China Trade Management

CHINA TRADE MANAGEMENT

Opportunities, Challenges and Best Practices

By Alan M. Field

October 2014

PRODUCED BY

+1.800.952.3839 | www.joc.com/group | www.amberroad.com

Copyright JOC Group Inc. 2014

CHINA TRADE MANAGEMENT: Opportunities, Challenges and Best Practices

WHITEPAPER, OCTOBER 2014

TABLE OF CONTENTS

I. Introduction . . . . . . . . . . . . . . . . . . . . . 1

II. China Pushes Inward and Outward . . . . . . . . 2

III. Challenges to Effective Trade Management:

Infrastructure Weaknesses . . . . . . . . . . 4

IV. Excessive Costs and Errors . . . . . . . . . . . . 5

V. Role of Global Trade Management . . . . . . . . 7

VI. How China Trade Management Helps . . . . . . 8

VII. About JOC Group Inc. . . . . . . . . . . . . . .16

COMMENTARY

China Trade Management Case Studies . . . . . . 10

CTM Best Practices . . . . . . . . . . . . . . . . . .12

Working with Local Agents . . . . . . . . . . . . .13

The Shanghai Pilot-Free Zone . . . . . . . . . . . . 14

FIGURES

Fig. 1. Chinas Merchandise Exports and Imports . 2

Fig. 2. Industrial Output by

Foreign-invested Firms in China . . . . . . 3

Fig. 3. Exports and Imports Attributed to

Foreign-invested Enterprises . . . . . . . . 11





I. INTRODUCTION

Although long the worlds most populous nation, China was a relatively modest player in the global trading system until a dozen or so years ago. Since then, Chinas merchandise exports and imports have grown at explosive rates. From 2000 to 2012, Chinas global merchandise exports grew by 703 percent, and its merchandise imports grew by 656 percent. Today, China ranks as the worlds largest merchandise exporter, and the second-largest importer, behind only the United States.

Although Chinas GDP growth has slowed in recent quarters, the country is on course to become the worlds largest importer, said Ty Bordner, vice president of solutions consulting at Amber Road, a New Jersey-based provider of Global Trade Management solutions. From that perspective, China is an incredibly important country in terms of volume. Practically everyone in the Fortune 2000 list (of leading global companies) does business in China, whether in the form of manufacturing, retailing, warehousing or marketing products, Bordner said. Chinas transformation has also become a major opportunity for providers of international transportation and logistics services eager to explore new markets for China and around China as the center of gravity for the Asia-Pacific region.

Total logistics costs in China are the highest of any country in the world, at $1.7 trillion in 2013, when figures for mainland China, Hong Kong and Taiwan are included, according to Evan Armstrong, president of Wisconsin-based research and consulting firm Armstrong & Associates. Thats the equivalent to 53.7 percent

Total logistics costs in China are the highest of any country in the world.





of the logistics costs of the entire Asia-Pacific region. The nice thing about China is that third-party logistics revenues increased there by 9.6 percent from 2010 to 2013, Armstrong said. From 2013 to 2016, we expect it will grow by about another 8 percent. From 2013 to 2016, Chinese growth will be the second-fastest in the world, second only to India, which is expected to grow by 8.8 percent.

II. CHINA PUSHES INWARD AND OUTWARD

Having already become the worlds largest merchandise exporter, Chinas economic growth no longer centers around expanding the nations presence in foreign markets. A great deal of the focus in China is less about import-export and more about building up networks for domestic distribution and intraregional distribution within China, Armstrong said. With economic growth, the average per-capita income of the Chinese population has increased dramatically, sparking an enormous increase in the number of people who qualify as belonging to the countrys middle class. These are the people who have enough purchasing power to acquire a wide range of consumer goods made in China or imported from abroad.

As recently as 2000, only 23 million people in mainland China belonged to the middle class, compared with 123 million in Japan, then the Asia-Pacifics largest consumer economy. By 2010, however, the number of middle-class Chinese had ballooned to 179 million, while the number of Japanese in that category had inched up to just 127 million. By 2020, a staggering 607 million Chinese will belong to the middle class, far eclipsing the 122 million Japanese in that category.

