Exporting – US Government Restrictions

In my last post, I kept the conversation pretty high level.  Now I want to bring it down a notch or two to get into more detail on the issues that you face as an exporter.  Today’s topic is the restrictions put on exporting by our government. 

The US government regulates all goods and services that are shipped out of the country.  Of course, because different parts of the bureaucracy are have different agendas, you may find that your products are acceptable for export in one departments regulations, but require a license or may be completely prohibited in another.  Exports are regulated not only by the type of product, but also to where that product is headed, who will receive it, and what it will be used for. 

For example, no products (with some minor exceptions such as humanitarian aid) can be exported to Cuba.  In fact, you are not permitted to export to Cuba either directly or through a third country such as Canada or Mexico.  The regulations prohibit any person subject to US jurisdiction from dealing in any property which Cuba or a Cuban national has or has had any interest. 

Just as an aside here, that means that not only can’t you export to Cuba, you can’t import from there either.  You are even precluded from buying Cuban cigars when you are outside the US much less bringing them back to share with me L.

Where to Begin?

As the Good Witch told Dorothy, “It’s always best to begin at the beginning…”

Department of Commerce - ECCN

The US Department of Commerce’s Bureau of Industry and Security is responsible for implementing and enforcing the Export Administration Regulations (known affectionately as EAR). 

Most products and destinations do not require a license to export.  In order to determine if you need a license, you should start by classifying your product by figuring out its Export Control Classification Number or ECCN (Hey, it’s the Federal government, everything has an acronym).  The ECCN is an alpha-numeric code that describes the item and indicates licensing requirements.  They are listed on the Commerce Control List (CCL). 

The first digit of the ECCN is the category:

0 = Nuclear materials, facilities and equipment (and miscellaneous items)

1 = Materials, Chemicals, Microorganisms and Toxins

2 = Materials Processing

3 = Electronics

4 = Computers

5 = Telecommunications and Information Security

6 = Sensors and Lasers

7 = Navigation and Avionics

8 = Marine

9 = Propulsion Systems, Space Vehicles, and Related Equipment

The second character of the code is the product group:

A. Systems, Equipment and Components

B. Test, Inspection and Production Equipment

C. Material

D. Software

E. Technology

So, if you want to export polygraph equipment to aid in law enforcement, you would chose 3- Electronics and A- equipment.  Next you would need to read through the CCL under 3A to find if there is a specific licensing restriction.  In this case, you will find that 3A981 (Polygraphs) is on the list.  The CCL then tells you the reason the item is controlled (in this case Crime Control) and that Country Chart column 1 applies.  You would then lookup the country you are exporting to in order to check if an export license is required.  If you want to export this product to Iceland – no license is required.  However, if you want to export to Hong Kong – you need a license from the Department of Commerce

Department of State - ITAR

Some products and services are controlled by the State Department Directorate of Defense Trade Controls (DDTC).  The DDTC regulates defense articles covered by the US Munitions List and subject to the International Traffic Arms Regulations (ITAR).  These regulations allow US companies to sell arms to our friends but not our enemies.  To learn more about ITAR – check out this site:

http://pmddtc.state.gov/regulations_laws/itar_official.html

Other US Government Agencies that Control Exports

·         Department of the Treasury, Office of Foreign Assets Control (OFAC):
OFAC administers and enforces economic and trade sanctions against targeted foreign countries, terrorism sponsoring organizations, and international narcotics traffickers. The OFAC Web site provides information on these sanctions as well as the complete list of Specially Designated Nationals and Blocked Persons (the "SDN list"). 

·         Nuclear Regulatory Commission, Office of International Programs:
Licenses nuclear material and equipment.

·         Department of Energy, Office of Arms Controls and Nonproliferation, Export Control Division: 
Licenses nuclear technology and technical data for nuclear power and special nuclear materials.

·         Department of Energy, Office of Fuels Programs: 
Licenses natural gas and electric power.

·         Defense Technology Security Administration:
The Defense Technology Security Administration (DTSA) administers the development and implementation of Department of Defense (DoD) technology security policies on international transfers of defense-related goods, services and technologies.

·         Department of the Interior, U.S. Fish and Wildlife Service:
Import and Export of wildlife and endangered and threatened species.

·         Drug Enforcement Administration, Office of Diversion Control, Import-Export Unit:
Oversees the export of controlled substances and the import and export of listed chemicals used in the production of control substances under the Controlled Substances Act.

