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Production Sharing Offers Benefits, Opportunities and Challenges

Published on Sunday, June 01, 2003

In today's dynamic global environment, companies often need to implement new strategies to remain competitive. For many manufacturers, production sharing is part of the answer.

Also referred to as co-production, cross-border manufacturing and outward processing, production sharing occurs when producers in different countries share in the manufacturing of a product. For example, a Detroit auto parts manufacturer may team up with a Mexican company to produce high quality and competitively priced products.

Production Sharing Benefits Are Vast

Cross-border manufacturing allows companies to:

1. Complement each others’ strengths in order to create greater value;
2. Gain access to unique technology, raw materials, and specialized intermediate inputs;
3. Reduce overall costs;
4. Provide an important market for a company's component exports;
5. Retain higher wage jobs, product development and design, capital-intensive manufacturing, and marketing-related activities in the United States; and sometimes
6. Provide the only means to keep companies in business.

Cross-Border Manufacturing Is Growing Worldwide

Production sharing is not unique to the United States. For example, companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines with a focus on computer hardware, telecommunications equipment, electronic components and appliances.

In the European Union (EU), most co-production involves apparel, auto parts and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production also is taking place in Northern Africa.

How big is production sharing? According to The World Bank, production sharing involves more than $800 billion or 30% of total manufacturing trade annually.

U.S. Tariff Code 9802

U.S. exports of components are co-produced abroad and often re-imported by the U.S. as finished goods. In most cases, these imports are entered into the United States under section 9802 of the U.S. tariff code.

Under 9802, U.S. materials assembled, processed or improved abroad can be shipped back to the United States, incurring duty only on the foreign labor and non-U.S.-made materials. As a result, these imports — which often contain substantial U.S. content — can be more price competitive than other imports with no U.S. content.

Outward Processing Advanced in the Auto Industry

Revolutionary technologies combined with production sharing have transformed the U.S. manufacturing industry. As such, levels of productivity and competitiveness during the 1990s increased significantly.

The U.S. auto industry is no exception. As global competition continues to increase, production sharing is one strategy employed by U.S. and foreign auto producers to stay ahead of the curve. This may involve, for example, the capital, technology and engineering skill of a U.S. producers with precision assembly provided by a Chinese partner. The result: an attractive top quality product.

In 2002, U.S. imports under 9802 of automobiles, trucks, buses, bodies, and chassis from Japan reached $18.6 billion. Germany followed with $9.3 billion; the U.K., $1.8 billion; Sweden, $1.8 billion; and South Korea with $1.5 billion.

North American Auto Industry Is Highly Integrated

Since vehicles assembled in Canada and Mexico are eligible for U.S. duty-free treatment under the North American Free Trade Agreement (NAFTA), only a small percent enters the U.S. under the 9802 tariff code.

For example, according to the U.S. International Trade Commission (ITC), in 2002, U.S. imports of automobiles, trucks, buses, bodies, and chassis from Mexico and Canada under 9802 were $618 million and $36 million, respectively. However, in 2002, co-produced U.S. imports of motor vehicles from Mexico not entered under 9802 are estimated at $19.5 billion. Co-production data from Canada outside 9802 is not available.

How Important Is Production Sharing?

In the late 1980s, the ITC conducted a survey of 900 U.S. firms that co-produced utilizing Chapter 98. When asked what they would do if this Customs provision was eliminated, the firms said they would:

• Turn to foreign suppliers of components;
• Drop labor-intensive products and import them from East Asia;
• Move all manufacturing to Asia;
• Cut back U.S. production and target a market niche not threatened by imports; or
• Go out of business.

Since then, production sharing has become vastly more important to U.S. companies and workers. According to the ITC, it has been responsible for generating new jobs and retaining those that would have been lost due to intense foreign competition.

Consider the Pros and Cons

Sharing manufacturing strengths with high and low-wage countries has become an important strategy for many companies. However, while co-production has been beneficial for many firms, some have invested in foreign-based production sharing facilities only to find unexpectedly low levels of productivity, excessively high turnover, poor infrastructure, and a corrupt legal system. Consequently, several firms have abandoned their efforts.

Co-production can be a means to achieve a higher level of global competitiveness. However, before engaging in production sharing, it’s essential to fully understand your needs, in addition to the needs of your partners, their culture and their environment.

