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By Donnie Barnes
BMW Manufacturing Co., LLC
Manufacturing vehicles in a foreign-trade zone is the same as manufacturing vehicles anywhere – but with some very distinct advantages. I state this to emphasize that a company does not have to radically change the way it does business in order to use an FTZ.
Direct delivery is reason enough for a company operating under a just-in-time inventory basis to be in an FTZ. If a shipment arrives at midnight and is needed on the assembly line, that shipment can be received into the inventory control system, taken straight to the line for use, and then be reported to Customs and Border Protection the next day. The cost of a line-down situation far exceeds any duty savings to be realized.
If the company exports, manufacturing in an FTZ can put the company in a much better cash flow situation. Instead of paying duty on imported parts, going through the manufacturing process, exporting the vehicles, gathering documentation, and waiting for CBP to refund the duties paid under its drawback program, the vehicle manufacturer simply never pays the duty on the parts that are used in the exported vehicles. Remember that only 99 percent of the duty paid is eligible for drawback. The merchandise processing fee is not eligible for drawback. And, if the manufacturer has not yet localized the purchase of parts subject to anti-dumping duties, it should remember that those “penalty” duties are also not eligible for drawback. Additionally, most drawback recipients use a specialized drawback broker to file the claims – which can cost 10 to 25 percent of the refund.
As much as a vehicle manufacturer hates to admit it, scrap is one of the products of the manufacturing process. Duty is never paid on the scrapped material.
The ability to file a weekly entry allows the vehicle manufacturer to reduce brokerage fees and merchandise processing fees. This is in addition to the administrative efficiencies that allow shipping to occur 24 hours per day – even when Customs is not available.
The security requirements for an FTZ closely mirror the C-TPAT security requirements. This should facilitate the vehicle manufacturer’s C-TPAT validation so that it can enjoy additional benefits – such as qualification to participate in the Importer Self-Assessment program.
The reasons go on and on…but the information contained in this short article should encourage non-zone companies to investigate the use of an FTZ!
Ms. Barnes was the Customs Manager for BMW Manufacturing Co. and Rolls-Royce Motor Cars NA. She is also a past president of the National Association of Foreign-Trade Zones.
By David Ostheimer
Lamb & Lerch
A number of motor vehicle importers have their Vehicle Processing Centers (VPC) located within General Purpose FTZ sites. The FTZ designation for the VPC provides the motor vehicle importer with two major benefits. The primary benefit is duty deferral — the postponement of the payment of customs duties until the motor vehicle has been processed and been shipped from the VPC to the dealer. This can generate substantial savings particularly when inventory levels rise. For example, an imported motor vehicle with a dutiable value of $20,000 is subject to a payment of $500 in customs duties (2.5% X $20,000). Utilizing a 7.5% rate of return on the company’s money, each day the motor vehicle remains within the FTZ results in a savings $.10 per vehicle ($500 X 7.5% ÷ 365). The greater the number of vehicles that are processed through the VPC and the longer the vehicles remain in inventory, the greater the FTZ savings.
A second major benefit is the potential reduction in the dutiable value of the imported vehicle. At the VPC the imported motor vehicle is oft times accessorized with either domestic status or foreign status components. For example, an AM/FM radio may be installed at the VPC located within a FTZ. If the AM/FM radio is a U.S. produced radio, the cost of the radio is not added to the value of the imported vehicle when entered into the customs territory, thereby resulting in a lower dutiable value for the motor vehicle.
Parts Distribution Centers
A number of motor vehicle parts importers have been studying and some have established their Parts Distribution Centers (PDC) within General Purpose FTZ sites. Due to extended warranties, motor vehicle companies must maintain a large inventory of parts within the United States for a lengthy period of time, which makes the FTZ program extremely attractive from a duty deferral perspective. In addition, a large number of the imported parts become obsolete and have to be destroyed. By obtaining FTZ designation on their PDCs, the motor vehicle companies are able to avoid the payment of customs duties on those parts that become obsolete and are destroyed.
From a logistics perspective, FTZ utilization provides the benefits of direct delivery and the consolidation of import paperwork. Through direct delivery, the parts are moved directly to the PDC from the port of unloading with much of the in-bond paperwork now being handled electronically. This results in an expedited movement of the parts to the PDC. Utilization of a cumulative C.F. 214 enables a company to file a single admission document for all parts received on a given day rather than filing multiple customs entries covering each shipment. This results in substantially less paperwork for both Customs and the company and reduces the company’s costs with regard to brokerage fees and merchandise processing fee.
There may be additional benefits that a PDC can realize through FTZ designation. If the PDC serves as a North American distribution center and services Canadian or Mexican dealerships, no customs duties will ever be paid on those components that are shipped from the PDC to Mexico or Canada. Furthermore, if the PDC is located in a state in which state or local ad valorem taxes are imposed on inventory, the FTZ will provide additional tax savings.
By Curtis Spencer
IMS Worldwide, Inc.
