Logistics Viewpoints

A complete analysis of logistics trends, technologies, and services

How Free Trade Influences an Automotive Supply Chain

Automotive Industry | By •

Production costs, transportation costs, and product quality are all primary considerations in corporate sourcing and production decisions. However, customs duties and other trade tariffs can also be critical inputs into these supply chain decisions, particularly when preferential treatment is an option. Trade duties and regulations vary by country and industry. And the automotive industry has the perfect combination of supply chain and customs complexity that makes the management of customs duties potentially rewarding, but also extremely complex.

MIC Customs Solutions introduced me to one of its automotive industry clients. This large automotive manufacturer uses MIC’s origin calculation system when analyzing sourcing and production scenarios for evaluating new vehicle launches and ongoing production thereafter. The planning process is detailed, cross-functional, and extensive.  Trade tariffs are only one consideration in the process, but can be substantial enough to influence final sourcing and even production location decisions.  Perhaps most impressive is the detailed information management process the company uses to evaluate these sourcing and production business cases.

Automotive Manufacturing and Country-of-Origin Evaluation

This automotive company’s process for evaluating new production business cases includes the upfront concept phase, information technology alignment, and the sourcing and production decision-making phase.  Local content feasibility and assembly layout are evaluated during the concept phase. Local content projections evaluate options for sourcing parts local to a potential production facility or from a region that is part of a free trade zone. It may turn out that feasible duty exempt options are available, or it may be that sourcing outside of the free trade area and paying customs duties turns out to be superior. Qualifying for preferential treatment under free trade agreements (FTA) requires that a certain percentage of parts qualifies for preferential treatment, as well as a certain percentage of sub-assemblies. For example, an FTA may stipulate that at least 60 percent of the value-add for a given part or component must come from the local area to qualify for preferential treatment. Then there are the same or similar threshold criteria for sub-assemblies and then ultimately the entire vehicle must meet the threshold to qualify for duty exempt import into the consumer market. These requirements that go back multiple tiers into the supply chain require strong corporate controls, information management, traceability, and detailed reporting capabilities.

The information management process at this automotive manufacturer requires the collection of country-of-origin data in addition to standard BOM information from suppliers.  The BOM information stored in the ERP system then needs to be communicated to the origin calculation system. However, the BOM for each model has variability across individual vehicles, greatly expanding the material information management requirements and complicating the projection of total duty exemptions. For example, some colors may have paint or interior sourced from different regions. There are also other vehicle options substantial enough to influence whether a vehicle will qualify for duty exemption. What I found most impressive about this process is that the local content is not only projected for a make and model, but also subsequently calculated individually for each vehicle around the time of production. For example, if a plant produces 200 vehicles in day, the local content calculation is performed 200 times in that day.

Final Word

As I noted in a recent post, many companies incorporate duties and tax costs right down through the bill of materials when analyzing various production and sourcing decisions. The automotive supply chain is subject to the criteria (complex supply chain, regulatory complexity, substantial preferential treatment options) that justify the evaluation of numerous sourcing and production scenarios. At the same time, the information management complexity and the potential financial payback justify the investment in global trade management (GTM) solutions to support the analytical and reporting processes required. I am impressed by the thorough planning process this automotive manufacturer performs prior to strategic production decisions. However, I am most impressed by the fact that the country-of-origin and preferential treatment calculations are performed for each individual vehicle at the time of production. This is a great example of an organization obtaining, maintaining, and leveraging supply chain data from the concept phase through to final production.

Do You Buy American Made Cars? Consider the Supply Chain.

Automotive Industry | By •

I believe that the average American over the last three decades has become progressively more aware of global supply chains and the distinction between an American company and an American made product. However, I also believe that information on country-of-origin is still very opaque in many cases. But the automotive supply chain is an exception due to the regulations and reporting required.

