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How Important is it to Screen Your Suppliers? Ask ZTE.

A smartphone being used as a GPS on a car dashboard.

I recently took an Uber in New York City and noticed that the drivers tend to have their smartphones mounted on their dash to allow them to use city maps. What humored me was seeing that my driver didn’t have the most common iPhone or Samsung Galaxy device, instead he had a Zhongxing Telecommunications Equipment (ZTE) smartphone. I chuckled at the irony and thought, “well that’s the last ZTE phone he’ll ever own,” at least for the next seven years.

ZTE is the fourth-largest smartphone vendor in the U.S. and sells to major mobile carriers such as AT&T, T-Mobile, and Sprint [1]. As the second largest telecommunication provider in China, they are a manufacturer and integrator of networking apparatuses and handheld devices [2]. The most common ZTE models include the Tempo X, Prestige 2, and Majesty Pro.

Not All Press is Good Press

Throughout the last couple of years, ZTE has made U.S. trade compliance news multiple times, but on April 20, 2018 they made headlines in bold font. ZTE had the unfortunate honor of achieving the highest export monetary penalty issued by the Bureau of Industry and Security (BIS) at $1.9 billion. This penalty was originally issued in March 2017 but ZTE was granted monetary deferrals and delays of suspensions, therefore April 20, 2018 was the official activation date.

Along with this hefty financial penalty, ZTE is no longer able to receive products from the United States. The impact of this on ZTE has been so substantial to its bottom line that they have had to halt operations [3].

So how does this apply to the Uber driver with his ZTE smartphone? Now that ZTE is frozen from receiving exports from the U.S.—or on behalf of the U.S.—his friendly retailer can no longer purchase from ZTE.

Why? Multiple exports occur in order to buy handheld devices from ZTE.

Export one: The retailer needs to request making a purchase, likely by email.

Export two: Then they will need to send a purchase order.

Export three: Finally, they must pay for the devices to be shipped from China, or a third party.

In between these transactions, there may have been additional communication by email or phone, which are all exports and are therefore banned.

While the Federal Communications Commission (FCC) grapples with the conflict between consumer interest and regulatory compliance, ZTE device owners have to wonder, will they be able to receive operating system downloads [4]?

Why ZTE Was Issued This Penalty

ZTE received components and equipment from the U.S. that were then transshipped to Iran and North Korea. In some cases, these products were not transformed but were shipped as is, and in other cases, they were put into telecommunications equipment to modernize the capabilities of the respective country—i.e. Iran and North Korea. This was a direct violation of U.S. sanctions.

Export compliance consultants and practitioners everywhere have been screaming, “screen your suppliers,” and now ZTE has given us a tangible example of why it is so crucial to practice export compliance within the supply chain.

The Nature of Their Deceit

It started back around January 2010, when ZTE began bidding on two Iranian projects where they would install cellular and landline network infrastructure. Through 2016 those contracts resulted in the illegal transfer of approximately $32,000,000 of U.S.-origin items, which were installed and used in Iran. During this time, it was also discovered that ZTE made 283 shipments of U.S. products to North Korea, these shipments included routers, microprocessors, servers, etc.

ZTE’s senior management knew they were in the wrong. In the summer of 2012, they required each employee involved with sales to Iran to sign nondisclosure agreements in which the employees agreed to keep all information related to the company’s exports to Iran confidential [5]. This resulted in employees providing false end user details to U.S. exporters and manufacturers.

During the two settlements in 2016 and 2017, ZTE had assured that all employees would be trained on compliance with U.S. export regulations and process updates. They also advised that internal audits would be conducted, and most importantly, top executives directly involved in the sales to North Korean and Iran would be disciplined for their actions, including the possibility of dismissal and at minimum a loss of bonuses. Earlier this year, the Department of Commerce (DOC) followed up with ZTE on the 2016 settlement requirements (internal audits, discipline of senior managers, implementation of compliance processes in line with U.S. regulations), as ZTE was allowed to continue business with the United States—a case of the U.S. attempting to maintain a flow of commerce—with the assumption that they would fulfill these requirements. However, ZTE failed to comply and falsely stated that all requirements were met, which has led to their current situation [6].