Chinas Economic Conditions

Congressional Research Service 19

Figure 12. Chinas Merchandise Trade: 2000-2011 ($ billions)

24.1 22.6 30.4 25.6 32 101.9177.6 262.2

297.4198.2 184.5 157.9

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Source: Economist Intelligence Unit.

Figure 13. Annual Change in Chinas Merchandise Exports and Imports: 1990-2011 (percent)

-20.0

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Source: Global Trade Atlas using official Chinese data.

Figure 1

ANNUAL CHANGE IN CHINAS MERCHANDISE EXPORTS AND IMPORTS: 1990-2011

By 2020, a staggering 607 million Chinese will belong to the middle class.





By 2022, more than 75 percent of Chinas urban consumers will earn 60,000 to 229,000 yuan ($9,000 to $34,000) a year, according to a report by McKinsey Quarterly. This compares with just 68 percent of Chinese in 2012 and 4 percent in 2000. The evolution of the middle class means that sophisticated and seasoned shoppers those able and willing to pay a premium for quality and to consider discretionary goods and not just basic necessities will soon emerge as the dominant force, the report said. This middle-class growth is expected to drive sales volumes in retail markets and increase the number of people who can afford to buy high-end and luxury products, including many products made in China, Armstrong said.

Trade between mainland China and Southeast Asia also is growing at a brisk pace, further lessening Chinas dependence on trade with industrialized nations of the West. China is now the largest trading partner of the Association of Southeast Asian Nations (abbreviated ASEAN), and ASEAN is Chinas third-largest trading partner, its fourth-largest export destination and its third-largest source of imports. In 2013, total trade between China and ASEAN stood at $443.6 billion, up 11 percent from 2012.

In the early years of Chinas transformation, a substantial portion of its export and import activity occurred in the narrow range of sectors where China enjoyed a comparative advantage, such as electronics, automotive equipment and industrial equipment. Now, shipments of health care products and life-sciences equipment are growing rapidly, according to Kae-Por Chang, managing director of Amber Road China. With Chinas reform of its medical sector, medical coverage is expanding

This middle-class growth is expected to drive sales volumes in retail markets and increase the number of people who can afford to buy high-end and luxury products.

Chinas Economic Conditions


2.3% in 1990 to a high of 35.9% in 2003, but fell to 27.1% by 2010.18 In addition, FIEs are responsible for a significant level of Chinas foreign trade. In 2011, FIEs in China accounted for 52.4% of Chinas exports and 49.6% of its imports, although this level was down from its peak in 2006 when FIEs share of Chinese exports and imports was 58.2% and 59.7%, respectively, as indicated in Figure 6. FIEs in China dominate Chinas high technology exports. From 2002 to 2010, the share of Chinas high tech exports by FIEs rose from 79% to 82%. During the same period, the share of Chinas high tech exports by wholly owned foreign firms (which excludes foreign joint ventures with Chinese firms), rose from 55% to 67%.

Figure 5. Industrial Output by Foreign-Invested Firms in China as a Share of National Total: 1990-2010

(percent)

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199019911992199319941995199619971998199920002001200220032004200520062007200820092010

Source: Invest in China (www.fdi.gov.cn)

18 Industrial output is defined by the Chinese government as the total volume of final industrial products produced and industrial services provided during a given period. Source: China 2011 Statistical Yearbook.

Figure 2

INDUSTRIAL OUTPUT BY FOREIGN-INVESTED FIRMS IN CHINA AS A SHARE OF NATIONAL TOTAL: 1990-2010





from the largest cities into second- and third-tier cities, and this is becoming a big market. Diabetes and other diseases associated with the worlds developed countries are becoming more common in China, so demand for related medicines and medical supplies is increasing dramatically, Chang said. Trade in luxury items, such as watches and accessories, also is expanding.

III. CHALLENGES TO EFFECTIVE TRADE MANAGEMENT: INFRASTRUCTURE WEAKNESSES

Between 2000 and 2012, Chinas expressway network grew at an annual rate of more than 16 percent, according to a report by audit, tax and advisory firm KPMG, transforming Chinas road system into the worlds second-largest at more than 75,000 kilometers by 2012. By 2017, China intends to build another 500,000 kilometers of modern roads and 108,000 kilometers of expressways; invest $82 billion to $98 billion annually in a railway fund; and increase the number of its civil aviation airports from 170 to 230, Vice Minister of Transport Gao Hongfeng told a 2013 conference of transportation officials.

