Category Archives: Global Trade

Is China Starting to Clean Up its Act?

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

There’s an interesting discussion going on over on Spend Matters about whether or not China is manipulating its currency. Well, I think it’s interesting because I’m participating. I don’t believe pegging a currency to the US dollar meets a normal definition of “currency manipulation.” Your mileage may vary, of course. The discussion can be found in last Friday’s Rant on Spend Matters (Should We Rethink Free Trade).

One of the other participants brought up the issue of China’s poor environmental standards. That’s true, as has been true of all developing countries. Back in the late 60s, Tokyo was one of the more polluted cities on earth. Traffic police wore oxygen masks. Electronic signs in Ueno and other places posted the CO and CO2 levels in the air. By the mid 80s the place was pristine. No outside pressure was brought to bear. The Japanese just got fed up and fixed the problem. It usually takes some degree of economic development before this starts to happen.

I’ve always hoped the same thing would happen in China. It looks like it’s starting to happen. I’m glad, because China is too big for the environment to continue to accept their volume of pollution. Most importantly, it’s happening because of internal Chinese policies, not foreign pressure. Thomas Friedman has a column in today’s New York Times titled “The New Sputnik“. It’s about Red China becoming Green China. (You can read the opinion for yourself.) Friedman is less than totally optimistic, saying pollution is going to continue in parallel with development with solar and wind industries. He also points out that the US seems to be missing this market and most solar cells are coming from China already.

Dick Locke, Global Procurement Group and Global Supply Training.

Uh-oh … Looks like Chinese tire manufacturers are going to take a hit for health reform

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

In “U.S. Adds Punitive Tariffs on Chinese Tires” (NY Times), Edmund L. Andrews states that:

The tariff, which will start at 35 percent this month, is a victory for the United Steelworkers union, a crucial ally in President Obama’s health care overhaul.

and that

the decision signals the first time that the United States has invoked a special safeguard provision that was part of its agreement to support China’s entry into the World Trade Organization in 2001. Under that safeguard provision, American companies or workers harmed by imports from China can ask the government for protection simply by demonstrating that American producers have suffered a “market disruption” or a “surge” in imports from China.

It also looks like the Times has an editing problem. It’s not a punishment at all, unless you regard a penalty for mere success as punishment. The tariff isn’t connected to any misdeed by a Chinese company.

And the connection to health reform is rather tenuous. The union would continue to support reform even without this tariff.

At least this step is better thought out than former President Bush’s tariff on Chinese steel. That wasn’t connected to any misdeed either. Because the tariff applied to the steel only, and not to products containing the steel, it made it more efficient to build steel-containing products outside of the US. I don’t think this one will hurt the US car industry like the previous tariff hurt US steel fabricators.

It’s an unfortunate trend though. Rather than take the time to build a case against Chinese tire manufacturers on the normal grounds (dumping, safety violations, pollution) they took the lazy way out. There’s no way for the Chinese companies to defend themselves. The only response can be retaliation.

Dick Locke, Global Procurement Group and Global Supply Training.

Can International IP Management Really Be Cost-Effective?

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A recent article in Industry Week claims to offer “a cost-effective approach to maximizing international property protection”. While the three step approach is logically sound, reasonable from a cost perspective, and reasonably complete from a legal perspective, I can’t help wondering how effective it really is. But to understand why, we first have to review the proposal.

The authors, who know their stuff, recommend the following:

  1. Always utilize contracts with trade secret protection with employees and business partners.
  2. Use patents to not only fortify the protection but protect your IP from those entities with which you have no contractual relationship.
  3. Implement your strategy in those countries in which you do business.

It’s certainly the right way to do business from an IP protection standpoint, and I might even recommend something similar if you asked, but I’m not sure it’s going to work, especially for those of you doing business with countries like China where IP protection has historically been very weak. I know that they have been talking about beefing up their IP protection, that they recently signed an MOU with Japan, and even cracked-down on the Fu Wei group, but what they’ve done is a drop in the bucket compared to the IP piracy that has been allowed to go unchecked for decades. And they’re not the only country where patents and WIPO might not do you any good. Furthermore, a contract is only as good as the legal system set up to enforce it. If we’re talking a country that naturally distrusts foreigners and tends to rule in favor of local companies, a contract might not do you much good either.