·         Food and Drug Administration, Office of Compliance:
For the Export of Unapproved Medical Devices

·         Food and Drug Administration, Import/Export: 
Licenses drugs.

·         Patent and Trademark Office, Licensing and Review:
Oversees patent filing data sent abroad.

·         Environmental Protection Agency, Office of Solid Waste, International and Transportation Branch
Regulates hazardous waste exports 

If all of this hasn’t left your head spinning, I don’t know what will.  The message here is clear.  There is a lot of homework to do before you can move forward with your exporting plans.  Even after you finish, the rules keep changing so you need to make certain you are regularly reviewing them and stay in compliance. 

Export

Exporting can be an excellent way to enter new markets.  It is relatively inexpensive, as compared to building a presence on the ground, but that doesn’t mean you can skip the hard work required to insure a successful launch.  Much of the groundwork should seem very familiar to you.  It’s the same activities you would undertake when thinking of selling your products in New Jersey!

Before you start, it is important that you understand any restrictions that the US imposes on the export of your product to your target country.  Some products are prohibited from export to any country while others are permitted to only certain countries.  You (and only you) are responsible to insure that you are in compliance with export regulations.  Failure to comply will expose you to fines, seizure of goods and permanent loss of export privileges.  A great place to start is to consult the Bureau of Industry and Security website: http://www.bis.doc.gov/licensing/exportingbasics.htm.  You might want to engage the services of a Customs Compliance Attorney to make certain you are following the rules to the letter.

Assuming that you are actually permitted to export your product(s), due diligence should begin with a careful and complete market analysis.  Who are the prospective customers for your product and how can you segment the market to identify effective marketing strategies?  The US Commercial Service can be a big help in this regard.  From their website, you can access a “Market Research Library containing more than 100,000 industry and country-specific market reports, authored by our specialists working in overseas posts.” http://export.gov/mrktresearch/index.asp

Who is the competition?  What drives them in terms of future goals and assumptions about the marketplace?  What are they doing today, what products do they sell and what is the lifecycle stage of these products?  What is their current strategy and what are their capabilities?

What about your strategy?  The three basic strategies still apply.  

• Cost leadership, the ability to produce the product at a significantly lower cost than the competition
• Differentiation, having a product that is unique in the marketplace
• Focus, finding a particular poorly served segment of the market and specializing in serving that segment.

Congratulations, you’ve identified a promising market for your products.  Now it’s time to face a whole bunch of other issues that you have never had to face before:

1. 1.       Find a business partner in the target country who knows the marketplace, speaks the language, and can handle the distribution of your product.  Once again, the US Commercial Service comes to the rescue.  Their Gold Key Matching Service “can help you find potential overseas agents distributors, sales representatives and business partners.”  They will set up pre-screened appointments for you to meet these potential partners easing the chore considerably. http://export.gov/salesandmarketing/eg_main_018195.asp

1. 2.       Logistics is critically important in the success of your initiative and you will find that there is a mind blowing array of modes and prices available to you. 

a.      Will you be shipping full containers or LTL?

b.      Are you shipping via truck, train, ship, air or some combination?

c.       Etc.

A good export broker can help you to navigate through this maze and design the best solution for you.  Keep in mind that conditions change rapidly and it’s important to review this on a regular basis.

1. 3.       Financing the export transaction can be a tricky business. 

a.    How will you get paid and how can you insure that you will get paid?

b.   Will you do a credit check?  Negotiate a formal contract?  Use Letter-of-credit?

c.    Will you require payment in advance or on delivery?

d.   Transit times, especially on the water, can extend to many weeks.  How will you handle your cash flow during this time?

e.   Will you be billing the customer in US dollars or in their local currency?  If the local currency is to be used, how will you handle the currency exchange risk?

f.     What tariffs will be imposed by the target country?

Getting your banker involved (specifically one with international business experience) can help to make this happen.  The government provides loan guarantees and direct funding.  Check out http://export.gov/finance/

All this may seem a little daunting, however, if you take it step by step you can easily navigate your way towards your desired goal..

Happy Exporting! 