Chinas transportation and logistics networks, meanwhile, arent fully prepared for the ongoing surge in trade volumes, into and out of China and across its inland trade routes. The infrastructure is being built, (but) it hasnt been completely built, Armstrong said. Some regulatory issues interfere with transportation, and the dramatic differences between inner China and the (regions along its) seaboard make it harder to operate in China than in Europe or the United States.

For now, Chinas logistics costs represent a significantly larger percentage of the countrys GDP 17.3 percent than logistics costs in the U.S., where they amounted to 8.5 percent of GDP in 2013, he said.

In terms of managing trade and logistics, China is still a developing country, with a logistics network that doesnt work as efficiently as it does in the United States, Canada or other developed countries. Railways are still passenger-focused, not freight-focused, Armstrong said. Although many superhighways are being built, a lot of secondary roads are not up to Western standards, he said. In China, the railroads are not as efficient, which forces highway-based solutions and trucking once you get off the major arteries and the secondary roads are not as good. The equipment is not standardized so you have a lot of different trailer types. And power units are older models, which causes inefficiencies in the supply chain.

All of those issues create additional variability in the supply chain, Armstrong said. If you are a manufacturer, or you are resourcing raw materials in China, you have to build in more lead time to meet production schedules, versus what we do in the U.S. in terms of on-time performance, he said.

Chinas transportation and logistics networks arent fully prepared for the ongoing surge in trade volumes.





Only 18 percent of Chinas potential market for third-party logistics services is being met, Armstrong continued. 3PLs will continue to find more opportunities in China by partnering with an ever-broader range of U.S.-based exporters and manufacturers that now have a presence in China.

IV. EXCESSIVE COSTS AND ERRORS

Foreign companies that operate in China cant afford to wait until theyre about to ship their goods to China before thinking about trade management issues such as warehousing and compliance. In China, companies must think about all aspects of their supply chain before a product is made or shipped, Bordner said. Trade compliance has an impact on procuring, sourcing and engineering. If a company replicates its overseas trade processes without incorporating rules specific to China, that will negatively affect operations, he warned.

Although a wide range of U.S. companies including small and midsize exporters have flocked to China to take advantage of the opportunities, most face a wide range of challenges in their efforts to maximize their opportunities. When it comes to compliance with Chinese regulations, an Amber Road survey of its customers found that fully 100 percent were concerned with persistent issues involving the management of their supply chains in China. These included the excessive costs involved in running their supply chains, and the manual transaction errors that led to higher costs and lower efficiency.

Approximately 30 percent of all Amber Road customers surveyed cited concerns about fines and penalties imposed by Chinese customs. About 60 percent expressed concerns that their companies relationships with Chinese compliance agencies would suffer a reduced status specifically, a reduced agency rating that would make it more difficult and time-consuming for these companies to manage their trade flows into and out of China.

When it comes to trade compliance, China is a uniquely complicated country to do business with as a foreign company, Chang said. Compliance requirements are complicated, with multiple agencies beyond simply Chinas Customs involved in the process. These other offices include:

The Ministry of Commerce, known as the MOFCOM.

CIQ, the China Inspection and Quarantine Bureau for Entry-Exit Inspection and Quarantine, which deals with hazardous materials and environmental emissions (including 3C - China Compulsory Certificates).

If a company replicates its overseas trade processes without incorporating rules specific to China, that will negatively affect operations.





SFDA, the State Food and Drug Administration, which regulates medical equipment and pharmaceutical items.

SAFE, State Administration of Foreign Exchange, which controls currency regulations, taxation, VAT valuation input and input. Its primary responsibilities include drafting policies and regulations related to foreign reserves and foreign exchange.

Each of the multiple regulatory agencies has its own sets of rules, for various China trade operations, Chang said. Licenses and permits are complicated.

Armstrong adds: China customs regulations tend to vary by province. What happens with certain commodities with regard to duties and taxes can be very different from what happens in the United States. They might target specific commodities on the import side and make it harder to import those commodities into China, and the customs inspections might vary by province, so you might have more inspections in one province versus another.