The Impact on U.S. Exporters

Not only is the ZTE ruling a hindrance to those who sell to or purchase from ZTE, but it is also impacting legal, legitimate, and profitable business for U.S. suppliers. As a manufacturer, ZTE has been involved in the modernization of telecommunication networks in many countries. For the U.S. exporter, sometimes ZTE is their customer and at other times, they are simply the middle man—the integrator, installer or operator. The ban on exports not only forbids new sales to ZTE, it also halts any pre-existing contracts, if ZTE is listed or known as an intermediary party on those contracts, mainly to entities that are based around Asia Pacific and the Middle East.

U.S. corporations must consider the impact this will have on ongoing services and maintenance requirements of existing telecommunications systems involving ZTE. If ZTE is the operator and has sold maintenance services to end users, ZTE is no longer able to purchase parts from the U.S.—directly or indirectly—or receive technical information to conduct that service or maintenance.

The Moral of the Story

We all understand that diverting goods to Iran or North Korea is against U.S. sanctions, but why was there such a hefty penalty? Well, ZTE had its own Hollywood-style-drama of lies and deceit which included making false statements to U.S. and Chinese attorneys and investigators, falsifying customs documentation, and mixing U.S. product with Chinese origin product in attempt to hide it.

What all of this tells us is just how important it is to ensure your vendors are compliant with U.S. export and import regulations. It also tells us to avoid single-sourcing providers, integrators, installers, etc. to help avoid major impacts to your business, if a situation like this arises.

A Chance for a Third Strike

After the April 20, 2018 penalty activation, ZTE did file documentation with the DOC again, stating they will train and audit their staff and processes, as well as discipline their senior team. The DOC has stated they are willing to see evidence.

Will ZTE have an opportunity for a third strike? With U.S. component—or chip—manufacturers suffering from a significant drop in export sales due to the inability to ship to ZTE, and the realization of possibly losing 75,000 jobs in Beijing China, we can expect ZTE to stay a topic of trade news for months to come. Also, due to the ongoing fear of a trade war with China, the BIS’s decision may be overturned by the Executive Branch.

President Trump has offered his assistance in resolving the issues between ZTE and the U.S. government [7]. How that help will be facilitated is unclear but does assure that ZTE will be a household name throughout 2018, with constant media attention. It is imperative for U.S. importers and exporter to stay current on trade news to assure compliance, as well as understand how these issues may impact their organization and bottom line.

MGTA’s import and export audit services can help you to uncover gaps in your compliance procedures. Contact Mohawk Global Trade Advisors to discuss how we can help you develop or improve your current import and export compliance programs.


Footnotes:

[1] “Company Overview,” ZTE USA. Retrieved on May 17, 2018 from <https://www.zteusa.com/about-us/>.

[2] Meyer, David, “One of the World’s Biggest Phone Firms Is Stopping Operations Because of a Ban on Buying U.S. Parts,” Fortune, May 10, 2018. Retrieved on May 17, 2018 from <http://fortune.com/2018/05/10/zte-components-china-technology-denial-order/>.

[3] Jiang, Sijia, “China’s ZTE Says Main Business Operations Cease Due to U.S. Ban,” Reuters, May 9, 2018. Retrieved on May 17, 2018 from <https://www.reuters.com/article/us-zte-ban/chinas-zte-says-main-business-operations-cease-due-to-u-s-ban-idUSKBN1IA1XF>.

[4] Dave, Paresh, & Shepardson, David, “China’s ZTE May Lose Android License as U.S. Market Woes Build,” Reuters, April 17, 2018. Retrieved on May 17, 2018 from <https://www.reuters.com/article/us-usa-fcc-china/chinas-zte-may-lose-android-license-as-u-s-market-woes-build-idUSKBN1HO2BD>.

