HOSTED BY PRESENTED BY

Importing for Export Success

Jim Trubits Mohawk Global Trade Advisors

Nicole Weidlein Wells Fargo Bank

Mary Slack Spectracom

Peter Parts Peter Parts Electronics

Importing for Successful Exporters Jim Trubits, Mohawk Global Trade Advisors

Incoterms Costs & Obligations

Logistics

What’s Reasonable

Care?

Classification

Other Agencies

Valuation

Docs

Free Trade Agreements

Record- keeping

Marking

Procedures

Documentation

What’s missing from your Customs invoice?

• Country of origin

• Incoterm

• Tariff number

• Value

• Piece count

• Description of goods

• Additional requirements

Post Entry Audits

• Conduct

• Correct

• Disclose

Importer Security

Filing (ISF)

Importer Security Filing (ISF)

• Must be filed 24 hours prior to vessel loading

• Requires Customs bond

• $5k-10k penalty max per shipment

Are you an

importer?

Returned for Processing/Repair

• Warranty items

• Non-warranty items

• Requires declaration form

• Only pay duties, fees, on repairs

• Repairs in NAFTA countries

Strategies for Duties, Fees, Taxes

• Eliminate

• Reduce

• Recover

• Defer payment

What is a Foreign Trade Zone?

• Not considered Customs territory

• Don’t pay duties, fees, taxes until goods withdrawn for consumption

• Customs entry not made until withdrawal

Temporary Importation Under Bond

• Goods not for sale or sale on approval

• Duty free in US

• 110-200% of duties, user fees, taxes

• Export within 3 years (max)

• Don’t export, pay bond

Duty Drawback

• Duties paid upon import

• Paid back upon export/destruction

• Restrictions apply for US manufactured goods exported to a NAFTA country

What costs should I add to land my

goods?

Insurance $72 ISF Fee $40 Bond Fee $550 Terminal Fee $475 MPF $115 HMF $37

Delivery $140

Product inspection

$300

ADD/CVD $30,000

Clearance $125

Duties $2,500

Subtotal $34,354 Transportation $2,220 Grand Total $36,574

FEE$

• Freight & insurance

• Duties, MPF and HMF

• Clearance fees

• Customs bond

Understand the nuances of the countries you are dealing with. For example, while 9 of 10 Chinese exporters would prefer to

receive payments in RMB, more than 40% are unwilling to ask customers to do so (China Daily, 2012).

Importers paying in USD should consider: Although paying a foreign supplier in USD may seem simpler, it can potentially be more costly than paying in the

supplier's local currency. Markups of the USD price are not uncommon when foreign suppliers are forced to manage the currency risk.

In evaluating your hedging alternatives, you should consider, among other factors: Tolerance for variance in cost of imports due to currency movements. Possibility of paying vendors in local currency rather than being invoiced in USD.

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A Major Consideration for Importers: Foreign Currency Risk

Considerations

Before beginning to import, a buyer will need to consider a number of preliminary matters that will make a great deal of difference in smooth and efficient importing. One of theses considerations is the currency in which their payments for these invoices will be made. While it may seem that conducting business in USD is more attractive, from a simplicity perspective, it is prudent to account for the overall costs inherent to your transactional currency.

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* Results based on Reserve Bank of Australia survey of Australian firms

An important potential benefit of utilizing local currency to settle trade payments is that foreign purchasers may receive

more favorable terms for payments made in the local currency. Recent studies in China highlight this impact: The People’s Bank of China estimated that overseas importers could expect to save 2-3% on their invoices; A study by Deutsche Bank estimated that the savings could be up to 5% and HSBC estimated savings of 3%; A survey of Chinese suppliers by Western Union showed that 1 in 5 explicitly added at least a 3% surcharge for payments made in foreign

currency.

These less favorable terms for non-local currency payments reflect suppliers’ increased costs to process non-local currency

payments, which can include transaction costs and inherent costs associated with assuming the additional currency risk. Often, local suppliers are not as well equipped to manage currency exposure as the foreign businesses they conduct business with due to less financial sophistication, more limited access to banking services and hedging products, and lower credit quality; as a result, many local suppliers simply add a surcharge to compensate for the assumption of currency risk.

In addition, many leading multinational corporates, such as IKEA and Ericsson, prefer to be invoiced in the local currency as

they gain better visibility into the cost structure of their suppliers and simplify negotiations to focus on commercial matters versus currency.

When isolating the currency component of the sales by paying in the supplier’s local currency, the purchaser may be able to utilize a hedging strategy to manage the currency risk. The purchaser's goals in hedging its exposure to foreign currency include: (1) protect the purchasing power of the USD against foreign currency (2) reduce volatility in the cost to acquire the needed foreign goods, and (3) potentially achieve a hedge rate better than current spot due to a favorable forward point adjustment.

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Potential Benefits of Payments in Local Currency

Who is benefitting from the USD strength?