A second concern is that the regulatory landscape in China is dynamic, Chang said. China manages its economy through rapid macro policy and regulatory changes that are abrupt and unpredictable, he said. To meet that challenge, companies really need to have people on the ground in China to constantly monitor changes and incorporate them quickly.

One example of abrupt change occurred in March 2009. Before then, when a company imported materials under its so-called Processing Trade provisions and later sold that product on the domestic market rather than export it the company had to pay duty and deferred interest at an annual rate of 6.12 percent. Overnight, China reduced the annual rate to 0.35 percent, prompting the companies to evaluate the interest payments against their internal working cost of capital (IWCC) and make strategic changes in their approach to Processing Trade the Chinese business activity of importing all or part of the raw and auxiliary materials, parts and components, accessories, and packaging materials from abroad in-bond, and re-exporting the finished products after processing or assembly by enterprises within the mainland.

A major concern is the frequency of audits, a costly, time-consuming process. In China, about one-third of all companies surveyed by Amber Road cited extensive audits of their operations as a major issue. In such cases, Most likely, there will be a settlement with the agency at a great cost (to the company), Chang said. Also, they can bring criminal charges (against the company) and the legal representative of company. That has happened.

The government, Chang said, can require companies to post guarantee deposits in the millions of dollars, potentially causing working capital problems for a

Each of the multiple regulatory agencies has its own sets of rules, for various China trade operations.





To address these complexities more quickly and effectively, a growing number of multinational companies are turning to Global Trade Management (GTM) software platforms.

company, or even suspend the import/export operations. In the absence of a settlement of the dispute, the foreign companys supply chain operations would eventually have to stop, he said.

V. ROLE OF GLOBAL TRADE MANAGEMENT

To address these complexities more quickly and effectively, a growing number of multinational companies are turning to Global Trade Management (GTM) software platforms. Amber Road, a leading provider in the sector, provides companies with a single centralized platform for managing the cross-border movement of goods in 139 countries, including various trade routes into and out of China. Its list of customers, including General Electric, Monsanto, Honeywell and TE Connectivity, use the companys platform to enable their goods to flow unimpeded into and out multiple countries, including China in the most efficient, compliant and profitable way possible.

Amber Roads suite of GTM software is composed of specific applications designed to automate and manage business processes forthe following needs: sourcing optimization,foreign supplier management,global transportation management,export management,supply chain visibility,import managementandduty management. By centralizing and automating these processes, the company accelerates the movement of goods across international borders, enhances compliance and reduces global supply chain costs.

Amber Road also has built a global trading network that provides pre-established connectivity to hundreds of trading partners. The networks secure data communication services enable suppliers, forwarders, transportation carriers and customs brokers to share supply information and alerts that are critical to the timely delivery of the goods they handle.

Last years acquisition of EasyCargo allowed Amber Road to add the Shanghai-based companys GTM functionality, called China Trade Management or CTM, into its product line-up. Until now, Amber Road has only been capable of supporting clients importing into and exporting out of China, and not to manage the in-country processing and manufacturing of goods, information technology and advisory firm Gartner wrote after the acquisition closed. With the EasyCargo acquisition, Amber Road customers can now rely on a single cloud-based provider for both import-export compliance and support for Chinese customs processing under the popular Processing Trade, General Trade, and other duty suspension regimes. These duty suspension regimes have unique requirements that make it difficult for software vendors to construct one application to handle all duty programs.

These duty suspension regimes have unique requirements that make it difficult for software vendors to construct one application to handle all duty programs.





VI. HOW CHINA TRADE MANAGEMENT HELPS

Overall, the benefits of CTM software can be divided into three categories, Chang said.

Managing the companys trade compliance mandate more efficiently: A company has a mandate to meet government and internal compliance. We provide them with tools to enforce company-wide policies, meet local compliance requirements and help facilities get higher customs ratings, which helps provide for preferential regulatory terms, better dispute resolution, and overall compliance.

Providing specific financial benefits, such as tax savings that may derive from Processing Trade, importing materials and/or reducing discrepancies. This includes benefiting from trade agreements to reduce duties and tariffs, or making changes in sourcing strategy, or identifying local candidates for manufacturing. Amber Road provides a suite of tools that enables companies to benefit from free-trade agreements, Chang said.