A Brave New World of Technology Is Making Treasurers More Efficient

Published on Sunday, June 01, 2003

What new technologies will impact treasurers and CFOs and change corporate finance in the not-so-distant future? A number of current and emerging technologies will allow treasurers to manage real-time information, eliminate boundaries for cross-border transactions, conduct business anywhere with wireless connectivity, better protect the corporate financial infrastructure and much more.

What’s Driving New Technology?

According to Susan Colles, Client Delivery Consultant for Bank of America, much of the new technology is “led by the demand for more message-driven and real-time activity to coexist with batch-oriented legacy systems. Enterprise Resource Planning and Treasury Management System vendors are developing technologies that will assist treasury staff requesting data on an ad hoc basis. This will encompass the deployment of web services, XML messages, and the unattended delivery of data.”

In addition, there are true science-fiction-style technologies, such as artificial intelligence, that could dramatically change the way treasurers conduct business. Here are some of the technologies foreseen as having the greatest influence on treasurers within the next five years.

A Single Standard

XBRL (Extensible Business Reporting Language) is a web-based programming language that creates a common language and a single standard for financial data. This means the way financial data is reported will be the same from company to company, simplifying the preparation of SEC filings, tax returns and other documents by treasurers. XBRL allows data to be used by any software program, across any platform, and in any country, offering the compatibility treasurers need, especially if their companies have offices throughout the world.

XBRL also tags financial data and gives it context, improving the accuracy and speed of corporate reporting. With XBRL’s precise tagging, financial information can move easily between domestic and foreign corporate divisions without needing to be manually re-keyed or passed through translation software. This is currently necessary because U.S. currency is kept separate from foreign currency and cash entries are automatically sorted according to each country’s accounting standards.

Once manufacturers begin to release XBRL-compliant software, this new language may very well become the standard for financial reporting.

Business Intelligence Software

At its most basic level, Business Intelligence (BI) software can help treasurers gain control over company data, centralize systems and use the web to gather information on both their business and competitors. BI software can go even further — it can offer search results that trigger customized database questions and answers. For instance, BI software can alert treasurers to production problems, assist them in finding solutions and provide all relevant data so treasurers can take action and make informed decisions.

At its most advanced level, BI software resembles something from Star Wars. New BI software will have an intelligent search agent, known as an avatar, that accesses internal databases, collects data, analyzes the information and presents it to the user. The avatar, which has a name and digitized face, can be questioned directly about daily product sales, returns, company rankings, etc. The avatar will use the internal databases to answer as many questions as possible.

Digital Cryptography

Cyber security has been an issue since the creation of the internet. Although perfect security is virtually impossible to achieve, mitigating risk is the key to internet security. One way to safeguard financial transactions is with public key cryptography (PKC).

Unlike conventional cryptography where messages are encrypted by a sender and decrypted by a receiver using the same password, PKC gives each person a pair of keys. One is a public key, which is usually printed in a confidential directory. The other is a private key, which is kept secret. Anyone can send a message with the public key, but it only can be decrypted with the private key.

Of particular interest to treasurers, PKC also can be used for authenticating digital signatures on either or both ends of domestic and global financial transactions.

What’s Ahead?

According to Colles, “Bank of America is very involved with numerous standards organizations, such as the Interactive Financial Exchange Forum, RosettaNet and TWIST, to stay abreast of the latest technology changes.” To learn more about the infrastructure and new tools that will help you prepare for the future, contact your Bank of America Global Treasury Services Officer.

Complying with the 24-Hour Rule

Published on Thursday, May 01, 2003

The events of September 11, 2001, the recent war in Iraq and the threats of future terrorism have forced Americans to identify and eliminate vulnerabilities. In doing so, our trade and transportation systems have become a major focus.

The Maritime Industry’s Challenge

An integral link in our transportation system and supply chain, the maritime industry is crucial to U.S. economic success. The impact of a terrorist attack on our waterway system could be enormous. Why? More than $738 billion or 7.5% of U.S. gross domestic product is derived from waterborne cargo.

The maritime industry already has implemented several important security measures. One of the most sweeping is the U.S. Customs’ 24-hour manifest information rule. Initiated on December 2, 2002, it requires sea carriers or non-vessel operating common carriers (NVOCCs) to electronically provide detailed descriptions of U.S.-bound sea container contents 24 hours before containers are loaded at foreign docks. This is designed to help Customs better analyze container content and identify terrorist threats.