• The relative strength of the USD has been in the headlines over the past year, particularly in terms of how this is impacting the price of US exports. This trend is expected to continue.

• Reason would serve that this would serve as a benefit to US importers, as the purchasing power of the USD should be greater and would be reflected in lower USD costs from foreign suppliers.

• The question is, have your suppliers been passing along this USD strength to you in their pricing?

When is the last time you have seen a downward pricing adjustment?

Based on the sources described on the previous slides, we assume for purposes of this example that the company might save roughly 3% by moving to local currency invoicing. If you had looked at a contract in China at the close of 2014: The mean forecast had projected the RMB to strengthen by roughly 2% by the end of 2015 (6.0000) Meanwhile, the average forward to December 2015 was 6.2450 * By locking into a forward contract or a similar structure, rather than paying a 3% premium for USD invoicing, the company

could potentially lock into a savings of slightly less than 2% off from current spot.

In U.S. dollar terms – if you were invoiced $5,000,000 USD for December 2015, this would have cost the company RMB = 29,798,400.00 (reflects 3% savings for local invoicing) USD = $4,771,561.25 (based on forward of 6.2450)

$5,000,000.00 - $4,771,561.25 $ 228,438.75 ≈ 4.5% SAVINGS *

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An example of potential saving

How to potentially save 3% or more…

5.85

5.91

5.98

6.04

6.10

6.16

6.23

6.29

6.35

Dec

-14

Mar

-15

Jun-

15

Sep

-15

Dec

-15

*Per Bloomberg's consensus survey of bank economists 09/24/14

Proposed 1-YR USD/CNH Hedge Rate @6.2450

Current Spot USD/CNH @ 6.1250

Mean Forecast

* Indication only, for illustrative purposes. Actual transaction rates and prices may be higher or lower depending on market conditions at the time a transaction is entered into When employing a strategy of paying suppliers in foreign currency, it is important to monitor exchange rates and your competitive position, and reassess your strategy, as appropriate, on an ongoing basis in a fluctuating market environment

Utilizing a long-term hedging strategy, the purchaser may be able to mitigate its exposure to FX risk while increasing its purchasing power – a clear improvement over the current situation.

Example: Company importing “just” 20% of it materials from Europe

Assume the following: $100 MM in Sales $60 MM COGS (20% =$12MM sourced from Europe at a rate of 1.35 EUR/USD = EUR8.9MM) $40 MM Gross Profit $30 MM Other costs/ exp $10 MM Net Income Now assume that the EUR has strengthened to 1.55 EUR/USD and there is no hedge in place: $100 MM in Sales $61.8 MM COGS (same 20% sourced at a rate of 1.55) EUR/USD =$ 13.8MM, (EUR 8.9MM*1.55) $38.2 MM Gross Profit $30 MM Other costs/ exp $8.2 MM Net Income

Impact on Net Income due to currency fluctuation: ($1.8mm) Key Take Away: Unmanaged positions create the risk of loss or gain, thus uncertainty to such things as earnings, expenses, and investment values.

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The importance of considering proper currency risk management

Why manage currency risk?

These examples and the examples on the following pages are hypothetical only and are not intended to represent or imply that any transaction or trading strategy will or is likely to achieve results similar to those shown in the examples. There are frequently sharp differences between projected and hypothetical results and the actual results achieved.

Risk Management Framework

Evaluating & Managing Currency Risk

Define Corporate Philosophy and Objectives

Identify Exposures

Quantify Exposures

Define Risk Management Polices and Procedures

Identify Strategies to Manage Risk

Execute Strategies

Monitor Exposures and Hedges

Review and Manage Performance

The first step is to determine what the overall objectives are for each line of business and where risk can be taken.

Second, determine and outline the transactional, translational, and economic exposures.

The company then quantifies exposures at each corporate level via a value-at-risk model or scenario analysis which aggregates exposures.

Once the company understands where it has exposure and to what degree, hedgeable risks should be defined and designated.

Wells Fargo will then help the company outline appropriate hedging structures to manage these currency risks.

Wells Fargo will help the company execute a tailored hedging strategy that best takes advantage of market conditions, size and nature of the transaction.

The company will monitor mark-to-market values of exposures (Wells Fargo will provide) and accounting rules to achieve effective hedge accounting, if desired.

Currency hedging is an ongoing process. As market fundamentals and business goals change, the company should periodically reassess its hedging policies.

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In summary

When dealing in foreign markets, currency risk is always present. The real question is who bears this risk?