Enabling operations to become more efficient and scalable, as well as more automated and more rule-based. GTM or CTM-enabled operations involve a reduced amount of rework and helps reduce the amount of work that doesnt provide value. Another key thing is to help our customers (determine) typical import-export performance and be able to apply lean principles for supply chain operations. We enable our customers to have lean operations, Chang said.

Finally, technology and content must be combined in China. They affect each other, so vendors of trade management software cant simply provide technology without also providing a source of content. Speed is essential. Because the environment is dynamic, we need to be able to deliver these changes quickly to our customers, Chang said.

When it comes to using advanced technologies to manage trade and logistics operations, most 3PLs utilize customized technology rather than entirely off-the-shelf solutions. In a July 2013 Armstrong & Associates study, 62 percent of Chinese 3PLs said they use their own customized versions of technology they purchased. Only 31 percent reported using software they purchased entirely off the-shelf.

For example, UTi Worldwide, which provides air and ocean freight forwarding, contract logistics, distributions, customs brokerage and other supply services, has integrated pieces of software to make its own priority system. It is very common for 3PLs to purchase different pieces of software and transportation

Technology and content must be combined in China.





and warehousing software, and then put it all together, and develop some sort of reporting or visibility tools on to that, Armstrong said.

Amber Road customers have the flexibility to create a GTM system that they find most appropriate for their needs, Bordner said. We provide a SaaS (software-as-a-service) solution, but we will also install the software if companies choose to deploy it that way. Ten years ago the weight between those two options would have been 90 percent on premises and 10 percent SaaS, but today its the opposite.

This kind of service also takes a lot less time to implement than traditional software requires. Deployment typically takes two to three months. Most customers, in terms of adoption [in China], are at a very early stage, although there are quite a few large multinational organizations working with us. Other companies are starting to see the benefits, Bordner said.

General Electric, one notable example, has multiple business units and many facilities in China involved in its implementation. GE is a high-visibility company and other companies have heard about what they have done. We see this momentum gathering, and we are getting more and more inquiries, Bordner said.

The entire software suite is set up in the cloud, and all users can access it via their Internet browsers. On-site installation isnt required by any users. Do third-party service providers play a role? That depends on the customer. Our software doesnt eliminate third parties, in most cases. Some customers dont want third parties to rekey information about their operations, while others may be more comfortable having things work that way, Bordner said.

Sometimes, brokers use our software for their customers so that they can take advantage of our offerings. Its easier for them to deliver service to them. Its a win-win for all parties, Chang added.

Although many major multinationals are among the early adopters of GTM solutions, this kind of service is increasingly accessible to smaller companies as well. We do have small companies using our software, and the trend toward using it is increasing across small, medium and large companies, because of the pricing structure, which they can afford, Bordner said.

Amber Roads software subscription model is linked directly to the number and size of the transactions. While the cost of managing a one-line item shipment is different from a 200-line item shipment, fees are not dependent on the value per se of the line item.

Some customers dont want third parties to rekey information about their operations, while others may be more comfortable having things work that way.





CHINA TRADE MANAGEMENT CASE STUDIES

The following brief case studies illustrate the multiple ways CTM platforms can be used to

meet the diverse needs of U.S. and other foreign companies operating in China.

CHALLENGE: An automotive parts manufacturer with 21 facilities across China,

engaging in both Processing and General Trade, was burdened with customs audits of

many facilities in clearance delays and additional import tax payments.

CTM PROCESS: In an effort to optimize its China trade compliance processes, the

manufacturer deployed the Amber Road CTM solution to handle up to 6,000 customs

declarations per month, covering some 50,000 items under management.

RESULTS: The manufacturer not only reduced its tax payments for bonded

materials, and minimized its clearance delays, but also simplified its service-provider

management, and upgraded its Chinese Customs Classification status so that it

received preferential regulatory terms.

Implementation of CTM technology provided the following results to the automotive

parts manufacturer:

l It was upgraded from Customs class B to class A, and then to class AA, enabling

the company to comply with customs audit requests on a more timely basis and

avoid settlement discussions.

l It has enjoyed duty savings of up to $27 million under Processing Trade and duty

savings of up to $8 million under provisions of various trade agreements.

l Productivity in China trade management increased 40 percent, enabling the

manufacturer to support its business expansion and focus on analytical goals

rather than clerical work.

l The company reduced its safety stock level by leveraging the CTM solution to

achieve predictable information about clearance and turnaround times.