Suicide Squeeze

One of the most exciting plays in baseball is the ‘suicide squeeze’. It requires timing and skill and when properly executed is very difficult to defend against.   The play starts with a runner on third with less than 2 outs and fewer than 2 strikes on the batter.  As the pitcher begins his throw, the runner breaks for home.  The batter must bunt the ball in fair territory.  If the bunt is far enough, the fielders have no choice but to throw out the batter on his way to first, allowing the runner from third to score easily. 

The two critical components of the play are the timing of the runner and the skill of the batter.  If the runner starts too early, he can be picked off at third.  If he leaves too late, there is a better chance for the defense to throw him out at home plate.  If the batter does not make contact with the ball, the runner is very easily tagged out.  He is under enormous pressure to make sure he puts the ball in play.

To defend against this play, the opposing team must anticipate the possibility and take measures to foil it before it begins.  There are two possible defensive plays that they can try.  The first, assuming the pitcher has a quick move, is to throw the ball over to the third baseman instead of pitching.  This will force the runner to stay close to third and perhaps lessen the possibility that he will run.  The other defense would be the pitch out (throw the ball to the catcher outside of the strike zone putting him in a position to throw out the runner while making it impossible for the batter to hit the ball) guessing right can turn the runner into an easy out.

In the current economy, managers are hesitant to invest in their business.  They face a great deal of uncertainty and just like the baseball manager, trying to defend against the squeeze play they need to develop a strategy to give their team the best chance of success.  This requires decisive action.  The passive manager is doomed to lose this battle.

Business decisions are always a question of risk versus reward.  The amount that we invest in developing and implementing contingency plans is (or certainly should be) based upon our assessment of the risks we are taking by not planning for such a contingency.  The most important thing is to assess the risk.  Once we have carefully considered that risk, we may yet decide that no action is necessary.  However, skipping the assessment of the risk is without a doubt a losing strategy.

Risk assessment is a continuous process.  As conditions change, risks that were minor in nature previously suddenly become much more serious.  Conversely, those that are serious risks today may become less so in the future.

A classic example of this phenomenon occurs when a small manufacturer suddenly wins a contract with a major retailer.  The retailer is likely to specify very precise shipping requirements including specific delivery times, exact labeling requirements, and more.  For the manufacturer, late delivery or labeling mistakes which were hardly a cause for much concern suddenly carry the risk of significant fines and penalties (chargebacks) which can quickly wipe out the contracts profitability.  Management must seek ways to reduce the risks of such errors through close scrutiny of the operations and continuous improvement.

Through understanding of the risks, a good baseball manager can implement a strategy which will keep the run from scoring.  A business manager has the same opportunity.

Sustainable Supply Chain

Over the past few years, building a sustainable supply chain has moved to the forefront in most business models.  This is partially a result of activism and media attention to these issues and also a function of concerns about the ability to maintain production levels in the face of dwindling resources.  Companies have found that sustainability is good business and believe that consumers prefer products produced in a socially conscious environmentally friendly manner.

Regardless of the reasons that move you to implement sustainable practices, it is seldom sufficient to focus solely inside to four walls of your company.  A successful initiative requires educating your suppliers and promoting sustainable business throughout the supply chain.

Sustainability initiatives can cover a broad range of areas. But they can generally be categorized into four major topics:

1. Energy & Climate

Reduce energy costs and greenhouse gas emissions

2. Material Efficiency

Reduce waste and enhance quality

3. Nature & Resources

Responsibly sourced raw materials

4. People & Community

Safe and productive workplaces and communities

So where do you begin?

The first step is to identify which sustainability areas are most important to you.  Just like every management objective, the next step is to establish goals and targets and to communicate them to your staff and your business partners.  Find detailed metrics and measure your current position as well as progress towards your goals.  Encourage your business partners to measure their performance and enlist them to help you meet your goals.

If all of us do our small part, we won’t be able to avoid making the world a better place.

Hire a Consultant

The most common response prospects give us is “I’m fine.” 

While many may indeed be “fine”, the majority of these businesses are doing their best ostrich imitation, hiding their heads in the sand.  Management is focused on the day to day operation of their companies and don’t have the time to look for areas that could be improved.  “If it ain’t broke, don’t fix it.” 

The “I’m fine” response also reflects a basic distrust of consultants.  To be fair, many in my profession have built reputations for which distrust is well deserved.  Consultants tend to be expensive and are frequently unable to produce quantifiable results.  There are 2 types of consultants.  The first is a professional who chooses a career helping companies to succeed.  Their professionalism and abilities significantly increase the likelihood of a successful engagement.  Be wary of the second type who is really unemployed and looking for work.  They may be experts in their fields but have not yet learned how to convert that knowledge into a productive result.

