Category Archives: Global Trade

GSP going away January 1, 2011

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous contributions are still archived.)

The U.S. Congress recessed without passing the legislation required to
continue the GSP program beyond January 1, 2011.

You do know what the GSP program is, don’t you? If not, you might
consider acquiring some training. It’s a program called the Generalized System of Preferences (guide) under which imports from about 135 developing countries have been given duty free treatment by the US. Due to congressional inaction, US importers will now be facing higher duties on many goods. Goods that were now eligible for duty free treatment will jump to the level that would be paid for goods from developed countries starting January 1st. Among the 135 countries, the most notable are India, Thailand, Turkey, Indonesia and the Philippines. There is probably a lot of material already in the pipeline.

This is the third time within my memory that this has happened. The last two times, Congress passed enabling legislation quickly after returning from recess. The made the legislation retroactive so people who paid high duties got them refunded. However, the next Congress is a bit unpredictable, with a lot of new members who are likely to be
anti-import. Stay tuned.

Dick Locke, Global Procurement Group and Global Supply Training.

The 9 Cs of Site Selection

A couple of weeks ago I penned a post on Finding the Right Site where I discussed a recent article in Strategy + Business on five factors for finding the right site and noted that I thought there were at least six critical factors. It wasn’t long before Dick Locke corrected me and upped the count to seven. However, after reading this recent article in Global Services on “Location Selection Best Practices”, I am now convinced that there are 9 Cs of site selection.

In addition to the five Cs, outlined in the Strategy + Business article, of:

  • Cost
    What is the total cost of the location, including the costs of land, office equipment, communications, wages, training, taxes, infrastructure, and wages. etc.
  • Capacity
    What is the current availability of talent in the region and the expected availability in years to come? etc.
  • Capability
    What percentage of the talent has the specific engineering skills that the company needs (and/or can be easily trained to acquire those skills) and how easy will it be to find the talent to build and maintain the appropriate operational environments? etc.
  • Communications
    What will be the ability to seamlessly share information between the site and headquarters without cultural, language, or distance obstacles? etc.
  • Culture
    What is the ability of the location to attract talent that will fit in with the company culture? etc.

And the two additional Cs identified by myself and Dick Locke of:

  • Competition
    How many similar companies are setting up in the region? etc.
  • Citizenship
    What is the marketing impact of the location? Are you going to participate in the local economy? etc.

I now believe the following two factors are equally important:

  • Core
    Is the core infrastructure sufficient for your operations? Chances are that you’re going to need a lot of power and water. Can the infrastructure handle it, or is it already at capacity? If the operation can’t go down, are redundant power, water, and/or communications feeds available? You can’t always wait for the infrastructure to catch up.
  • Call
    An extended site visit is absolutely essential before you make a long-term commitment to a new location. A 2-day fly-by to sign the papers and celebrate is not enough to make a selection. The location has to be surveyed, the talent pool has to be evaluated on the ground, and the local living conditions have to be experienced. Someone has to spend at least a few weeks, if not a few months, evaluating the ins and outs, ups and downs, and pros of cons of any location on the short list before a final decision is made. And unless this factor gets its own category, and weighting, it won’t be done and “gotchas” will go undetected.

Selecting the wrong site will cost you tens, if not hundreds, of millions, so take your time and use the 9 Cs to select the right one.

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If Basel II Crippled Trade Finance, Will Basel III Stifle It?

Last year we discussed how Basel II is crippling trade finance, but it looks like the worst might be yet to come. According to some reviewers, Basel III, the forthcoming update to the Basel Accords, might stifle it.

As per this recent article in the Financial Times, the top 35 banks will face a $100 Billion Basel III shortfall in equity capital after the new regulations are imposed, with 90% of the shortfall concentrated in the biggest six banks. Barclays Capital estimates that the banks will need to hold top-quality capital equal to 8% of their total assets.

Not only will the Basel III reforms force banks to increase the risk adjustment for big swathes of their business, but it will gradually tighten the definition of what counts as tier one capital, putting many of the US banks who are already on shaky ground on top of a fault line. This could force banks to curb lending to the real economy or raise borrowing costs.

Plus, as described in this post over on the Reuters blogs, when credit in an economy is growing faster than the economy itself, a countercyclical capital buffer kicks in, which essentially says that banks need to have more capital in good times. So, instead of the 7% common equity, 8.5% Tier 1 capital, and 10.5% Tier 2 capital, the banks will need 9.5% common equity, 11% Tier 1 capital, and 13% Tier 2 capital.