In 2006 I engaged in a conversation with a friend from high school, Adam, and a friend from college, Bob. Adam is an enthusiast of classic American made cars. He owned classics like a 1968 Chevy Chevelle and antiques like a ‘57 Chevy.  In contrast, Bob bought his car for practical purposes. He bought what he considered to be the best car for his needs within his budget. Bob and I had recently completed a graduate school program that included coursework on manufacturing operations and supply chain management. Therefore, we had the concepts of outsourcing and global supply chains fresh on our minds. Bob arrived at the restaurant at which we met in his recently purchased Mazda. Of course, Adam saw the opening to gently hassle Bob for his foreign car purchase. This directed us into a discussion about how American car brands (GM, Ford, Chrysler) were not necessarily American made any longer. At the same time, foreign cars such as the Japanese brands like Honda, Toyota, and Mazda were not necessarily foreign made. The discussion was about automobile manufacturing but also covered the concepts of sourcing, extended supply chains, and of course marketing and branding.

Bob mentioned that the automotive dealer displayed a sticker on his car that outlined the percentage of American made parts it contained. And in fact, much of his car was American made. This is the first I heard of what turns out to be a stipulation of the American Automobile Labeling Act. More recently I received similar treatment from my father about the purchase of my Honda Accord. As a longstanding proponent of “buy American made,” he of course owned a car made by one of the Big Three US auto manufacturers. I decided to point him to a website that provided aggregate information on the percentage of a given vehicle’s parts that were American made (it turns out that the data reflects American and/or Canadian made). We reviewed the data and learned that his Dodge did have a higher percentage of American made parts (78 percent) than my Honda (65 percent), but the difference was much less than expected.

More recently I have been speaking with GTM software suppliers about their software suites and the processes they support. Perhaps most interesting to me are the applications that manage country of origin information and support the calculations necessary to support preferential treatment from free trade agreements. This reignited my interest in the information on automobiles and the relative percentages that are manufactured in various nations, and the role that preferential tariff treatments and threshold calculations play in sourcing and production decisions. I will soon publish a blog post that details the complex process by which automotive manufacturers evaluate and incorporate tariff treatments in their production and sourcing decisions. Let’s just say that product genealogy is likely to have improved considerably due to free trade compliance processes.

In the meantime, I decided to review the Department of Transportation’s information on automotive country of origin data. I found the NHTSA website that provided aggregate information on manufacturer, model, and aggregate percentage.  However, I was unable to obtain the more detailed information that would normally be found on individual vehicles at the point of sale. It’s worth noting that vehicles are required to display not only the percentage value of parts that are American and/or Canadian made, other countries that individually contribute 15 percent or more of the equipment content, the country-of-origin for the engine and transmission, and the location of final vehicle assembly.

I assume that most Logistics Viewpoints readers are aware of global supply chains and their complexity. However, I believe that looking beyond branding and obtaining greater insight into what is figuratively “under the hood” is beneficial to all of us as consumers. Wouldn’t it be great if the average consumer could query a car make and model and find details on the company and country of manufacturers of sub-assemblies, engines, transmissions, and more? Country of origin certainly does not imply quality, but it is additional information that can be incorporated into the average consumer’s buying process. For a proprietary take on the topic, go to the American University Kogod School of Business Made in America Auto Index.

Global Trade Management in Today’s Contentious Political Environment

Global Trade | By •

Global Trade ManagementThe political environment and public policy decisions are central determinants of global trade patterns. But political risk seems especially heightened in today’s international business environment. From the Brexit vote, to Trump’s trade renegotiation rhetoric, to Marine Le Pen’s promise of intelligent protectionism, there has been an undeniable trend of political intent to reexamine trade policies and free trade agreements.

I am in the process of updating ARC’s Global Trade Management (GTM) market study and have engaged in several discussions about today’s political environment and its impact on global trade and GTM solutions. Of course, political rhetoric accounts for much of what has already occurred. But the recent election results in the UK and US reinforce the view that substantive change may be forthcoming. And the political rhetoric also seems to have a way of feeding on itself. Executives understand that public policy, especially trade policy, can have substantial impact on their supply chains. Although existing trade policies have not yet changed from these political events, corporate executives want to be informed about the impact potential changes will have on their business, and prepared to quickly adapt their supply chains to function optimally in the new trade environment. From my discussions with GTM suppliers, I see corporations focusing their preparations on two main areas, namely:

External Corporate Environment: The specific political changes and the potential trade impact of these changes on the supply chain.