So why should you hire a consultant?  

Carter McNamara offers the following list:

 The following are typical situations when an organization might need a consultant.

1.       The organization has no expertise in the area of need.

2.       The time of need is considered short-term, e.g., less than a year, with a general start and stop time.

3.       The organization's previous attempts to meet their own needs were not successful.

4.       Organization members continue to disagree about how to meet the need and bring in a consultant to provide expertise or facilitation skills to come to consensus.

5.       Leaders want an objective perspective, i.e., someone without strong biases about the organization's past and current issues.

6.       A consultant can do work that no one else wants to do.

7.       An outside organization demands that a consultant be brought in, e.g., a funder wants to ensure the organization is well suited to spend the funder's money.

8.       The organization wants a consultant to lend credibility to a decision that's already been made (this situation would be looked at by many experienced consultants as highly unethical).

If you see yourself in any of these situations, a professional consultant can help you through it.

What is your Plan B?

As the baseball season began, my beloved NY Mets got off to a fast start.  They found a way to win the first 4 games in part because their star 3^rd baseman, David Wright was hot, hitting for a .583 batting average and an on base percentage of .647.  Suddenly, disaster struck!  Diving back to first base, David broke the pinky on his right hand and is out indefinitely.  The Mets replaced him at 3^rd base with a lesser player and promptly lost the next game.

The Mets troubles are not unlike those of most businesses.  If a key player in any business is unable to perform, the business must find a way to continue and hopefully flourish.  In business, the key player could be anyone including suppliers, customers, skilled workers, your computer systems, even you.  The loss of any of these players, even temporarily, can have a devastating effect on your business.

A very important part of business management is finding ways to mitigate the risk to the company brought on by the loss of a key player.  The more contingency planning you do today, the smaller the crisis when the inevitable happens.  Securing your business does not have to be an expensive undertaking, (although at times the risks involve may justify large expenditures), but is instead all about assessing the severity of the risks and your tolerance for the losses that can accompany them.  Here are some examples:

• Let’s imagine a situation where a key supplier of a component part loses her factory in a fire.  She calls you to deliver the bad news that your last order had not yet shipped and that she expected to be unable to start shipping again for 8 to 12 months.  What will you do?  Do you have alternate (secondary, tertiary) suppliers who can pick up the slack?  How long can you continue to operate?  What will it cost you? Higher costs? Lost revenue? Angry customers?

• Imagine a situation where your business partner dies suddenly of a heart attack.  What will it cost to replace him in the business?  Do you have a buy/sell agreement in place?  Do you really want to be in business with his spouse?

• Imagine if a tornado destroyed your offices.  How long will it take to get back up and running?  Do you have your computer systems backed up and your data stored off site?  How current is your backup?  Will your customers be impacted? 

I am sure that you can think of many more examples that apply to your business. Developing a plan will position you to deal quickly with these issues and keep you in the game. 

Moral Dilemma

There is a growing wealth of information about businesses who promote sustainability and ethical practices.  I think that it is probably safe to agree that if everything else is equal and company A operates on a higher ethical standard than company B, most of us would buy company A’s product instead of the comparable one from company B.  We would prefer a product manufactured with greater emphasis on sustainability in the areas of Energy & Climate; Material Efficiency; Nature & Resources; and People and Community. 

The moral dilemma arises when the products are not equal.  If for example, company A’s product is 10% more expensive than company B’s, we are faced with utility function.  Do we as consumers value our sustainability enough to spend more on products from manufacturers that promote such practices? 

I think there is some circumstantial evidence that some people are willing to incur the additional expense.  One example that I frequently cite is the Toyota Prius.  Clearly the most successful of the hybrids, the Prius offers its owners gas mileage in excess of 45mpg.  By most accounts, in spite of this high mileage, owners will never recoup the additional cost of the vehicle (over a similar size car equipped with a standard engine) even with gas prices over $4 per gallon.

To complicate the buying decision, the Prius has some end of life issues that call into question its overall ecological benefits.  Prius’ electric motor is operated off of a large lead acid, and metal hydride battery which is not particularly earth friendly.

Ultimately, if you want to ‘do the right thing’ you must carefully and extensively research your options.