And that’s just the beginning. In 2015, the liquidity coverage ratio gets introduced and then the net stable funding ratio arrives in 2018. And the committee is reviewing the need for additional capital, liquidity, or other supervisory measures to reduce the externalities created by systemically important institutions.

While stronger measures are obviously needed, as the economy cannot afford another Bear Stearns, if it’s too much, too fast, will the banks be able to handle it?

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Life Lessons from Clown College: II

   

First of all, let me apologize for taking so long to write Part II. I never expected such an overwhelmingly positive response to my previous posts, and it went to my head, and like a writer who wins a National Book Critics Circle Award for their first novel, I developed a severe case of writer’s block because the last thing I want to do is disappoint you. But thanks to some prodding, and the realization that I don’t have to tackle it all at once, I was able to capture three more life lessons that I learned in clown college that I’m sure will help you in your Procurement Career.

  • Learn to Barter (because it’s all funny money in the end)
    Not all purchases should involve exchanges of currency for goods or services. When possible, and especially when the deal is with a strategic supplier or partner, an exchange of goods or services should be considered. For example, if you’re a temporary labor placement agency buying software from a foreign IT company that needs temporary labor in your home country, consider an exchange of services in lieu of paying for support or future upgrades. Not only will this reduce cash-flow requirements in a tight economy, but it protects you from currency exchange risks in countries with unstable currencies undergoing fairly rapid inflation or deflation.
  • Be Cognizant of the Risks
    Those of you who don’t might end up without a job just like Fred ended up without a head. I didn’t know No-Head Fred, but, thanks to him, my entire class knew why you didn’t stick your head in the mouth of a hungry lion who didn’t like you. Fred didn’t understand that a lion could bite your head off and, as a result, didn’t insure that the lion was fed before performing the stick-your-head-in-the-lion’s-mouth trick. However, since the rest of us understood the risk, we always insured that the lion was fed and happy before performing the trick, and we all kept our head. Now that trade is truly global, this is one of the most important lessons for a Procurement Professional. If you’re not cognizant of the risks, you’ll never know when you might lose an entire shipment, or, if you’re not careful, your life. While a short-cut off the coast of Somalia in a shipment from Mumbai to Adan (for example) might seem like a good idea at the time, it won’t seem like such a good idea when Pirates are boarding you. North of Seoul might be the last place you want to build a new plant if North Korea declares war on South Korea. I know the risks aren’t always this big, but they can be, and if you’re not cognizant of them (and do not take the necessary precautions), you could lose your head over them.
  • Don’t Be Afraid to Laugh at Yourself
    Just like the situation gets a little tense in the dressing room when you have a poorly-timed wardrobe malfunction, negotiations in challenging economic times can get so dire that you couldn’t even cut the tension with a knife. In these situations, the only way to break the tension-ice is with a good hearty laugh, but no one is going to laugh unless you laugh at yourself first. In the first situation, the only thing you can do is look down and let out the heartiest laugh you can. In the second, you’ll have to make a slip of the tongue that’s so funny that you can’t help but laugh heartily at yourself. For example, if you were buying ball bearings and you accidentally called them bears’ balls, I’m sure laughter would break out.

I hope you enjoyed these life lessons. Until next time, please join me and eleven of my friends as we take a ride in our clown car.

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Another Headline From the Land of D’OH: Going Global Means Expecting the Unexpected

I have to say that I never expected our next headline from the land of D’oh! to come from Knowledge@Wharton, but I guess that this is just more proof that the unexpected can happen when you go global! But seriously, who didn’t know this? It’s 2010, and everyone knows that every country is different. Different cultures. Different political systems. Different goals. And no matter how much you think you know about another culture or country from reading a book or taking a course, there’s always going to be something you don’t know. After all, there’s lots about your own country you don’t know. For example, for those of you in the US, how many titles in the US code and which ones would impact you if you changed your product line?

And now that national security is becoming a prominent issue in many countries, it only stands to reason that the complexity of doing international business is only going to increase, and that the unexpected is going to become more common. This is especially true in information technology, as information can have political ramifications, and telecommunications, which transmit information, as these are both high-growth industries and there’s a lot of money at stake.

Furthermore, when companies offer products or services that can be used for, or to compromise, national security, there’s a chance there’s a good chance that it can put them in conflict with local governments. So what should they do? According to the article, these companies should put crisis management in place. Because a crisis is almost as inevitable as a supply chain disruption, and we all know that the black swan is coming.

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