Internal Corporate Environment: The company’s internal processes and its ability to adjust to the changing trade environment.

External Corporate Environment

The proliferation of free trade agreements over the last couple decades has increased the degree to which preferential treatment of certain goods has shaped supply chains. Ty Bordner of Amber Road puts the number of trade agreements currently in effect across the world at about 600. And the effect of these agreements on supply chain decisions should not be overlooked, as duties and tariffs are substantial enough to redirect sourcing and even production decisions. Rainer Roll of MIC Customs Solutions explained a case to me where a manufacturer estimated that roughly half the cost of a production facility upgrade was going to be financed by duties savings made possible by a free trade agreement. In fact, many companies incorporate duties and tax costs right down through the bill of materials when analyzing various production and sourcing decisions. And it’s not just the GTM vendors stating the relevance of duties in strategic decision making. Toby Brzoznowski of Llamasoft, a leading provider and supply chain design solutions, confirmed in his post Leveraging Supply Chain Design to Thrive in Uncertain Times that taxes and duties are critical inputs into supply chain network design by impacting overall costs, sourcing decisions and manufacturing strategies.

In contrast, the more recent political environment has created uncertainty about existing trade policies, especially free trade agreements. Voters in many nations believe that trade agreements are detrimental to their economic well-being. They often focus on the displacement of a subset of workers, rather than the widespread efficiencies brought about from increased competition and specialization. Linda McKee from SAP’s Global Trade Services team told me that the sudden change in public perception about free trade agreements has caused some executives to become more cautious about the long-term stability of the agreements. Long-term stability may not be a prerequisite for transactional sourcing decisions, but it is essential for supply chain partnerships and capital investment decisions.

The Brexit vote has occurred, but there is still a lot of uncertainty about the specifics regarding the unwinding of the UK in the European Union (EU), including the terms of trade. Although there is still much uncertainty, companies are beginning to evaluate their exposure to trade agreement changes from UK’s planned withdrawal from the EU. Rainer Roll of MIC Customs Solutions stated that companies are analyzing various scenarios to determine the potential effects on their business, both the risks and opportunities. For example, what are the effects of moving production from continental Europe to the UK to support UK demand – and vice versa, the effect of moving production currently in the UK to continental Europe? Companies are analyzing country of origin information and conducting total landed cost analysis so that they are well informed and ready to act when the trade environment does change. In North America, concerns about changes in NAFTA aren’t as acute, but corporate executives are beginning to ask questions about the potential impacts of changes to NAFTA. Chris Jones of Descartes informed me that corporate boards are looking to understand the cost implications of changes to NAFTA and the feasibility of nearshoring operations that are currently in Mexico or Canada. Similarly, Patrick Maley of BluJay Solutions noted interest in determining what the Trump administration can do through regulation and what changes would need Congressional approval.

My overall takeaway is that companies are mostly evaluating these political scenarios from a risk analysis and contingency planning perspective. However, they are doing so with an eye on being prepared and able to act intelligently, competitively, and quickly once the changes do go into effect.

Internal Corporate Environment

Evaluating internal processes and capabilities is part of what companies are doing to make sure they are prepared to act in an uncertain, fluid environment. Companies are evaluating their ability to analyze the numerous potential scenarios and want to make sure they have the required information to determine the duties and rules associated with country of origin for raw and intermediate materials and the necessary data to conduct a total landed cost analysis. This environment reinforces the need for the data and a structured, systematic way of analyzing the cost drivers and supply chain contingencies if the environment does change. At the same time, companies want to make sure that their GTM software providers can handle upcoming changes. For example, there is concern about the existing UK customs system (CHIEF) being retired and replaced with a new system in tandem with the UK’s withdrawal from the EU. Descartes and SAP both mentioned that companies are concerned about the concurrent system and regulatory changes. But the GTM vendors can easily handle these changes. The concern is more with the fluidity of the rules surrounding imports and exports from the UK and whether there will be sufficient notice before implementation of the new rules and the replacement customs system.

