to the Korea Statistical Information Service. This is even higher than in Japan, where in the same year the figure was $2,794.

“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. He interviewed 300 foreign companies that have bases in Asia.

© 2023, Eva Fox | Tesmanian. All rights reserved.

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