CHALLENGE: A global industrial conglomerate with multiple business units and large

number of facilities in China engaging in General Trade, Processing Trade, and Bonded

Zone operations. The company encountered compliance issues in multiple facilities,

resulting in high guarantee deposit requirements, Customs classification downgrade,

and additional import tax payments.





CTM PROCESS: The company selected Amber Roads CTM as its enterprise standard

for all China operations since 2010.

RESULTS: The company enhanced its compliance capabilities, increased bonded

material contents, minimized clearance delay, simplified service provider management,

upgraded Customs classification, and obtained guarantee deposit waivers.

CHALLENGE: A global metal-forming manufacturer with one major facility in China

engaging in Processing Trade needed to develop advanced expense-management

functionality for automating the processes of estimating, verifying and allocating

expenses at different levels of its organization.

CTM PROCESS: The manufacturer deployed Amber Road CTM technology to manage

up to 700 declarations a month, covering some 3,000 items under its management.

RESULTS: This implementation not only improved expense estimation and allocation,

but also reduced expense report preparation from seven days to just two, eliminated

26 spreadsheet-based reports from these processes, and generated new kinds of

reports that were previously unavailable. Chinas Economic Conditions


Figure 6. Share of Chinas Exports and Imports Attributed to Foreign-Invested Enterprises in China: 1990-2012*

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Source: Invest in China (http://www.fdi.gov.cn/pub/FDI_EN/default.htm)

Note: Data for 2012 are January-April 2012.

According to the Chinese government, annual FDI inflows into China grew from $2 billion in 1985 to $108 billion in 2008. Due to the effects of the global economic slowdown, FDI flows to China fell by 12.2% to $90 billion in 2009. They totaled $106 billion in 2010 and $116 billion in 2011 (see Figure 7). Chinese data for January-May 2012 indicate that FDI fell by 1.9% on a year-on-year basis. Hong Kong was reported as the largest source of FDI flows to China in 2011 (63.9% of total), followed by Taiwan, Japan, and Singapore, and the United States. Accoroding to Chinese data, annual U.S. FDI flows to China peaked at $5.4 billion in 2002 (10.2% of total FDI in China). In 2011, they were $3.0 billion or 2.6% of total (see Figure 9).19

The cumulative level (or stock) of FDI in China at the end of 2011 is estimated at $1.2 trillion, making it one of the worlds largest destinations of FDI. According to the United Nations Conference on Trade and Development, China was the worlds second largest destination for FDI flows in 2011, after the United States (see Figure 8). The largest sources of cumulative FDI in China for 1979-2011 were Hong Kong (43.5% of total), the British Virgin Islands, Japan, the United States, and Taiwan (see Table 3).20

19 U.S. data on bilateral FDI flows with China differ significantly with Chinese data. For additional info on bilateral FDI flows based on U.S. data, see CRS Report RL33536, China-U.S. Trade Issues, by Wayne M. Morrison. 20 Much of the FDI originating from the British Virgin Islands and Hong Kong may originate from other foreign investors. In addition, some Chinese investors might be using these locations to shift funds overseas in order to re-invest in China to take advantage of preferential investment policies (this practice is often referred to as round-tipping). Thus, the actual level of FDI in China may be overstated.

Figure 3

SHARE OF CHINAS EXPORTS AND IMPORTS ATTRIBUTED TO FOREIGN-INVESTED ENTERPRISES IN CHINA: 1990-2012*





CTM BEST PRACTICES

What are the best practices for taking full advantage of the benefits of China Trade

Management solutions? Kae-por Chang, managing director of Amber Road China,

suggests the following:

l Clearly Define Roles and Responsibility: Creating a successful program requires

that you first establish what functions are needed, and then assign roles to

corporate and facilities as appropriate.

l Establish Corporate Compliance Policies and Objectives: Apply an 80/20 rule and

clearly define corporate compliance policies and objectives to enable each facility

to quickly devise its own CTM practice that meets its specific requirements based

a consistent corporate framework.