Non-Compliance Will Not Be Tolerated

On February 2, 2003, after a 60-day phase-in period, Customs began fully enforcing the 24-hour advance manifest regulation. According to U.S. Customs Commissioner Robert C. Bonner, “all parties who have implemented the rule seriously deserve commendation, but for those who have not, U.S. Customs will not tolerate non-compliance.”

Although an important step in preventing terrorism, the rule is likely to impact your imports and supply chain. As a result, it’s necessary to become familiar with the regulation’s requirements and carefully implement them in order to prevent supply chain disruptions.

You Must Utilize AMS

All cargo declarations are required to be sent to Customs via its automated manifest system (AMS). If you are not set up on this system, you can utilize a service provider or a port authority who is, or you can provide paper documents to your carrier for input into AMS. Visit www.cbp.gov/xp/cgov/import/carriers/ams_ports/for a list of entities using the direct interface system.

Common Terms No Longer Accepted

The use of common cargo descriptions such as “said-to-contain,” “general merchandise” or “freight-all-kinds,” are no longer accepted. Instead, a precise narrative description of the cargo or its six-digit tariff number must be supplied. In short, Customs must be able to identify physical characteristics and packaging so irregularities can be determined. The cargo’s description also must be precise enough to identify any goods which may emit radiation. For example, “electronics” is not an acceptable description, but “CD players” or “computer monitors” are.

Beware of Do Not Load Messages

As of the phase in period, Customs Service ports began to issue “do not load” messages to sea carriers and NVOCCs not in compliance with the 24-hour rule. In fact, between February 2 and April 29, 2003, Customs reviewed more than 2.4 million bills of lading, and approximately 260 containers with inadequate cargo descriptions were denied loading for violation of the 24-hour rule. However, most of these violations were resolved in time for the shipment to make its original voyage.

If carriers or NVOCCs are found in non-compliance, they may be fined between $5,000 and $10,000, their container may not be allowed to be unloaded at the port of destination, or the vessel may even be denied docking privileges. And although an error may arise because of false information provided by the shipper, Customs will still pursue the party it regulates — the sea carrier or NVOCC.

In addition, if a container is examined by Customs, either at home or abroad, and the manifest description of the contents is in Customs’ opinion inaccurate, carriers can be held liable for penalties and NVOCCs can be held liable for liquidated damages.

Greater Shipper Disclosure Required

In the past, Customs may have only received information that identified the shipper as a carrier, importer or even a bank, which didn’t allow Customs to track specific shippers. Today, specific information about the shipper is required, including the shipper’s full name and address. If shippers don’t comply, they run the risk of closer scrutiny and increase the likelihood that their container will be examined. Furthermore, Customs may be more inclined to issue do not load messages.

Other Important Issues at Hand

Because more detailed information is now included in the manifest, shippers are concerned that their information could be obtained by competitors or criminals. And, if competitors learn of a new foreign source or identify a strong U.S. buyer by reviewing the data, the shipper could lose its competitive advantage. To prevent this, shippers should request confidentiality. They also should talk with their customs broker or freight forwarder to protect themselves from potential misuse of information.

Truck or Rail Cargo Is Exempt

The 24-hour rule does not apply to cargo that is shipped to Canada or Mexico and then brought into the U.S. by truck or rail. However, if Customs suspects goods are being routed in an attempt to evade scrutiny, those goods will likely be treated as high risk.

C-TPAT Membership Offers Benefits

It is expected by Customs that members of the Customs-Trade Partnership Against Terrorism program (C-TPAT) will provide the required 24-hour information as a regular part of their security-related procedures.

Although C-TPAT participants will not be excluded from advance reporting requirements, their participation in the program may assist them during the targeting process. Furthermore, C-TPAT participation by the carrier or NVOCC may be a mitigating factor in the case of penalties.

Keep Operations Running Smoothly

Supply chain managers should note that other modes of transportation, such as air, rail and truck, soon will be subject to advanced notification requirements from Customs, too. So what can companies do to ensure successful business operations as a result of the new 24-hour rule?

To begin with, each company must contact Customs and review all the details. Importantly, firms need to reevaluate their supply chain to ensure that every involved organization, starting with the overseas exporter, understands the rules and is complying. Then, it is vital to determine where changes need to be made and to quickly implement them. The traffic departments of both exporters and importers should work closely together and with all intermediaries to build in the necessary lead times and prepare the required information accurately.

