Working with EU Investors for Vietnamese Food Processing Firms & Vice Versa

Vietnamese food processing enterprises are reportedly looking for investors as a result of broad economic challenges. In this article, we run through what EU and Vietnamese firms should know about working with each other.

Food processing accounts for the bulk of the production value of Vietnam’s processing and manufacturing industry.

In fact, in 2020, despite the economic downturn inflicted by the Covid-19 epidemic, the growth rate of the industrial production index of food manufacturing and processing still reached 4.5 percent.

The sector has recently, however, faced a number of setbacks. Rising input costs, a shortage of capital, and slowing demand are all contributing to a challenging business environment. This has seen firms reaching out to foreign investors from markets like the EU, to help boost their bottom lines and ensure their operations moving forward.

In this article, we look at international agreements that govern cross-border trade and investment between Vietnam and the EU, how to comply with their requirements, and what is needed to find suitable investors.

EU-Vietnam Investment Protection Agreement (EVIPA)

The Investment Protection Agreement between the European Union and Vietnam (EVIPA) is the little brother of the European Union-Vietnam Free Trade Agreement (EVFTA). This agreement aims to create a solid investment environment in Vietnam to attract more investment from the EU. It aims to do this by establishing clear procedures for settling disputes between investors from either party.

Investment treatment

Fair and equal treatment for investors is the primary function of this agreement. A party can be said to have breached this agreement when its actions lead to one of the following:

• a refusal to hear criminal, civil, or administrative proceedings;
• a fundamental violation of fair judicial and administrative due process;
• discriminating against investors on non-commercial grounds such as gender, ethnicity or religious belief; or
• coercion, an abuse of power, or similar misconduct.

In the event that a party has a disagreement, the EVIPA also provides stipulations for dispute resolution.

Dispute resolution

When there is a dispute between parties, the parties shall endeavor to resolve it through open dialogue with the aim to reach a mutually agreed-on solution. One party shall submit a request for mediation in writing to the other party. This should clearly define the dispute and the relevant provisions of this agreement that have been breached.

If the parties are unable to resolve the dispute through consultation, the party that raised the dispute may suggest the parties move to more formal arbitration.

There are a number of mechanisms in place to do that for example the Permanent Court of Arbitration to which the EU and Vietnam are both a party.

For more information see: Settling Business Disputes: Commercial Arbitration in Vietnam

Key treaty regulations for food processing firms

The European Union-Vietnam Free Trade Agreement (EVFTA) came into force in August of 2020. This agreement will see tariffs on most goods traded between Vietnam and the EU reduced to zero by 2027. Aside from tariffs, however, the agreement provides rules of origin requirements that can impact food processing export operations.

Rules of origin

Rules of origin require that the bulk of goods for export are made within the economic jurisdiction of the parties involved. For example, there are limits on what percentage of the ingredients of a bottle of ketchup can come from other countries before it is no longer considered a product of the member state.

Goods are regarded as having EVFTA origin when falling into one of the two cases below.

Goods of pure origin

This category is for goods that are naturally formed in the territory of Vietnam or the EU (e.g. animals that are born and raised in Vietnam or the EU, fish that are caught by Vietnamese or EU fishing trawlers, or raw fruits or vegetables grown in Vietnam or the EU).

Goods that have undergone full processing

This case includes manufactured or processed goods formed from materials originating wholly or partly in the EU or Vietnam. In this situation, there are some key criteria firms need to be aware of.

• They must use clear commodity (HS) codes

This requires that the HS code of the finished product should be different from the HS code of any non-originating materials.

For example, the finished product, ketchup (HS code: 2103.10), is categorized under “Miscellaneous edible preparations”. However, the non-originating materials used in the production, such as imported tomatoes have a different HS code (0702.00), which belongs to the category “Edible vegetables and certain roots and tubers”.

• They must not exceed non-origin maximum rates

This limits the volume of materials from countries not party to the agreement that can be used in manufacturing or processing before the goods are no longer considered under the agreement.

For example, suppose a Vietnamese ketchup manufacturer operates under a trade agreement that sets a non-origin maximum rate of 15 percent for tomatoes. This means that if the non-originating tomatoes used in the production of the ketchup exceeds 15 percent of the total value of the tomatoes in the finished ketchup product, then it may not receive preferential tariffs.

• They have to be processed in a country party to the agreement

If the raw materials are not made in Vietnam or the EU then they must at least be processed within the boundaries of one party or the other in the agreement.

For example, if the tomatoes used in a bottle of ketchup are imported then the ketchup must be processed within Vietnam or the EU. This could involve activities such as sorting, washing, peeling, cooking, and blending the tomatoes to create the ketchup. Ergo, if the tomatoes come from China and the ketchup is made in Laos it cannot then be shipped to Vietnam to be shipped to the EU and receive the benefits of the EVFTA.

