Characteristics and Considerations of Vietnam M&A by Industry: Part 6 – Manufacturing
2025/06/01
- I-GLOCAL CO., LTD. Hanoi Office
- Certified Public Accountant of Japan
- Shuya Kondo
Introduction
This article explains important points to note regarding manufacturing industry M&A as the sixth installment in the series.
Vietnam’s real GDP growth rate in fiscal year 2024 was 7.09%, with the manufacturing sector showing a high growth rate of 9.83%, indicating that it is driving the Vietnamese economy. Exports in fiscal year 2024 increased by 14.3% year-on-year to 405.5 billion dollars, and moreover, production shifts from China to Vietnam are progressing due to U.S. tariff policies against China and rising labor costs in China. The manufacturing industry in Vietnam is expected to continue expanding, making it an attractive investment destination for foreign companies.
I hope this paper will be helpful for companies considering M&A in the Vietnamese manufacturing industry.
1. Analysis of the Vietnamese Manufacturing Industry
・Major Industries
Although there are various industrial sectors within manufacturing, the electronics components sector, including semiconductors, is particularly thriving. The export value of products related to this sector in fiscal year 2024 is approximately 126.5 billion US dollars, accounting for about 30% of total exports. This is because major companies such as Samsung Electronics and LG Electronics are expanding their production in Vietnam, and related suppliers are also rapidly entering the Vietnamese market. However, due to the effects of the so-called Trump tariffs, there is a possibility that some companies may reduce their production scale, so it is necessary to pay attention to future trends.
・Status of industrial agglomeration by region
Various industries are scattered throughout Vietnam, but roughly speaking, the north is known for electronics, automobiles, and precision machinery; the central region for garment manufacturing and food processing (particularly seafood); and the south, as the economic center, has a concentration of food processing for domestic demand, light industry, daily necessities manufacturing, and various other industries.
・Status of Foreign Companies’ Entry
In the 2024 fiscal year’s ranking of FDI investment amounts by country (manufacturing industry), Singapore is ranked first with approximately 10.2 billion dollars, followed by South Korea in second place with about 7 billion dollars. China and Hong Kong follow next, with Japan ranking fifth at approximately 5 billion dollars.
The number of local manufacturers accounts for approximately 80% of all manufacturers based in Vietnam, which is overwhelmingly more than foreign companies. However, in terms of sales, foreign companies have a larger scale, accounting for more than 50% of the total in Vietnam, and foreign companies also account for about 70% of total exports.
2. Points to Note Regarding the Business and Future Prospects of the Target Company
Below are the basic items to be noted when considering an acquisition.
・Labor Costs
At present, labor costs in Vietnam are lower than in China, and there is still a cost advantage. However, labor costs have been rising every year, and there is a possibility that we may not be able to enjoy the expected benefits in the future. We would like you to make decisions taking into account not only cost reductions but also other synergies.
・Regarding the sales growth after the acquisition.
In B2B manufacturing, many business partners and suppliers have long-term contracts, and it is not uncommon for these relationships to depend on a personal trust with the owner of the target company. It is recommended to confirm whether the relationship with customers is based on the appeal and price of the product or on personal relationships with the owner, and to consider the risk of losing connections with clients when the owner changes after acquisition.
In the case of B2C, adapting to the cultural customs, preferences, and trends of Vietnamese consumers is the key to sales growth. Therefore, even after the acquisition, it is recommended to maintain and build the sales system by retaining key Vietnamese personnel familiar with local circumstances and hiring new staff.
・Regarding the region:
Although companies located in well-situated industrial parks near metropolitan areas are often acquisition targets, from a policy standpoint, since extensions of industrial parks are not permitted and there are cases where relocation to suburbs is being forced, it is recommended to consider the possibility of continuing production on the given land at the time of acquisition. In addition, local manufacturing industries often find it difficult to hire additional workers due to population outflow, making production expansion challenging, or may face increased employment costs. Furthermore, there are cases where large factories operate nearby, causing workers to leave, so it is necessary to carefully consider the region of the target company.
3. Points to note regarding structuring
・Regarding foreign investment regulations
Most products are open to foreign capital, and except for some products (such as medical X-ray devices, chemical substances classified as explosives or toxic substances), 100% foreign ownership is possible.