l Invest in a China Trade Management (CTM) Solution: Without an effective CTM

system solution with continual regulatory updates, companies may be able to

identify patterns and promulgate best practices at the operations level, but the

approach will be, at best, catch as catch can. This brings with it unmitigated

compliance risks, clearance delay, supply chain impact, additional tax payments,

inefficient operations, and an inability to respond to agency audit. A CTM Solution

provides the tools you need to do the job right the first time, every time.

l Create Protocols to Manage Service Providers: By extending purchasing and

compliance processes and developing a set of rules and regulations to determine

how data is transmitted to inbound trading companies, companies can shorten

cycle times, improve service levels, lower supply chain execution costs and

better support compliance initiatives. These protocols should include service

provider qualification; expense management; audit measurements; and regular

performance reviews.

l Conduct Regular Internal Audits: The key to managing the complex,

interconnected systems of global trade operations is establishing key performance

indicators, analyzing results and developing strategies to continuously improve

performance. Internal audits can serve as catalysts for improving an organizations

governance, risk management and management controls; making data-driven

decisions; and shifting from tactical decision-making to continuous improvement

programs. Establish performance measurement systems as the basis for internal

audit and continuous improvements.

l Leverage Internal CTM Expertise: Knowledge of CTM practices is more important

than ever and the supply is limited within a company. Structure the CTM

organization to effectively and efficiently utilize the expertise with the necessary

tools and technology.





l Establish a CTM Infrastructure to Meet Performance Objectives: Align your CTM

approach with the companys overall goals. Performance objectives should

be defined and measurable and allow for continuous process improvement.

Incorporate compliance requirements into strategic and daily supply chain

operations.

WORKING WITH LOCAL AGENTS

Everyone who does business in China agrees that local business agents play a

critical role in China, as it does elsewhere in Asia. It is critical to have people

on the ground and people locally in your operation who can interface with local

operations and get plugged into the local network, said Evan Armstrong, president

of research and consulting firm Armstrong & Associates. Any provider that is

serious about developing China business has to have people within operations

in China. It is not a place to do business at arms length. It is best to either be all

in, or all out. Those U.S. companies that are there are pretty much all in if they

are doing well. The ones having some issues probably havent made the right

commitment to the region.

The attitudes of U.S. companies doing business in China tend to fall into one of two

extremes, said James Chan, president of Philadelphia-based consulting firm Asia

Marketing and Management. Many Americans dont think that doing business in

China requires any special knowledge. They underestimate China, he said. At the other

end of the spectrum, many Americans are overly scared by all the horror stories about

intellectual property theft, local competition and intractable officials.

In Chans experience, many U.S. companies see China as an admirable friend or a

fearful enemy. They often fail to recognize that both extremes are wrong. China has

become both a friend and an enemy, both an attractive and profitable market, and a

potentially dangerous competitor, he said.

Rather than flee from Chinas complexities, Chan encourages non-Chinese companies

to embrace the underlying duality of their relationship with the West. The regulatory

complexities are a smokescreen that effectively prevents many foreign companies

from leveraging their opportunities, Chan said. If you are so paralyzed by changing

regulations, you will never succeed. You will be confused, he said. But if you know

how to approach them, it is not daunting.

Most foreign companies are distracted by those complexities, and they wind up being

unfocused. The answer, Chan says, is to find and groom an agent, someone who you

can rely on to understand the niche, whether transportation or pharmaceuticals, or





something else. That person must become your eyes and ears on Chinese soil, he

said, so their requirements go beyond speaking English well and understanding your

technologies. Such a process can take several years.

Chan, who has trained successful agents for U.S. exporters of industrial products,

cautions U.S. companies against relying on statistical metrics for measuring agent

performance, because that doesnt work in China. An important question to ask about

any Chinese agent is whether you feel the agent understands your products, and that

he believes that working with you is a ticket to prosperity over the long term. Only in

those cases where a prospective agent is confident in your success will that individual

wind up being the loyal, longtime ally your company needs in China, he said.

THE SHANGHAI PILOT-FREE TRADE ZONE

In a significant move aimed at striking a balance between agency enforcement and

trade facilitation, the Chinese government has established the Shanghai Pilot Free

Trade Zone (PFTZ) in September 2013. The 29-square-kilometer zone encompasses four

previously discrete bonded zones in Shanghai: Waigao Waigaoqiao Free Trade Zone,

Waigaoqiao Bonded Logistics Park, Yangshan Bonded Port and Pudong Integrated

Bonded Zone.