In other words, the best strategy in the world won’t help you if the country in which you are doing business isn’t strong on IP protection. As a result, the first step should be to only do business in countries with strong IP enforcement if IP is critical to your business. The next step would be to find trusted business partners in those countries who believe in mutual IP protection. Then contracts (which should still be solid) become less important and patents only an issue for products that can be cost-effectively reverse engineered.

Don’t Forget About the NPFTF …

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If you’re on the ball and a US public company, you’re probably worrying about the SEC (Securities and Exchange Commission) and the FCPA (Foreign Corrupt Practices Act) because the government has been cracking down — hard — on violations and handing out million, and billion, dollar fines to violators. But while you’re making sure your staff are adhering to the SEC guidelines and not bribing foreign officials, you better make sure they are not committing fraud at home because the National Procurement Fraud Task Force (NPFTF) is ramping up too. Established by the Federal government in 2006, the NPFTF members include the FBI, the DOJ Inspector General, inspector general, defense investigative agencies, federal prosecutors, and various divisions of the DOJ.

Focusing on civil and criminal enforcement, the NPFTF has pursued more than 400 fraud cases since its inception. While bribery is the most prevalent type of fraud, bid rigging, embezzlement, money laundering, false claims, product substitution, misuse of classified and sensitive information, and mischarges have also been pursued. To date, these cases have resulted in more than 300 criminal convictions and hundreds of millions of dollars in settlements and judgments.

It’s important to remember that your average organization has a greater risk to fraud than you realize, according to PwC research summarized in a recent S&DC Executive article that notes that the “risk of waste, abuse and fraud in procurement is seeing an increasing threat in a down economy”. That’s why you need to insure your processes and controls are strong and that they are regularly monitored and evaluated. After all, it’s not just the Feds that are on the ball … over 20 states and cities have followed their lead and started enacting their own civil false claims acts. If you’re a career procurement professional, chances are your ethics are second to none, but who knows what your internal customers, trying to circumvent your processes with their maverick spending habits, are up to.

So what can you do to minimize your risks? Look for, and eliminate, these red flags:

  • inconsistent data across procurement-related systems
  • data quality issues related to spend data and vendor data
  • lack of controls around preferred vendors & negotiated contracts
  • lack of compliance with preferred buying guidelines
  • multiple instances of the same vendor in master data
  • inconsistent payment terms across the organization
  • duplicate payments
  • inefficient invoice processing
  • lack of sanity checks

And take the following actions:

  • streamline procurement processes
  • strengthen IT systems
  • do not rely solely on a code of ethics & whistleblower hotline
  • perform periodic due diligence of vendors
  • analyze procurement trends, payment patterns, & product change mix

Fines and Delays Could Hit U.S. Importers Hard in 2010

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Today’s guest post is from Matt Gersper, founder and president of Global Data Mining and co-owner of CUSTOMS Info. Matt has over 20 years of experience in process optimization and data mining in the business domain.

Failure to comply with the Importer Security Filing (ISF) regulations could bring financial disaster to unprepared U.S. businesses. There are three major reasons business leaders should assure their companies are compliant and each reason has direct bottom-line impact.

First is the risk of significant penalties for non-compliance. The ISF regulations, commonly referred to as “10+2”, state an importer can be fined $5,000 per filing if an ISF is not timely, complete and accurate. The penalty phase begins January 26, 2010.

This chart shows penalties that could be incurred in just the first 60 days of the penalty phase for 5 companies. Penalties of this magnitude would quickly get a CEO’s attention, and could have a devastating impact on any business. You can calculate your potential exposure based on the number of ocean entries you have.

 

Import Value Ocean Entries Potential Risk
Company 1 $2,784,000,000 10,969 $9,140,000
Company 2 $1,076,000,000 39,111 $32,592,000
Company 3 $806,000,000 5,541 $4,617,000
Company 4 $104,000,000 1,306 $1,088,000
Company 5 $83,000,000 869 $724,000
    2 months of penalties (Jan 26 through Mar 25, 2010)

 

Second is Custom & Border Protection‘s (CBP’s) renewed commitment to enforcement and revenue collection. CBP’s recently published “Trade Strategy for Fiscal Years 2009-2013” makes it clear just how important revenue collection has become to the U.S. Government. Shockingly, CBP’s report lists “Enforce US Trade Laws and Collect Accurate Revenue” as its number two strategic goal ahead of “Advance National and Economic Security“.

