Case – Greenlight Planet: Made in China OR Made in India

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Author – Romi Kher, Cornell University Co-Author – Deborah Streeter, Cornell University

 

CASE DESCRIPTION

This case has been designed for use in junior and senior level undergraduate courses in Social Entrepreneurship or Business Planning, since students in either course may pursue business ideas that include social objectives or focus on the “triple bottom line.”

CASE SYNOPSIS

In 2008, Greenlight Planet found itself making a critical manufacturing decision. The company had determined that the only affordable production opportunities for their solar-powered lanterns would be in Asia and began looking into cost and logistical details. Manufacturing in India, their target market, would lower transportation costs, avail them of tax breaks and provide the opportunity to create a grassroots movement. But the founders also discovered that Chinese manufacturers were financially competitive and allowed Greenlight Planet to consolidate their supply chain. What should the founders do and which country makes the most sense for the manufacturing decision?

INTRODUCTION

TJ Duane States Importance of Finding a Team That Complements You

Patrick Walsh faces a critical decision about where to manufacture the solar-powered lanterns that he successfully marketed during the incubation stages of Greenlight Planet, the company he founded in 2004. Pondering the issue, Patrick considers the option of manufacturing in China, which could turn out to be the most competitive option in terms of price. But his partner, Mayank Sekhsaria, favors India as a sensible place to begin assembling the product since his family’s business has had considerable success at contracting with factories there and has strong vendor relationships that could facilitate the process. Anish Thackar, the third partner, notes that since the product is sold in India, keeping the production process there will allow the entire management team be based in the same country and create domestic employment in India that could result in favorable treatment from the Central government. Patrick wants to focus on affordability, a crucial element for the ultra-poor consumers Greenlight Planet is targeting. But in this otherwise environmentally friendly industry of social entrepreneurs, he wonders whether the company will draw criticism for the carbon footprint associated with transporting goods from abroad, rather than using local production. The partners are now meeting to discuss their options and move forward with mass production. What should the team decide?

BACKGROUND

2004 – Early exposure to India

Lynn Calpeter States Importance of Getting Best People On Your Team

During his sophomore year at the University of Illinois, Patrick Walsh was exposed to Engineer Without Borders (EWB), an organization that Patrick today describes as “ostensibly a development NGO but excelling in giving sheltered Western engineering students some intimate experience with the challenges in the developing world.” He joined EWB and began working on an electrification project in rural India. The goal of the project was to install a vegetable oil powered generator that would bring electricity to the village for the very first time. While Patrick had read about international development issues at the base of the pyramid, this was his first opportunity to contribute in a meaningful way and he could not wait to move to India for the summer.

During the installation, Patrick discovered that the village school, which was only half a kilometer away from the generator, could not be connected to the grid because the power lines would not reach that far. The villagers did not seem bothered by leaving the school off the grid as the children only attended class during the day, in plenty of sunlight. The team finished the installation and while the project was an overall success, the lack of electrification of the school really bothered Patrick. Spurred by his entrepreneurial spirit, Patrick began researching better alternatives that could offer superior performance at lower prices and more flexibility than the vegetable oil generators he was working with. He also wondered if he could improve upon the traditional kerosene lamps used in Indian villages and offer an alternative that could be cheaper and environmentally friendly.

Having worked semi-autonomously to solve problems with EWB and having dealt with various technical, financial, and political challenges, Patrick quickly learned to maximize his limited experience and resources. Thinking about the problems associated with the usage of kerosene lamps, Patrick hypothesized that solar power could be a viable alternative. After some initial research, Patrick discovered that in the U.S., solar-powered LED’s were being used to light home gardens. He reasoned that such a technology could offer a cheaper and environmentally better option for the Indian villager as compared to the biofuel-based systems his team had installed. Patrick decided he would focus on solar solutions and thus, the first seeds for Greenlight Planet were planted.