[5] “ZTE Corporation Agrees to Plead Guilty and Pay over $430.4 Million for Violating U.S. Sanctions by Sending U.S.-Origin Items to Iran,” The United States Department of Justice, March 7, 2017. Retrieved on May 17, 2018 from <https://www.justice.gov/opa/pr/zte-corporation-agrees-plead-guilty-and-pay-over-4304-million-violating-us-sanctions-sending>.

[6] “Secretary Ross Announces Activation of ZTE Denial Order in Response to Repeated False Statements to the U.S. Government,” Department of Commerce, April 16, 2018. Retrieved on May 17, 2018 from <https://www.commerce.gov/news/press-releases/2018/04/secretary-ross-announces-activation-zte-denial-order-response-repeated>.

[7] Trump, Donald J., Twitter, May 13, 2018. Retrieved on May 17, 2018 from <https://twitter.com/realDonaldTrump/status/995680316458262533>.


By Kristen Morneau, Senior Advisor

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©2018 Mohawk Global Trade Advisors

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If My Cargo Is Not Adequately Insured, What Is My Exposure?

Insuring cargo for international transport is very different from other forms of property insurance. There is an entire body of law, known as Admiralty Law, that has evolved around marine transportation. The coverage found in a marine cargo policy (which also covers international shipments by air) is written to insure against the many perils that may be faced during international transport. These include perils specific to case law that has been developed and tested throughout history. Most marine policies therefore add clauses to cover concepts unique to Admiralty law. Many of these risks are not contemplated by riders attached to property covers that attempt to protect goods in transit. As such, these riders fall short of the mark.

De Facto Self-Insurance
Self-insurance is a common fallback position for companies that move international cargo without the benefit of a marine policy. Whether mindfully done or not, moving cargo without adequate insurance coverage is de facto self-insurance; or at the very least, co-insurance—in cases where minimal insurance is in place but not written on the broad-form needed to provide truly adequate coverage. Even when using Incoterms correctly, where the responsibility to insure is with the other party, there may be exposure regarding difference in coverage for perils not specifically named in the transactional policy. Importers and exporters are cautioned to assess the risks and evaluate for adequate marine coverage.

General Average
A good example of an arcane concept fully covered by only a marine policy is General Average. It commonly occurs in cases where something happens to the conveyance, necessitating sacrifice of some of the cargo in order for the voyage to successfully continue. This might happen if a vessel is grounded or if a fire breaks out onboard. In either case, tugboats may need to be employed or the vessel may need to be taken to another port for repairs and inspection. Under such circumstances, the carrier would declare General Average as a mechanism to attach risk-sharing to all cargo interests aboard the vessel. After declaring General Average, a vessel operator would typically ask each cargo owner for a deposit based on their cargo’s prorated value to the venture, with the goal of covering the cost of any other cargo damaged or extraordinary expenses incurred by the operator while saving the voyage. The self-insured cargo owner and the vessel operator would then continue correspondence on this issue for an average of about ten years, until all expenditures have been discharged. Based on this scenario, General Average could prove very costly and time consuming for the self-insured. Not so for the shipper covered by a broad-form policy, who would have their insurer attend to these matters on their behalf.

Other Types of Coverage
Other types of marine coverage include:

  • Institute Cargo Clauses A, B, and C; with A being the broadest coverage and C being the most restrictive.
  • Free of Particular Average, which is bare-bones insurance, covering total loss only. Without the benefit of a broad-form marine policy, such ex tensions or limitations might not be adequately addressed or defined, leaving the cargo owner with substantial exposure.

A good risk management program will usually uncover these idiosyncrasies of international transport and protect against them. Many companies employ the services of a marine insurance broker to set up the right program. Other companies may rely on the services and expertise of their freight forwarder or Customs broker to secure adequate coverage.

Mohawk Global Trade Advisors can help you identify the many risks involved in international cargo transportation, the extent of liability that might be incurred, and the possible solutions available to minimize that risk. Click here to learn more about our risk management services.

By Rich Roche, Vice President. Click here to read more about Rich.