Certificates of Origin

In terms of goods exported from Vietnam:

• For shipments valued at lower than 6,000 euros (US$6,500), exporters can self-certify the origin of the goods; and
• For shipments valued at over 6,000 euros (US$6,500), an authority such as the Ministry of Industry and Trade or the Vietnam Chamber of Commerce and Industry (VCCI) can issue Certificates of Origin to the exporter after confirming the origin of the goods.

Examples of food products with rules of origin

Imported goods related to deforestation

To combat climate change and protect biodiversity, the EU requires that the production of goods for sale in the EU should not lead to deforestation and forest degradation.

Specifically, the EU’s regulation bans the import of agricultural products produced on land originating from deforestation or causing forest degradation after December 31, 2020.

Products impacted by this regulation include but are not limited to cattle, cocoa, coffee, palm oil, soybeans, fodder, leather, chocolate, furniture, and charcoal.

See also: EU Deforestation-free Regulations and Vietnam’s Exports

Overcoming differences in business management and communication

In order to get on well and have a sustained partnership with an EU investor, there are several cultural differences that Vietnamese firms should be aware of. These include:

Communication style: EU investors generally emphasize direct and explicit communication, with a focus on facts and logical arguments. Conversely, Vietnamese investors often value indirect and implicit communication, relying on non-verbal cues and contextual information.

Decision-making process: EU investors tend to follow a structured decision-making process, involving analysis, evaluation, and consultation with stakeholders. Vietnamese investors, on the other hand, prioritize consensus-building and decision-making based on hierarchical structures and seniority.

Negotiation styles: EU negotiators generally value a win-win approach and strive for objective criteria in negotiations. Vietnamese negotiators employ a more relationship-focused approach, emphasizing mutual trust and concessions as a way of avoiding conflict.

Examples of foreign-invested food firms in VN

The Vietnamese food processing industry has attracted a lot of attention from a range of foreign firms. Some examples are stated below.

Morinaga Milk Industry Corporation (Japan)

Morinaga Milk Industry Corporation is one of the leading dairy manufacturers in Japan. In 2021, Morinaga acquired the Elovi factory in Thai Nguyen and established Elovi Vietnam to manufacture and distribute milk and yogurt products. Most recently, it formed a joint stock company with Le May Production Trading Service Company to distribute milk formula for babies.

Daesang (Korea)

Daesang Group is a multinational corporation in Korea specializing in manufacturing and supplying products such as frozen food. Daesang Group decided to buy Duc Viet after thoroughly researching the meat processing industry in Vietnam. The deal was valued at US$32 million.

Where to meet investors

Networking and industry events

Industry conferences, trade shows, and networking events are a great way to meet investors. These events often attract investors, venture capitalists, and business professionals who are interested in investing in F&B businesses.

For example, Vietnam Foodtech is a comprehensive trade event held annually for the purpose of promoting and connecting domestic and foreign businesses in the fields of food and beverage, and related processing technology.

Professional services providers

Consult with professional services providers, such as investment advisors, consultants, and law firms that specialize in helping businesses attract foreign investment. These professionals often have extensive networks and can provide guidance on how to connect with potential investors in the F&B industry.

Government agencies and trade organizations

Contact relevant government agencies and trade organizations that promote foreign investment and trade. These entities often have resources and databases that can help you identify foreign investors interested in the F&B sector. For example, the European Chamber of Commerce (EUCHAM).

See also: How Our Business Matchmaking Services Can Help Your Vietnam Market Strategy

What needs to be prepared

Pitch deck: A visually appealing presentation that accompanies your investor pitch. The pitch deck should be concise, and engaging, and highlight the key aspects of your F&B business, such as the market opportunity, competitive advantage, financial performance, growth plans, and investment requirements.

Financial statements and accounting books: Historical financial statements, provide investors with a clear understanding of your F&B business’s financial performance over time. In addition, an accounting book may need to comply with international standards as opposed to VAS.

Intellectual property documentation: If you have intellectual property assets, such as patents, trademarks, or copyrights, prepare the relevant documentation to showcase the uniqueness and value of your intellectual property. This helps investors understand the proprietary aspects of your F&B business and its competitive advantage.

Legal and regulatory documentation: Gather all necessary legal and regulatory documents, including business licenses, permits, certificates of compliance, and any other documentation required for operating an F&B business in your target market. This demonstrates your commitment to legal and regulatory compliance and reduces potential risks for investors.

Next steps

The Vietnamese food processing industry has shown positive growth in the past few years. However, due to Covid-19 and the subsequent global economic downturn, many Vietnamese firms in this field have faced a number of problems that may require capital to resolve.

There are many things, however, that firms need to know when finding and working with EU investors, and vice versa regarding investment protections, free trade agreements, and cultural differences. In this vein, the complex world of cross-border investment in the food and beverage industry can best be navigated with good quality support and advice.

To learn more contact the business advisory experts at Dezan Shira and Associates.

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