The Shanghai PFTZs goal is to provide a central government-approved location for

conducting experiments in policy and administrative reforms across multiple Chinese

agencies. Trade operations outside of the PFTZ are expected to be quite different from

those within the zone, according to Amber Road. The government hopes to analyze

the results of the PFTZ and use its success to change governmental mindsets at other

agencies throughout China.

Following the launch, the first significant change was the introduction of the

negative list at the PFTZ. In a significant departure from past practices, the Chinese

government has replaced the complicated and lengthy approval process previously

required for every business operation with a simple filing registration. The only

exceptions are the 16 business sectors designated on this list.

The following reform measures have attracted the greatest interest among Amber

Road customers:

l Trade facilitation changes enacted by Customs and China Inspection and

Quarantine.





l The impact of those changes on supply chain and compliance operations of

companies operating in China.

l How Amber Roads solution enables companies to take advantage of these new

reform measures.

In its efforts to enable companies to conduct business more rapidly and cost effectively

while also enforcing customs regulations China Customs and China Inspection

and Quarantine have taken steps based on these four principles:

1. First Line Opening to speed up the entry of goods into the PFTZ. This involves:

l Inbound declarations after entries. In the past, each inbound shipment needed

an inbound declaration filed prior to entry. This new measure enables inbound

declarations within a 14-day window after goods enter the PFTZ.

l License and certificate waiver. Under this new measure, items not on the CIQ list

no longer require supporting documents to accompany their declarations. Thus,

CIQ will begin to differentiate the treatment of inspection from quarantine at the

first line of the PFTZ.

2. Second Line Control is an effort to establish more effective and efficient enforcement

of compliance while supporting supply chain operations between the PFTZ and

domestic markets. This involves:

l Coordinated Agency Clearance. In the past, Customs and CIQ conducted their

own declarations, inspections and goods release, based on separate processes

and timelines. This coordinates the activities from both Chinese agencies so that a

company only needs to submit the declarations once, respond to inspections once

and receive the release of goods once.

l Pre-Registration of Licenses and Certificates. In the past, each China import

declaration required its own supporting documents, including licenses and

certificates. This was time-consuming and led to clearance delays. The new

measure enables companies to pre-register their licenses and permits with

Customs based on forecasts, while waiving requirements for supporting

documentation from the subsequent declaration submissions.

l Simplified CIQ Inspection for China imports. CIQ previously inspected each

shipment, increasing clearance time. The new measure authorizes CIQ inspections

in batches before the submission of CIQ declarations. CIQ is currently choosing

third-party, inspection-service companies and devising a risk-based approach for

ad hoc inspection.





3. Free Material Flow within PFTZ: The goal here is to reduce the time and cost to

transport goods among the four previously discrete bonded zones within the PFTZ.

In the past, white trucks special Customs-supervised, bonded vehicles were

required for transporting goods among these four boned zones.

4. PFTZ System Enhancements, which include:

l Single Window System. Based loosely based on the United Nations concept,

this aims to provide a single outlet to submit regulatory documents and receive

responses from all agencies involved.

l Single PFTZ Supervision Platform. Each of the four discrete bonded zones within

the PFTZ currently has a different supervision platform, but the goal is to create a

single platform based on the experience gained over the past few years.

ABOUT JOC GROUP INC.

JOC Group Inc. is the authoritative provider of business intelligence, data and events covering the global container shipping and logistics market. Through its PIERS and JOC products online, print and events JOC Group Inc. provides the access, intelligence, insight and support that enable our customers to establish and maintain critical customer connections and make informed decisions to compete effectively in the global marketplace. JOC.com is the leading information portal providing a mix of editorially created content and pertinent visualized data combining more than 200 different data sets. JOC Groups leading industry events include TPM (held annually in Long Beach, California), TPM Asia and JOC Inland Distribution. Through PIERS, the worlds most comprehensive database of U.S. waterborne trade, international businesses from transportation, chemical, energy and finance sectors analyze unique intelligence to inform critical business decisions.

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Documents

China Trade Management