Keep Abreast of New Requirements

The 24-hour rule, along with a variety of others, likely will change over time. As a result, it is vital to keep abreast of changes and new requirements. For more details about the 24-hour rule, go to www.cbp.gov/xp/cgov/import/carriers/24hour_rule/ or contact your local U.S. Customs office.

Check Imaging: A Cost and Time-Saving Option for Businesses

Published on Thursday, May 01, 2003

Even with the advent of electronic and internet payments, most business-to-business payments made in the U.S. are still made by paper check. However, paper checks have many drawbacks, including storage cost and space, as well as the time it takes to return checks and have access to funds. But legislation proposed by Congress may stimulate the adoption of check imaging by banks and provide some great benefits to businesses. How will this impact your company?

The Movement to Check Imaging

Although Federal law currently requires banks to exchange paper copies of checks, legislation being considered by Congress may change that. As of June 24, 2003, the legislation, commonly known as Check 21 and the Check Truncation Act, is gaining momentum.

It allows banks to exchange electronic images over networks rather than paper checks, completely automating the clearing process. The legislation started slowly but has picked up speed and more proponents in response to the September 11th terrorist attacks that shut down the nation’s air space and significantly impacted the delivery of paper checks for processing between banks.

Many banks, including Comerica, have already adopted online and CD-ROM check imaging for their business customers as an alternative to returning paper checks to them. The check image shows the front and back of each check, including the signature and often the endorsement. For added convenience, single or multiple check images can be retrieved by a variety of criteria, such as account number, check number and posting date.

The new process is providing a number of cost and time-saving advantages to businesses.

Expedited Information

Clearing check images will speed up the time it takes to receive information on returned checks. With the paper check process, it takes six to seven days for a business to know it has returned items. According to Chris DiBartolomeo, Image Services Product Manager for Comerica’s Treasury Management Group, “Clearing check images will allow businesses to know about and see items in just two to three days. They’ll know sooner whether a person is passing bad checks or if there’s a disputed payment, so they can address the problem and work on retrieving their funds faster.”

More Convenient Check Storage

The storage and management of paper checks have always created a significant effort and expense for businesses. Check imaging virtually eliminates the need for storage because 12,000 to 30,000 check images can be stored on a single CD-ROM. What’s more, several years of check images can be kept in a single three-ring binder.

“The real beauty of it is that businesses can benefit from the simplicity of a paperless office without sacrificing security,” reassures Bridgit Chayt, First Vice President and Group Manager of Corporate Products for Comerica. “Comerica provides check backup for seven years, which means our business customers can get a copy of their checks any time they need to.”

Streamlined Operating Processes

Businesses can receive check images to speed up account reconciliation. Convenient CD-ROM indexing can save hours of time in researching and filing checks because the indexing can be sorted by date paid, dollar amount or check number. What’s more, if there’s a customer question or dispute about a check, businesses can attach a copy of the check image in a customer form letter and send it through regular mail or email.

Faster Dispute Resolution

For businesses that use lockboxes, check imaging can quickly resolve payment, coupon and invoice disputes by providing a fast and easy way to research check numbers, dollar amounts and payment dates. An image offers quick and decisive proof to clear up any questions or discrepancies that arise between a business and its customers. Check imaging also expedites reconcilement and is a valuable tool for improving collections.

Improved Fraud Detection

“For large businesses like insurance companies that have numerous checking accounts for payroll, insurance claims and rebates — as well as hundreds of people with access to those accounts — check imaging is a godsend,” states DiBartolomeo. “On the next business day, these businesses can now review their checks for anything suspicious, such as numbers that are out of sequence, different check stock or an endorsement signature or payee name they don’t recognize.”

Check imaging also enhances positive pay services, which provide reports that identify potentially fraudulent checks by comparing the serial numbers and dollar amounts of posted checks with a business' issued checks. If there’s a question about a check, the business can simply click on the check image then decide whether or not to pay it.

Any Size Business Can Benefit

"It's unfortunate that many small and middle market companies think services such as check imaging only make sense for Fortune 500 companies. The truth is they can often realize greater efficiencies and cost savings than their larger counterparts,” emphasizes Chayt. “Check imaging allows smaller companies to grow their businesses without increasing overhead."