When discussing local currency invoicing with your suppliers keep in mind that: They could be benefitting from pricing in USD as they are passing along a considerable markup, but They may still prefer to invoice in local currency, to reduce their risk and gain convenience of local currency receivables

on their end

If you are looking to move to local currency pricing: Discuss the overall terms of the contract. Not only could you be saving on the currency mark up, but you could also

receive benefit elsewhere in the contract, such as longer payment terms as the supplier’s risk is reduced. In certain countries you will need to adjust the terms of the contract, as they will require the correct currency of payment

noted

Local currency invoicing may not be the best solution in all cases: In cases where a currency is controlled or illiquid, USD payables likely make more sense

Understand that you are assuming risk when you move to local currency pricing Be sure to consult with a foreign exchange specialist to discuss strategies to help mitigate this impact

Temporary Importing repair items

• Importer of Record

• Documentation

• Import or Export License, other required forms

• Temporary Import Bonds, Carnets

• Import Value

• Descriptions

• HTS v. HS, and 9801

• Country of origin

Controlling your imported repair shipments

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• Courier Shipments • Lower Value shipments sometimes “batched” by courier • May be difficult to correct entry • Make sure your customer’s documentation is accurate

before they ship • Provide information for their Commercial Invoice or even a template

Importer of Record

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• Import Value – Where does this come from? • Sales value • Depreciated value • Have a written procedure to determine • NOT $0 on Commercial Invoice

• If it has no value, why are you shipping it?

• Watch out for “help” from your customer

• Description: accurate and detailed explanation • “electronic materials” (bad) v. “GPS simulator” (good)

• HTS v. HS; and 9801 U.S. Goods returned

Documentation – Commercial Invoice

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• Shipper’s Declaration (separate or on commercial invoice) • Customer signs statement

• Manufacturer’s Affidavit – you sign • If U.S. Manufacturer and you’re the manufacturer

• Other required forms (FCC, FDA, etc.)

• ITAR? – do you need a DSP-61 or License Exemption? • What are the requirements for use?

Documentation for Imports

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• TIB – Temporary Import Bond

• Carnet

• Does the value of the item and type/duration of import justify this?

• Foreign Goods Returned - **New** • Comments from Jim Trubits…

Consideration for foreign manufactured imports

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• Build database and product descriptions

• Manage your couriers and Customs brokers

• Document, document, etc.

• Connect internal linkages

• Train your team

Tips

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• Country of Origin = Country of Manufacturer • #1 Error by inexperienced shippers – using the country of

shipment as the country of origin

• Import Value – document how you determine this, provide to customer for RMAs No artificial low values to avoid duty

• Verify import documents for accuracy – don’t pay duty on US Goods Returned for repair!!

• Ensure your re-export documents match your import documents!

• Recordkeeping

Hard Learned Lessons in RMA imports

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Sourcing Local vs. Global

(Smartly!)

Remember…. while you are sleeping tonight… there are competitors around

the world at work on getting to your customers and taking away your

business!

Just this one thing….and….

• Everyone’s selling price is generally close, and many times your price is made available to your competitors. (Imagine that!) What only you know and what is most important is that you do a better job than all your competitors buying raw materials.

• The single most important thing you can do for your raw materials needs is get the lowest possible price for the ‘right’ quality needed. You don’t make money when you sell, you make most of your money when you buy!

….this one thing too….

• This means buying each item from the correct

manufacturer ….wherever in the world that happens to be.

• Take a globe, erase all the country lines, and source

globally, not based on the country, but based on the factory. Discuss Japan vs. Vietnam as an example. Just because it’s made in Japan as an example, it’s got to be good……NOT!

What scares buyers from buying outside

of the U.S.?

• What scares buyers from buying outside of the U.S.? Pitiable, poor, inferior, second-rate, low-quality, subpar, imperfect, faulty, defective, shoddy, shabby, unsound, unsatisfactory, third-rate, not up to snuff, rinky-dink, malfunctioning, damaged, defective, not working, out of order, kaput, busted, on the fritz, crummy quality!

• And did I mention unreturnable?

Quality: Why quality problems?

• Poor communication by the customer • Poor understanding by the manufacturer • Misrepresentation by a ‘supposed’ manufacturer

outsourcing to a third party • Poor quality control by the manufacturer • Substandard raw materials substituted by the

material suppliers • Inability of the vendor to adequately understand

English and what you really want

Steps to insure likelihood of quality!

• Visit the manufacturer after quoting and sampling • Vendor evaluation: Phase 1, Phase 2, Phase 3 • Product review during the quoting process and

before manufacturing • Make sure you agree with spec documentation

BEFORE manufacturing starts • QC first production lot • (We opened an office in China in 1989 to do these

things “in house”)

Boats go both ways!

If you are not yet selling outside the US……

WHY?

EXHIBITOR LIST

Littler Mendelson, P.C. Digital Rochester SEKO Worldwide Global NY, Empire State Development Export-Import Bank of the U.S. U.S. Small Business Administration U.S. Department of Commerce

Mohawk Global Logistics Language Intelligence ER – Select LLC CentriLogic Wells Fargo Bank ALT Translations, LLC

High Tech Rochester Brockport Small Business Development Center St. John Fisher College PC Results Inc. Monroe County Economic Development SPEED Global Services

THANK YOU SPONSORS