Overall, the global trade environment is expected to become more complex. The UK will have to renegotiate trade terms with countries outside of the EU and with those countries within the EU. The Trump administration is looking to establish numerous bilateral agreements instead of one multilateral agreement with Transpacific nations, and other elections such as last weekend’s election in France provoke additional uncertainty about international trade. GTM vendors believe that the increased complexity is stimulating additional demand for their products, as companies look to more formally manage their planning and execution of international trade and customs compliance.

In Defense of Global Trade

Global Trade | By •

Globe-trottingLogically enough, the majority of Logistics Viewpoints (LV) readers work in the logistics field. And LV is a logistics industry blog, not a political op-ed site. However, I believe the issue of global trade is both a core logistics topic and a hot political one. Furthermore, the presidential candidates from both major parties have been denouncing international trade as of late. I actually believe both candidates are supporters of free trade, whether it be domestic or international. But that isn’t obvious given some of the recent rhetoric. So I thought it important to briefly restate the benefits of trade – both domestic and international –  given the negative press that it has been receiving and its importance to the logistics industry.

Trade Enables Productivity, Leading to Prosperity
Productivity improvements are considered a primary driver of economic prosperity. Centuries ago Adam Smith and David Ricardo discussed productivity, resource allocation theories, and the concepts of absolute and comparative advantage. The theories explain the mutual benefits from a person, organization, or country, doing what it can do best, then trading with others that have a different core competency. More recently, Michael Porter explained in the Competitive Advantage of Nations that national competitive advantages are determined by the dynamic interaction of a number of determinants that allow a region, national, or set of organizations to produce a good or service superior to that offered by others. Key to Porter’s model is the importance of specialization, investment, and continuous improvement. These factors improve quality and efficiency, and I would also argue they lead to greater variety and more purchasing options – ultimately benefiting consumers with the spoils of progress.

Specialization, Expertise, and Economies of Scale
Specialization allows for a concentration of focus that contributes to expertise. Add competition among experts and this can lead to continuous improvements in a product or service. When a nation specializes and trades, it is likely to obtain increased demand for its superior products or services. Increased sales volume makes capital investments both feasible and increasingly profitable. Investments serve as a fixed cost that reduces incremental costs for each unit. Once these investments are made, the producer increases the potential for total profit, but also becomes more reliant upon high levels of production to pay for the initial investments. Ultimately, this reliance on high volumes reduces price to the consumer even further.

Logistics, Globalization, and Specialization
Logistics is a critical function to global trade and our economy as a whole. In fact, I wrote a Logistics Viewpoint article that discusses economic research crediting modern inventory management practices with modern-day improvements in macroeconomic stability. Similarly, the efficiency of modern transportation allows low price producers to retain their cost advantages even when including transportation and other elements of total landed cost. Sophisticated transportation networks allow consumers to purchase crops from around the world. Fifty years ago it was a rare treat to get an orange for Christmas. US supermarkets now sell apples from the southern hemisphere each spring and domestic apples in the fall. Logistics supports globalization and globalization increases choices. I believe that politicians and the average person understand the benefits of global trade. We just need to remind ourselves of trade’s benefits every once in a while.

6 Answers for Your Top TPP Agreement Questions

Global Trade | By •

Mike Short CHRYou’ve probably heard about the Trans-Pacific Partnership (TPP) agreement in the last few weeks in some form or another. Since the release of the final text for the TPP agreement, along with President Obama’s announcement on November 5, 2015, that he intended to sign it, the TPP agreement has been a fairly hot topic—across all industries—with some aspects being more controversial than others. While we’re still sorting through the full text, we wanted to provide you with some background, answer some questions, and offer some insight about what the TPP agreement means for the transportation and logistics industry. Here are the top six questions our customers are asking about the TPP agreement.

