Ready-Built Factories in Vietnam: Key Selection Criteria
Ready-built factories are a popular option for foreign firms looking to establish a presence in Vietnam quickly. In this article, we run through key selection criteria and how they compare to more traditional options.
Ready-built factories (RBFs) are increasingly becoming a popular choice in Vietnam’s industrial real estate market. Equipped with all the essential infrastructure, they offer a swift and efficient solution for companies seeking to set up their operations in Vietnam. This article delves into the growing prevalence of RBFs in Vietnam and examines the critical factors that firms should take into account when determining whether an RBF is the right choice for their needs.
Why RBFs are popular
Fast and cost-effective
For both cost and time, in comparison with the long process of acquiring land and building a factory, choosing RBF within an industrial park (IP) may be a better option. Investors do not need to worry about delays or the extra costs associated but can rather focus on recruitment and fitting out the premises to reduce the time between establishment and operation.
With RBF projects, investors do not have to make a substantial upfront payment. Instead, RBF payment terms are usually quarterly or monthly. This can ease cashflow challenges for investors.
Easier to scale-up
RBFs offer flexibility in scaling up. Investors can start by selecting one unit and then merge adjacent units as their business grows. Furthermore, since these factories are all equipped with the same infrastructure, such as electricity, water, and waste treatment systems, the expansion process is likely to be easier.
This strategy is often preferable for SMEs and businesses when first entering the Vietnam market. This gives them the time they need to stabilize their operation and cash flow before taking the next step towards expansion at optimal costs.
Simplified legal procedures
Handling legal matters in the context of long-term land leases can be considerably complex due to the need for multiple license registrations to obtain approval for business operations. These requirements typically include securing land-use right certificates, obtaining construction permits, developing environmental protection plans (EPP), preparing environmental impact assessment reports (EIAR), and registering fire protection measures.
Conversely, the legal complexities associated with land issues at the outset are typically managed by RBF developers. This alleviates a significant burden for investors, and, in some cases, RBF developers also extend their support by providing legal services to facilitate a seamless entry into the Vietnam market.
There is often less hassle for companies with respect to keeping track of management and operational activities for their RBFs with these tasks usually handled by the developer. As a result, there are fewer worries for investors who can instead focus on more important production activities.
Key selection criteria
Regional development orientation
Different regions in Vietnam are better equipped for different industries. For example, the northern region is popular with electronics, automotive, and renewable energy manufacturing projects. On the other hand, the central region is more popular among food processors, heavy industries, and oil and gas. Meanwhile, sectors like plastics and rubber, garments and textiles, are generally more common in the southern region.
Proximity to transportation infrastructure
Easy access to ports, airports, and highways is of the utmost importance to investors when choosing an RBF. Reducing shipping, freight, and logistics costs can ensure their products enter the market at a lower price point or at a higher profit margin. This also applies to their raw materials supply chains.
Access to labor
Access to an abundant labor supply offers enormous advantages for investors. It usually takes roughly two to three months for companies to recruit a sufficient supply of skilled labor; however, choosing a location near an abundant labor supply can reduce the time and effort it takes to recruit and subsequently reduce hiring costs.
Data from the Business Intelligence team at Dezan Shira & Associates shows that rental costs per square meter for RBFs vary across regions.
- Northern region: US$3.7 to US$6 sqm/month
- Central region: US$2.5 to US$4 sqm/month
- Southern region: US$3.0 to US$6 sqm/month
Investors should also note that the minimum leasing period for RBFs is commonly three years with rent increase applied yearly or at the completion of the three-year lease.
These fees cover a range of services, such as security, and maintenance services, to ensure the smooth operation of an RBF. Policies regarding these fees vary between developers. Some RBF developers include management fees in the rental fees whereas others do not. Therefore, before leasing an RBF, it is recommended investors thoroughly review the lease agreement and clarify whether management fees are included and which services are covered.
As for electricity costs, investors usually pay monthly and directly to Vietnam Electricity Corporation (EVN) using Vietnamese Dong. Whether a surcharge is applied depends on the developer’s policy. Meanwhile, a wastewater processing fee is calculated based on 80 percent of the freshwater supply input. Investors must ensure that all wastewater released from their factories meets “Class B” standards, per the National Technical Regulations on Industrial Wastewater QCVN 40:2011/BTNMT. Telecommunications are also the responsibility of the leasee.
There is usually one small area in the factory designated as an office. This can be important for businesses in order to reduce the cost of renting additional offices and to avoid wasting time traveling back and forth between the factory and the office. Some factories may come with additional office space for meeting rooms and product support services.
Floor load refers to the weight that the factory floor can support. It is usually measured in tons per square meter (tons/m2) in Vietnam. This is crucial for manufacturers that use heavy machinery. As a reference point, textile factories usually have a floor load of 3 tons/m2.
A typical industrial factory electrical system will include four components: a medium voltage system supplying power to the main transformer, an electrical distribution cabinet system, an industrial equipment electrical cabinet system, and an industrial equipment system in the factory. However, due to different requirements for different manufacturers, it is recommended businesses carefully check with the developers whether the selected RBF’s electrical system will suit their needs.
Fire safety system
Fire safety in RBFs in Vietnam is governed by the National Technical Regulation QCVN 06:2022/BXD on Fire Safety for Building and Constructions, in which RBFs are classified under ‘industrial buildings’. As a result, to comply with the provisions given in these regulations, developers must provide fire-fighting and prevention tools: fire extinguishers, fire alarm systems, sprinklers, and more for their factories to be able to operate.
However, with 12 groups of equipment on the list of fire prevention and fighting equipment in Vietnam, investors are advised to clarify with developers during their site visit regarding available equipment and their specifications.
Security systems are important for protecting a firm’s equipment and staff. Some commonly requested features include:
- 24/7 security guard;
- CCTV surveillance; and
- Security booths and fencing.
Some RBFs will come with these features, however, at others, they may need to be requested.
Ventilation and air conditioning
Air conditioners (AC) are typically used in offices, whereas ventilation fans are employed in production areas. A decent ventilation system can also prevent the build-up of air pollution within the factory and may reduce the chances of fire.
Other considerations in facilities
To attract more investors, there is a tendency among developers to add additional amenities to enhance their competitiveness by including parking spaces and sometimes room for a canteen.
Furthermore, firms should remember to check for access to mobile loading docks/levelers compressed air systems, and any other non-permanent equipment they might need.
Tax incentives and other preferential policies
Following Law 32/2013/QH13, since January 2014, the CIT rate of below 20 percent has been applied, in which there are three preferential rates: 10 percent, 15 percent, and 17 percent. The pre-defined period for these preferential rates depends on the sectors and types of projects mentioned in the aforementioned law.
Other preferential policies
Developers also often provide a variety of other incentives like discounts and additional services like recruitment or legal support. These policies can be negotiated with developers and should be brought up during the site selection process.
Choosing a suitable RBF requires careful consideration of various factors. With the right selection criteria in place, businesses can take advantage of the benefits of RBFs and enjoy an easier, more cost-effective market entry. In this light, as Vietnam continues to attract greater foreign direct investment (FDI), the potential for RBFs to take on a bigger role in the greater industrial property landscape is only likely to grow,
For support deciding on the best market-entry option for your firm, contact the location selection experts at Dezan Shira and Associates.
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Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region. We maintain offices in Hanoi and Ho Chi Minh City, as well as throughout China, South-East Asia, India, and Russia. For assistance with investments into Vietnam please contact us at email@example.com or visit us at www.dezshira.com
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