#38: Flatted factories
Can they lead the ‘Make In India’ mission?
In the popular imagination, factories are often envisioned as sheds with high ceilings, usually limited to the ground floor. This vision is a relic of the 19th century when such designs were commonplace worldwide. The 20th century saw the rise of a very different factory type when countries such as Singapore, Taiwan, and South Korea adopted the 'Flatted Factory' model, where manufacturing units are stacked vertically in multistoried buildings. In Hong Kong, flatted factories now account for approximately 70% of the city's industrial floor space (Research Office, 2019). In 2016, South Korea had over 792 flat factory complexes, officially known as ‘Knowledge Industry Centers’(Oh, 2019). These policies to encourage flatted factories may have contributed to the rapid industrialisation of East Asian countries (Sabillon, 2015). In recent years, China has also adopted the 'Factories going upstairs' policy in the Industrialised Shenzhen region to make land more affordable for manufacturers (Liu et al., 2023). These East Asian countries used the flatted factory model to maximise land use and increase productivity.
The Indian government is trying to replicate the manufacturing sector miracles of China and other East Asian economies. It is estimated that India will need a 16-fold increase in manufacturing to achieve its goal of ‘Viksit Bharat’ in 2047. One way to accomplish this goal is by encouraging flatted factories that allow high-density manufacturing in urban areas, as seen in East Asian economies. Such factories grow vertically on the same land, accommodating multiple light manufacturing units with shared amenities. Since 2018, several state governments have reinitiated schemes to set up flatted factories to encourage industrial growth.
However, building regulations in states lead to less than optimal land use for flatted factories. The magnitude of the problem becomes clearer when India’s regulatory framework for flatted factories is compared with international examples like Singapore. Parking, ground coverage, floor area ratio and setbacks for flatted factories in India are far more restrictive. Liberalising these regulations may encourage more flatted factories, contributing to India’s prosperity.
Flatted factories in India
In the 1960s, some state governments built multi-storied industrial units and leased them to light manufacturers (Meraqi, 2021). The leading states were Tamil Nadu, Maharashtra, and Delhi. Over the years, the model was not expanded by the states, nor did it see any significant private investment.
In recent years, there has been a renewed focus on flattened factory models in many Indian states to reduce the initial investment in setting up a manufacturing unit. In 2021,Uttar Pradesh introduced dedicated building regulations for flatted factories to encourage industrialisation. In the same year, Gujarat also decided to build flat factory complexes in industrial areas. Similarly, in 2023, Assam and Tamil Nadu decided to build flatted factory complexes. This time around, states are following a mixed model of flatted factory development. In addition to building flatted factories themselves, states are also trying to encourage private developers to build factory complexes.
Job benefits
One of the benefits of the flatted factory model is that it can create more jobs than conventional factories for a given amount of land. The job creation ability of flatted factories varies across Indian states due to the variation in building regulations applicable to such factories. The table below compares job creation potential on a standard plot in four Indian states through flatted factories.
As the table above shows, Telangana can generate 2.5x more jobs than Uttar Pradesh because Telangana has a liberalised policy for Floor Area Ratio (FAR), which allows a flatted factory to avail of unlimited FAR. Delhi can employ 27% more people than Uttar Pradesh, but its building regulations require investors to build 33% more floor space.
International comparison
More jobs (per sqm) are created in India’s flatted factories than in conventional factories. However, Indian states fall behind compared to other jurisdictions like Singapore, which has more than 7,000 flatted factories as opposed to Delhi’s seven. Singapore’s flatted factory (52 Serangoon North Ave 4) is an example of efficient land use. Built on a plot of 6,000 sqm, the factory has a usable floor space of 18,000 sqm spread over seven floors. A flatted factory in India on a similar plot looks very different.
The table below compares hypothetical flatted factories in four Indian states with Singapore’s 52 Serangoon North Ave 4. In this scenario, the building will have a maximum of 7 floors with 4 m as a floor height. Per worker, the space requirement will be 6.76 sqm. Parking will be provided in an underground basement. All building regulations, including Floor Area Ratio (FAR), ground coverage, setbacks, and parking, will comply with the state building code.
A similar factory in Telangana with unlimited FAR can create 14% more jobs than in Singapore but will require three additional floors (23% more usable floor space). The same factory in Punjab can create 9% fewer jobs than in Singapore but would require roughly one additional floor to achieve the same usable space.
Fewer jobs in flatted factories in India: an explanation
What explains the difference between Singapore and Indian states? Flatted factories' low employment generation capacity is due to the restrictive building standards. India’s building regulations force investors to leave land/floor space unused. Flatted factories are supposed to be vertical. Regulations limit this vertical growth by limiting the FAR. Uttar Pradesh allows a flatted factory to avail 1.5 FAR, while Punjab allows 3 FAR. On the other hand, Punjab has more stringent parking requirements (2 cars/100 sqm) than Uttar Pradesh (1 car/100 sqm). In Delhi, an investor will have to leave 70% of the land vacant due to the state's restriction on the ground coverage. Telangana allows flatted factories to avail themselves of unlimited FAR, in theory. However, factories in Telangana lost land to another regulation–setbacks that reduced usable land. Consequently, factories in Telangana have to build more floors to get the same floor space as Singapore factories, increasing construction costs.