2005 – Learning about the market

Following the initial project, Patrick was scheduled to spend the following summer in India working on various electrification projects as part of his commitments with Engineers Without Borders. Although the projects themselves focused on using biofuel-powered devices, Patrick decided he could also use this opportunity to pilot, on a small scale, his plans for using solar lanterns as a relatively inexpensive and environmentally friendly light source. Since he had no experience designing solar lanterns himself, Patrick went online to look for existing solutions and found a Chinese solar lantern that fit most of the necessary attributes. He purchased the solar device and took it with him to India and Argentina, in order to test it in under real conditions in the field and solicit feedback from the villagers. It was not surprising that the concept of the solar lantern was well received in India, given the relatively high cost of fueling the kerosene lanterns that were pervasive in the areas Patrick visited. The solar-powered devices not only were a better and cheaper alternative to kerosene, but they also allowed individuals to light areas selectively to suit specific purposes. Three other things became obvious to Patrick as he worked on the various biofuel electrification projects in India:

  • While biofuel powered generators were useful, they would never be scalable to the levels needed to support entire villages, due to cost factors and technological restrictions.
  • In contrast, solar lanterns did not have scale restrictions. Furthermore, since villagers were used to paying for kerosene to fuel their lamps, it made intuitive sense that they would be willing to pay for a substitute product if it served their needs better and if the lantern was a quality build.
  • Government approaches to village electrification lacked focus and on a national level, India lacked a coherent and integrated strategy.

Armed with this knowledge, Patrick returned to the University of Illinois and began working with a variety of people on design ideas for a solar lantern that would be sold commercially. His primary goal was to create an efficient and cost-effective lantern, using materials easily available in India, his target market.

2006 – Market Validation

2006 turned out to be a notable year for founder Patrick and Greenlight Planet. In January, Patrick received a grant for $10,000 from the EPA and a $17,000 grant from the National Collegiate Inventors and Innovators Alliance (NCIIA) that asked him to build prototype lanterns and test them in India. The grants required Patrick to demo his idea and determine demand. Armed with materials for 100 rudimentary prototypes, Patrick headed off to India during his winter break to build the first batch of lanterns and conduct market trials in the state of Orissa. The trials could not have gone any better for Patrick.

At the end of the very first demo, the translator turned to Patrick and told him that the villager wanted to know if the lantern was for sale. Patrick was shocked! The prototype was basic in design and unpolished. Patrick was even unsure if he could sell his prototypes while carrying out the terms of the grants, which specifically related to testing the technology. Each demo brought another request to buy the device and the overwhelming positive response to his lantern amazed Patrick. While he had hypothesized that there would be some demand for solar lanterns, he was caught off guard at how desperate the villagers were for a cheap and clean source of light. He quickly contacted the U.S. grant administrators for clarification about whether he could in fact sell the lanterns while carrying out the grant responsibilities. Both administrators said yes and by the end of his trip, Patrick was already in business. He returned to the U.S. encouraged with the validation and determined to begin building a serious company while staying in school to finish his degree.

2007 – Partners Onboard

A notable development in 2007 was the addition of Mayank Sekhsaria and Anish Thackar as dedicated partners in the Geenlight Planet endeavor. While working with various students and researchers at the University of Illinois, it became apparent to Patrick that not everyone working on the project had the commitment and dedication that was required to turn

this project into a sustainable and financially viable business. However, in watching students move through this revolving door of talent, Patrick noted that Mayank and Anish stayed involved with the project. He knew to succeed he would need additional manpower and he invited the two students to join the business.

With his partners formally on board and buoyed by the overwhelming response to his market trials, Patrick finalized his prototype in the University labs, funding his efforts by applying for other grants and entering business plan competitions. His time at EWB had taught him that everyone from the local community, to the university, to private foundations, to the federal government had funding sources applicable for student projects, and since theirs fit into various niches (green engineering, poverty reduction, student startup companies, etc.), they began applying for grants and other competitions. They were so successful in raising money that by graduation, the team had amassed $100,000 is seed financing. This fundraising delayed the need for outside investors until after a more complete proof-of-concept could be prepared.

