(This is the first of two articles examining the challenges companies face regarding international trade and the results of the KPMG Thomson Reuters 2016 Global Trade Management survey)
Trade has become a hot-button political issue in 2016 thanks to Brexit and the Trans-Pacific Partnership (TPP). Even before these extraordinary developments, international businesses have been struggling to keep pace with rapidly-changing trade regulations. But a majority of companies are not taking advantage of systems and processes that can help them increase their trade-management efficiency.
Electronics, like other global industries, rely heavily on trade. Yet many of the activities critical to global commerce are still managed manually, according to the 2016 Global Trade Management (GTM) Survey conducted by KPMG and Thomson Reuters. Moreover, companies are not using free trade agreements (FTA) to their full extent; are dealing with a very complex product-classification process; and are lacking a centralized trade-management strategy, said Taneli Ruda, SVP and managing director of Thomson Reuters ONESOURCE Global Trade.
“Leveraging technology to automate these processes enables trade teams to work on higher-level strategies,” Ruda said in an interview. “One of those is your supply chain: have you run various cost scenarios on your supply base? Are there more tax-efficient ways you can source components? Taxes can make a significant difference on costs, particularly when it comes to free trade agreements and trade zones.”
The GTM survey identified six specific areas that could benefit from technology:
- Manual processes
- FTA utilization
- Product classification
- Process centralization
- Transfer pricing and customs valuation
By controlling their operational approach to doing business, the study finds, companies can make their trade functions more efficient.
Corporate activities around the import and export of goods are still managed manually, the study found, which is a significant drain on resources. Import documentation and licensing, product import classification and global supply chain management are particularly time consuming, respondents said. These tasks are a good fit for automation in today’s trade management environment.
Automation can also lead to opportunities that yield direct duty savings, such as the utilization of free trade agreements and zones; or eliminate functions that introduce hidden costs and risks into the daily workflow. The goal, Ruda said, is to create an environment where trade compliance is strategic and costs are reduced through efficiency.
Trade teams largely see the value in automation and would adopt technology that reduces risk and makes their jobs more efficient, the study found. Only 34 percent of respondents are currently using a GTM system for any aspect of import and or export activities. Overall, global trade technology use is highest in North America (42 percent) and lowest in Asia (21 percent.)
Cost is one barrier to GTM automation: Respondents cited a lack of support or budget from within the organization as well as the existence of multiple enterprise resource planning (ERP) platforms as reasons why GTM technology isn’t being leveraged. Trade teams need to build a business case for GTM, the research suggests, including an objective analysis of the costs and benefits associated with technology.
Although free trade agreements (FTAs) are a hot button in the U.S. presidential election, a strong majority of respondents to the GTM survey acknowledge leveraging FTAs produces a positive return on investment. Yet only 23 percent of respondents said their companies are fully utilizing all of the FTAs available to them. The challenges that get in the way of full FTA utilization are complex of rules of origin, challenges in gathering required documentation, and a lack of internal expertise. “Getting suppliers to submit all of the documentation and paperwork [associated with FTAs] is an onerous task,” said Ruda.
Additionally, FTA qualification can be moving target. As new SKUs are entered into a system and bill of materials structures evolve, constant work is needed to keep FTA qualifications up to date. "Companies that are manually managing these tasks find the process daunting," Ruda added. “Many companies are choosing not to participate in FTAs for fear of non-compliance costs or penalties. Technology can help automate standard tasks and eliminate a lot of the work related to FTA qualification."
Companies are already thinking about the Trans-Pacific Partnership (TPP). The survey results showed slightly higher-than-average levels of preparation activities are taking place in Japan (45 percent) and Vietnam (44 percent). In the U.S., only 32 percent of companies surveyed are currently planning for TPP; Canada and Mexico report 46 percent and 32 percent active planning, respectively.
(In Part 2, EPSNews will take a look at product classification, process centralization and transfer pricing and customs valuation.)
ELECTRONICS INDUSTRY SNAPSHOT
Respondents from the electronics industry had almost identical responses to questions about TPP as did the mean. This may be because electronics have low import duty rates and therefore FTA availability does not sway their target supply chain structure as much as it does for other industries.
Additionally, electronics companies cite more complex and changing requirements with local governments as a top challenge, the survey indicates, and they are more likely to consider transfer pricing as a risk. This may be because electronics companies hold IP assets in a wide range of geographic locations and therefore the price of goods is strongly correlated to IP as opposed to the physical costs of raw materials.
Electronics companies identified their top 3 challenges as:
- Disparities in requirements between countries
- Complex and changing requirements with local government agencies
- Inefficient processes and systems
Electronics companies identified their top 3 risks as:
- Import valuation
- Transfer Pricing
- Product import classification