Third is the impact supply chain delays could have on your business. A recent study by the National Association of Manufacturers (NAM) estimates the ISF regulation will create a permanent 2.8 day delay in supply chain speed.

This chart applies the cost model of supply chain delays from a Purdue University study and estimates the annual financial impact that would be incurred if these five companies suffered the 2.8 day permanent delay.

 

Import Value Delay Days Estimated Cost
Company 1 $2,784,000,000 2.8 $62,361,600
Company 2 $1,076,000,000 2.8 $24,102,400
Company 3 $806,000,000 2.8 $18,054,400
Company 4 $104,000,000 2.8 $2,329,600
Company 5 $83,000,000 2.8 $1,859,200

 

While some importers hold out hope that the penalty phase will be postponed by CBP, hope is not a strategy. “I’d let my CFO know the penalty phase will be going into effect as scheduled and the implications could have tremendous negative impact on the bottom line”, says Beth Peterson, President of BPE. Peterson has been a strong advocate representing the interests of industry to CBP regarding the impact the ISF regulations could have on U.S. businesses.

American Shipper, BPE and the International Compliance Professionals Association (ICPA) conducted a research project to understand the current state of ISF compliance, the impact this regulation has (and will have) on the supply chain, the challenges that companies are facing in their attempts to comply with ISF and the best practices importers can leverage to comply with — and ideally benefit from — ISF compliance. Their study revealed 3 of the top 4 challenges importers are having with 10+2 compliance are related to data management.

DATA MANAGEMENT CHALLENGES

  • Nearly 60% of companies have challenges providing timely ISF data.
  • Nearly 40% struggle to collect complete ISF data.
  • Around 20% have problems with the accuracy of the data they are providing.

These are the very three issues causing penalties to be assessed. To make matters even worse, the penalties estimated above could be twice as large since the regulations state that fees can be as high as $10,000 per filing if two or more violations occur. For example, the filing is not timely and is it not complete.

Modern database and workflow applications can dramatically improve a company’s data management efficiency and significantly bolster capacity to achieve ISF compliance. Web-portals, or central information hubs, allow parties around the world to collaborate and interact online, with the same information, though a single platform. Here are six tips that can help you select the right solution to achieve ISF compliance and improve data management.

  1. A secure website accessible worldwide by any authorized user.
    It should provide control over multi-party collaboration and the ability to grant privileges by user and role.
  2. A centralized database that is the system of record.
    A “single version of the truth” for 10+2 and other customs information about every item enterprise-wide.
  3. Easy upload of data from any system, business unit, or supplier.
    It should provide easy to use features to normalize, view, sort, filter, and work with data.
  4. Easy integration with existing systems.
    It must manage the data used by your various business applications that support your global trade initiatives.
  5. Leverage best-practice functionality in a manner that increases productivity.
    Web-based applications can automatically update users about recent changes to the system and its data.
  6. Unparalleled visibility and oversight.
    Automatic record keeping of the critical data elements created in each step of the workflow in every business unit around the world which is required to meet the reasonable care standards of modernized custom agencies.

Selecting a system that meets these requirements will dramatically improve a company’s enterprise-wide data management efficiency, help achieve 10+2 compliance and avoid financial penalties. In fact, 10+2 can be a hidden opportunity for strategical companies. Optimizing inefficient data management processes can improve supply chain performance and deliver a positive return on investment. For example, improving supply chain speed by just one day would be worth $800,000 per year to a company importing $100 million annually.

I strongly advise executives of companies importing into the U.S. to act with urgency. According to estimates by the CBP, “it takes sixty to ninety days to ramp up and be filing correctly”. Best-in-class companies are funding cross-functional teams to develop a strategic enterprise-wide solution, using 10+2 as a catalyst to optimize currently inefficient business processes, and creating competitive advantage for their company at the same time.

Thanks, Matt.