What is the TPP agreement?
Essentially it is a proposed trade agreement between 12 countries—U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. Similar to other trade agreements—think North American Free Trade Agreement (NAFTA)—the agreement seeks to encourage companies in these countries to conduct more business with one another. This is accomplished in many ways, including securing workers’ rights, reducing or eliminating tariffs and duties on imports and exports, and even creating a shared understanding regarding intellectual property.

How does it affect me?
Ultimately, the goal is that companies (likes yours) in the participating countries will be incentivized to work together because they’ll be saving money when importing and exporting goods. We think open markets and elimination of tariffs may be especially beneficial for companies in the textile and footwear industries as well as agricultural products including dairy, beef, and pork—but certainly not limited to these areas. Another outcome of this type of trade agreement is that manufacturing may shift to participating countries to maximize the potential savings—similar to the shift with increased manufacturing in Mexico, which directly correlates to the implementation of NAFTA. If the shift in manufacturing is great enough, the TPP agreement could also impact trade lanes, shifting the most popular lanes to participating countries.

When will the TPP agreement go into effect? (Or how soon can I start seeing savings?)
The passing of the Trade Promotion Authority (TPA) earlier this year should help expedite the process; however, for a trade agreement this significant, there’s still a long process involved before implementation. So even though the President announced his intention to sign the agreement, it does not mean things will change overnight. At the very earliest, the TPP agreement will likely not be reviewed (or approved) by congress until December 2016. Even after the TPP agreement goes into effect, the majority of affected tariffs will not be wiped out immediately, but rather phased out over many years, which varies by country and commodity.

You mentioned saving money, how much are we talking?
Well, no one really knows for sure yet. However, the American Apparel & Footwear Association estimates that in the first year after implementation of the TPP agreement that the footwear industry alone will realize $450 million in savings. That’s only the first year. Over the course of 12 years—the timeline footwear duties will be phased out—the savings would be close to $6 billion in savings on duty from footwear imports alone.*

Do I need to change my global supply chain because of the agreement?
Right now the answer is not quite yet. We’re still in a waiting period to see if congress will give the thumbs up or thumbs down (again, most likely late next year). If the agreement does go into effect, then there may be strategy changes you can undergo to reap the largest rewards, and that’s a conversation to have with your logistics provider at that time.

Where can I get more information?
At some point, you’ll want to have a conversation with your logistics provider about how this will (or won’t) directly impact your specific organization, but as nothing has officially changed as of yet, that conversation may be premature at this point. Here are a few resources I’d recommend if you want to learn more about the TPP agreement:

  1. The U.S. Trade Representative Website. They’ve put together a fantastic page that really outlines the major points without having to read through the full text. There are also links to chapter summaries and you can access the full text from here too.
  2. The International Trade Administration Website. Their site breaks down the impact of the TPP agreement by state and industry.

Ultimately, the TPP agreement is a complicated issue, one that if it passes will certainly impact the transportation and logistics industry in many ways. What are your thoughts on the TPP agreement? Leave your comments below. If you still have questions about the TPP agreement and what to expect for your business, email solutions@chrobinson.com and I’ll try to find you some answers.

* “TPP Poised to Slash Footwear Duties by $450 Million in Year One, Says FDRA President,” International Trade Today, November, 10, 2015, 2-3.

Mike Short is the President of Global Freight Forwarding at C.H Robinson. Short joined C.H. Robinson through the acquisition of Phoenix International in 2012, and is an 18-year veteran of the global forwarding industry. Prior to being named President, Mike served as Vice President, Global Forwarding – North America. Prior to joining C.H. Robinson, Short held a number of roles at Phoenix International, including Regional Manager, Sales Manager, and General Manager of the St. Louis office. He graduated from the University of Missouri in 1993 with a Bachelor of Arts in Business.

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