India’s restrictive regulations in these five areas translate into a loss of economic opportunities and jobs not created. The table below compares job loss due to various standards in Indian states with Singapore.
A flatted factory in Punjab will need a total built space of 29,592 sqm to achieve a usable floor space of 18,000 sqm (64% more). This additional space construction is required to service the parking requirement mandate of the regulation. In Uttar Pradesh, the difference is 2,700 sqm (30%) due to lower parking requirements. In Singapore, only 7% of additional construction is required due to rationalised building regulations.
A flatted factory in India can generate fewer jobs than Singapore (1,331 - 3,276 jobs), barring the state of Telangana. This lower job generation capacity is further impacted by building regulations, leading to a much higher space construction than in Singapore. A factory in Delhi will generate 1,598 potential jobs (45% fewer than in Singapore) but will require the construction of 11.56 sqm of built space per worker (75% higher than in Singapore). The reduced employment in Delhi is attributable primarily to two building regulations: ground coverage and parking, which lead to increased construction costs and lost floor space.
Punjab generates more jobs with flatted factories than Delhi and Uttar Pradesh. This is due to the higher FAR available for such factories in the state. However, Punjab lags Singapore in potential jobs by 9%. Punjab also mandates higher parking requirements, leading to the construction of 11,592 sqm of basements to accommodate parking, which is nine times higher than what Singapore requires. A cumulative impact of building regulations in Punjab forces an investor to construct 11.11 sqm to provide one job against 6.6 sqm, 40% more than Singapore. This difference translates into higher initial costs in setting up a flatted factory in Punjab.
Telangana generates the most number of jobs with flatted factories. A flatted factory can potentially generate 3,276 jobs, 50% higher than Delhi. This is because Telangana has a liberalised FAR policy and lower parking requirements. When compared to Singapore, Telangana can generate 12% more jobs. However, this 12% increase in jobs comes at a significant increase in the cost of construction. A flatted factory must construct 9,599 sqm of additional floor space spread over three additional floors, roughly 33% more than Singapore, to generate 12% additional jobs.
Uttar Pradesh is the most restrictive of the five states studied and can generate roughly a third of what Telangana allows. A flatted factory can generate 1,331 jobs, the lowest across all Indian states. The state allows a flatted factory to avail FAR of up to 1.5 only. The lower FAR bars the vertical growth of flatted factories. Uttar Pradesh's parking mandates are 50% lower than other Indian states. The lower parking mandates lead to a significantly lower per-worker space of 8.79 sqm, which is still 25% higher than Singapore's but 24% lower than Delhi's.
Across Indian states, the cumulative impact of building regulations leads to a higher construction cost for a flatted factory in India compared to Singapore. If the construction cost of 1 sqm of built space is assumed to be Rs 1, the construction cost of the flatted factory in Singapore will be Rs 19,196. However, the same factory will cost Rs 29,592 in Punjab. A 35% increase in construction cost will still lead to fewer potential jobs (10% fewer jobs) in Punjab. These costs may be discouraging investments in flatted factories in India.
Way ahead
India can benefit from the growth of its manufacturing sector, and the government has recognised this fact. After a long break, governments have restarted initiatives for flatted factories, which enabled East Asian countries to ramp up light manufacturing. However, economic growth from flatted factories may be constrained by building regulations.
Indian states can promote economic efficiency and job creation through liberalisation of building standards. This requires an economic analysis of building regulations, weighing the benefits from regulations against the costs imposed on the economy and job creation. Some regulations may be required for safety and security. However, the higher density achieved in other jurisdictions points to opportunities for reform and easing the burden on businesses. Reforming building regulations for flatted factories may be a low-hanging fruit for India’s prosperity.
References
Liu, H., Lin, W., Liu, H., & Xiu, P. (2023). Industry’s going upstairs: The innovative usage of industrial land and evaluation of its economic effects. Economic Research-Ekonomska Istraživanja, 36(1), 1402–1419.
Meraqi. (2021). Multi-storied industrial complexes: Flatted factory & Ramp-up units (p. 10).
Oh, S. (2019). Hedonic analysis of factors affecting sales price of flatted factory units: Evidence from Korea. International Journal of Strategic Property Management, 23, 256–268.
Research Office. (2019). Industrial Buildings in Hong Kong. Legislative Council Secretariat.
Sabillon, C. (2015). Manufacturing, Technology, and Economic Growth (1st ed.). Routledge.
Shubho Roy and Shaunak Desai are researchers at Prosperiti.