Congress passed the Trade and Development Act of 2000, which included a provision authorizing the foreign-trade zone industry to utilize weekly entry processing for entries of goods coming out of a foreign-trade zone warehouse or distribution centers in addition to previously authorized manufacturing operations. The growth in General Purpose Foreign-Trade Zones (those that are not specifically established for a single company, usually involved in manufacturing) has risen dramatically since then, driven in large part by the growth in trans-Pacific imports from Asia. Dozens of new, import gateway-driven sites have been added to the foreign-trade zone program nationwide, including industrial parks owned and developed by the nation’s largest real estate developers.
Developers of big-box industrial parks, including ProLogis, IDI, Centerpoint Properties, AMB Properties, Duke, Keystone, Opus and DP Partners, whose properties house the nation’s largest import distribution centers, are establishing FTZ sites at gateway locations where they can be fed by the trans-Pacific logistics system.
The demand by retail and consumer goods importers for FTZ space is at an all-time high. In the greater Los Angeles area, where five different General Purpose Zones have been established, the growth rate in new general purpose FTZ sites and active operations has been in double digits. Other areas that are seeing significant growth in GPFTZ operations include Houston, Atlanta, central Pennsylvania, Chicago (near the major intermodal ramps), Dallas and New York-New Jersey. The growth is not just in niche-specific FTZ subzones as was the case in the 1980s and 1990s. Instead, it’s in new, large-sized distribution centers for the import distribution of finished goods.
Leading retail and consumer goods importers are realizing that use of an FTZ for trans-Pacific and other imports is a functional and viable strategy to cut logistics and import-processing costs from the supply chain. The addition of the weekly entry process means that the importers are allowed to consolidate entries into a single Customs entry filing of one per week, 52 per year. For a large importer that has multiple entries per day, going to a one-a-week process provides a direct financial benefit. A recent Journal of Commerce Trans-Pacific Maritime Conference illustrated the case of Huffy Bicycles. The firm’s import manager, Pat Volkman, said recently, “We have continued to see a marked improvement in our supply chain velocity while saving substantially with the weekly entry program. Make no mistake, it does require constant vigilance, but what is there about the program after 9-11 that doesn’t anymore?”
Importers of electronics, footwear, high-end consumer goods and apparel, are becoming increasingly interested in the opportunities afforded by FTZs. “If we can keep earning our clients the additional profits that this cost-cutting allows, our customers are going to be thrilled with the development of our revitalized FTZ program,” said Ted Henderson, vice president of customs compliance for EGL Global Logistics. “We have found quite an audience willing to listen as we have begun to roll out our ‘new-generation’ FTZ program. Once they understand that their cost-cutting affects their brokerage and supply chain logistics expenses and does not delay the process, they are eager to become involved.” EGL, Exel, NYK Line, Nippon Express and other international 3PLs have added the FTZ program to their menu of services.
How does the FTZ program fit into the new 24-Hour Rule and the Customs-Trade Partnership Against Terrorism? Ever since the 1930s, when the foreign-trade zone program was first created in the U.S., operators of FTZs have been required to provide more security than other importers. Since an FTZ is a “secure Customs controlled facility” by definition, enhanced physical, procedural and personnel security has been the norm, indeed a requirement to become activated. U.S. Customs and Border Protection has made it clear to the FTZ industry that security is imperative. In fact CBP C-TPAT Program executives note that receiving and admitting imported merchandise into a FTZ is considered a C-TPAT “Best Practice”.
In addition, the recent automation of the FTZ admission process brings FTZs into a fully automated import supply chain environment.
Because an FTZ operates “in-between” the normal flow of importing, from the first point of contact with the U.S. to distribution points in between, FTZ operations have historically been advised in advance of incoming shipments so that paperwork (now almost fully electronic) could be managed properly. The extension of advanced manifest rules modeled on the original 24-hour rule for ocean imports to all modes have dovetailed with FTZ operations. Most FTZ inventory management systems are geared to accept web-based and EDI information in advance of shipments so that proper notifications can be made to bring the freight into the zones.
The 24-hour rule, for the most part, will not impact a FTZ distribution center any more than it does a sophisticated and fully integrated supply-chain importer today. When it comes to exporting from an FTZ (which will be impacted by the 24-hour rule for exporting, coming into play sometime in the near future), advanced notification is required anyway, as the zone operator must prepare all export documents in advance. No delay should occur to a zone operator in implementing the export 24-hour rule at all.
The opportunity for lowering costs of importer processing through utilization of the automated admission process and weekly entry is only available within a FTZ environment. Third-party logistics providers are adding it to their service mix because it is being demanded by more importers. Real estate developers are making sure their industrial parks at import gateway locations are included into foreign-trade zone programs. As the use of FTZs for import distribution becomes more common, Customs should start to reap some of the processing benefits associated with automated admission and weekly entries while experiencing a sense of confidence that such supply chains have the layered security of both C-TPAT and FTZ fully employed. Lastly, by bringing additional value to the international supply chain here in the U.S., we all benefit by keeping logistic jobs in our own country rather than having them migrate to our neighbors.
Curtis Spencer is president of IMS Worldwide, Inc., an international trade advisory firm. He is a member of the best practices committee of the Container Working Group, and is subcommittee chair of the COAC Technology Task Force.