・Regarding the investment scheme
While it is common to invest directly in the target company, another scheme is to establish a new company as a vehicle and transfer the main assets, machinery and equipment, contracts with customers, etc. to this new company. This method is sometimes adopted for purposes such as avoiding significant compliance violations and tax risks. Also, while factories of the target company in Vietnam may be established as branches based on the form of location (for example, the headquarters with head office functions is in Ho Chi Minh City, and multiple factories are set up as branches in neighboring areas such as Dong Nai Province and Binh Duong Province near Ho Chi Minh City), branches do not have a corporate legal entity, so they cannot be directly acquired. In cases like this, when acquiring only specific factories, the option of establishing a new company becomes viable.
・Regarding the acquisition of companies inside and outside industrial parks
Companies within the industrial park sometimes receive support from the industrial park itself for ownership transfer procedures. Utility systems such as wastewater treatment are also well-developed, and since the land usage rights have been lawfully acquired or leased by the industrial park, there is little need to worry about legal risks after acquisition.
On the other hand, for locations outside the industrial park, there are cases where land usage rights or buildings were obtained without proper procedures in the past, and such past deficiencies may be pointed out during ownership transfer procedures in M&A, posing a risk of complications in the process. Also, drainage treatment facilities are often not properly maintained, which may result in the authorities pointing out violations of related laws and regulations after acquisition. As a fundamental policy of Vietnam, it can be seen that operation of manufacturers outside industrial parks is not actively encouraged, so when considering M&A of manufacturers outside industrial parks, it is recommended to thoroughly verify and consult with local consulting firms knowledgeable about various procedures in the target area.
4. Major Issues in Due Diligence (DD)
In due diligence for manufacturing industries, the following specific issues can be considered.
・Double bookkeeping and fictitious recording of raw material purchases and inventory
Cases have been observed where invoices are falsified in collusion with suppliers, and fictitious purchases are recorded in tax accounting books. There are also cases where the amounts of actual purchases are inflated in the records (e.g., recording a purchase of 100 as 150).
In such cases, fictitious materials (inventory) will also be recorded incidentally, and to resolve this, they are allocated to another fictitious work-in-process project, leading to a chain of fictitious transactions. It is necessary to carefully verify during due diligence whether such transactions have been conducted.
・Circular transactions
As introduced in Chapter 3 “Wholesale” of this report, there are also cases in the manufacturing industry where the same inventory is circulated multiple times in a pattern like “target company → partner company A → partner company B → target company” to inflate sales. One possible reason could be to increase apparent sales in order to secure borrowing credit from the bank, but there are various reasons, so it is necessary to carefully check whether such transactions are taking place.
・Commission to client representatives
Sometimes, opaque payments are made to individual client representatives in order to secure contracts. In addition to the high likelihood that such payments constitute commercial bribery, they are key to maintaining customer relationships and securing contracts, making it practically difficult to stop them (stopping would significantly reduce sales), thus becoming an important issue. If such payments are discovered during due diligence, it is recommended to carefully and thoroughly verify the legality of the scheme and the potential for discontinuation in the future before closing.
・Regarding VAT refunds
Companies with a high ratio of exports sometimes record large amounts of unpaid VAT, but if there are deficiencies in the documents at the time of export sales, the VAT refund may be denied during tax audits at the time of refund. Since it can also affect cash flow after the acquisition, it is important to review the availability of necessary documents and evidence during due diligence.
・Environmental regulations
Regulations on drainage, exhaust, and waste disposal have been tightening year by year, and there are frequent cases where reports submitted to authorities differ from actual measurement values, leading to penalties (fines or suspension of factory operations) when discovered. Environmental compliance is linked to business continuity, so it is necessary to check it carefully.
In conclusion
The above provided an explanation of the points to note in M&A of manufacturing businesses in Vietnam.
In terms of foreign capital restrictions, the hurdles for M&A are low, and in fact, M&A by foreign capital is actively carried out. However, expanding sales channels after an acquisition relies heavily on relationships with local customers and suppliers, so it is necessary to confirm in advance whether the existing relationships can be maintained if the investors change after the acquisition. Additionally, there are companies that have been known to operate double books using fictitious purchase transactions, so caution is advised.
This article was translated by Yarakuzen.