 

THE DECISION

Two points of view

Danny Stein Discusses Personal Qualities of Entrepreneurs

With $100,000 raised and his partners on board, Patrick and his team know they have to make a manufacturing decision soon. Research has convinced the entire team that using U.S. suppliers would be too expensive, so they have all agreed that the lanterns would have to be manufactured somewhere in Asia to be cost effective. The three partners are now ready to present their respective views and make a decision so they can proceed with production.

Patrick has located component manufacturers and assemblers in China and believes that manufacturing in China makes the most sense. Mayank and Anish, on the other hand, favor manufacturing in India, based on their experiences and contacts there. Specifically, Mayank argues that his family can use its personal business contacts and experiences with factories in India to connect Greenlight Planet to a favorable situation.

Case for production in India 

Anish and Mayank make the case for manufacturing in India by pointing out that India provides a one-country solution for Greenlight Planet. The lanterns can be assembled and sold in India, eliminating many shipping and import tax issues that would arise if the lanterns were made in China and then shipped to the market in India.

Additionally, the carbon footprint of manufacturing in China and shipping to India is higher as compared to keeping the supply chain integrated within India. The state Government of Orissa is also willing to provide some tax incentives if Greenlight Planet establishes a manufacturing facility and creates local jobs. Finally, they both point out that Mayank’s family has an established list of contacts that can be leveraged.

Patrick agrees that the above are good reasons but reminds his partners that it will be unavoidable to import at least some of the components from China, since not all of them are available in India. Thus, it is not possible to keep the supply chain completely contained within one country.

Case for production in China

Patrick then makes the case for production in China by pointing out that based on his conversations with Chinese suppliers; it is possible to select component manufacturers and assemblers that can offer a more streamlined solution. He also reminds them that Chinese electronics factories may have more evolved quality-control processes than Indian ones, making it easier to produce to particular specifications. Finally, on a costs basis, it appears that the product would be less expensive, on an ex-factory basis, if manufactured in China.

Cost considerations

Patrick expects to manufacture the lantern for about $9 total cost in China (see Table 1) and considers the following financial information. Shipping is accounted for and Indian import duties will be 10% for the complete product. Additionally, freight and customs brokerage charges would amount to roughly $0.20 per unit if the finished product is shipped from China.

Table 1: Components and Assembly Costs in China
Component Price FOB Shenzhen
Solar $2.45
Battery $1.80
LED’s $0.75
Casing and Circuit $2.75
Final Assembly $1.30
Total $8.85

Indian customs duties vary depending on whether the whole product is imported in a finished state, or individual materials are imported separately. Table 2 outlines Indian import duties for various renewable energy products.

Table 2: Components and Import Duties (* denotes a special government promoted rate)
Component Import Duty
Finished renewable energy product (eg: complete solar lantern)  10%*
 Solar panels by themselves  5%*
 LEDs  20%*
 Other components  32%

The team must decide whether to import the complete finished product, or alternatively to import only certain components and assemble the finished product in India. In this latter case, the solar panel, casing, and circuit would be imported, while the other components would be sourced locally. This latter option would reduce freight cost by $0.08 and would save $0.20 on assembly.

Both Anish and Mayank agree that affordability is critical for success for Greenlight Planet but are concerned that none of the three partners have reliable contacts in China. Locating in China also leads to management and business development challenges. As Patrick and Mayank go back and forth, Anish steps in and says “Do we really know whether China is a cheaper alternative to India? Let’s go over the numbers again before we decide which one of us relocates to Shenzen”.

QUESTIONS FOR DISCUSSION

  1. Based on your financial analysis, which production destination offers Greenlight Planet the most cost effective option? (back of the envelope analysis is fine)
  2. Besides cost considerations, what other factors should come into play in making the decision?
  3. Where do you think Greenlight Planet should manufacture its solar lanterns? Why?

NOTES FOR TEACHING CASE

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