©2014 Mohawk Global Trade Advisors

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It’s Raining… Inside My Container!?

Have you ever encountered this scenario? “My container arrived and the cargo inside is wet. There are no holes in the container and the interior stinks of mold and mildew. It also looks like it’s raining from the ceiling of the container. How did this happen?”

Container rain drips onto boxed cargo.

Container rain drips onto boxed cargo.

If your container was loaded in a tropical environment, where the air was warm and humid, then shipped to the United States, where temperatures were far cooler, your cargo may have experienced a phenomenon known as “cargo sweat” or “container rain.” Differences in temperature of as much as 50°C can occur at certain times of the year between tropical regions and the cooler, temperate climate of the U.S. As the outside temperature drops, the container’s contents cool, causing hygroscopic or moisture absorbing cargo and packing materials to release water vapor. The cool temperature inside the container prevents the water vapor from being absorbed into the air. This happens as the temperature of the container’s top and side panels falls below the dew point of the air trapped within the container, and like the dew running down a glass of iced tea on a hot summer’s day, condensation or “sweat” begins to form on the cargo and the inner ceiling and walls of the container. If there is enough moisture riding along with your cargo and packing materials, given the right heating and cooling cycles in the container, the vapor release could be so significant that it would seem to be “raining” from the ceiling.

"Sweat" appears on the inside of a shrink wrapped pallet.

“Sweat” has formed on the inside of a shrink wrapped pallet.

As warm, moist air is cooled below its dew point, water vapor in the air is transformed to condensation, sometimes in large enough amounts that it penetrates the same packing materials the vapor was released from. Water from the ceiling may fall directly on the cargo or drip down the walls, pool on the floor, and be reabsorbed by the cargo or packing materials. The resulting damage will be attributed to the inherent vice of the cargo or packing materials, and may not be covered by filing a cargo claim.

To avoid cargo sweat/container rain, there are several factors that must be considered. First, if you are loading cargo in warm and humid environments, you should understand the temperature fluctuations that your cargo may be subjected to for any given voyage. Next, you should understand the hygroscopic or moisture absorbing properties of your cargo and the material used to package it. Cargo with a high fibrous construction (such as cotton, apparel, jewelry boxes, etc.) will hold a certain amount of moisture at origin that can be released under the right cooling conditions. If your cargo and packaging are not hygroscopic, then you have little to worry about. Lastly, the type and amount of cardboard used can greatly contribute to moisture release.

If your factors are such that there is a high probability of sweat or rain, you may want to consider using desiccant in the container to wick moisture from the air before it becomes a problem for your cargo. For the best results, desiccant bags should be hung evenly throughout the container. Most desiccant manufacturers have guidelines for their products that will help you determine the type and number of units to deploy.

Ventilation is another fix; although ventilated containers are hard to come by and typically committed to specific bulk cargo that originates in the tropics, such as coffee, seeds, beans and nuts. If transporting retail goods, you will be better served by hanging desiccants.

Plastic barriers used to enclose inner packing can help prevent damage from cargo sweat or container rain, but must be used with caution since they may also trap moisture inside—particularly if they enclose hygroscopic cargo or packing materials. The best policy is to use a plastic barrier on the innermost confines of cargo that is not hygroscopic. An example of this would be electronics wrapped in plastic, supported in styrofoam, and contained within a carton. Since the electronics are not hygroscopic, the plastic barrier protects against water coming from the outside without fear of trapping vapor on the inside.

You may not be able to prevent cargo sweat or container rain, but by paying attention to the details of your shipment, you may be able to reduce the likelihood of their occurrence.

MGTA helps companies identify, manage, and mitigate risk in their supply chain. Click here to learn more about our risk management services.

By Rich Roche, Vice President. Click here to read more about Rich.

© 2013 Mohawk Global Trade Advisors

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Not All Risks Are Created Equal: Why You Need a Risk Management Plan Now More Than Ever.

In 2012, an explosion at a resin plant in Germany shut down production of nearly half the world’s supply of a critical polymer used in automotive fuel and brake lines, sending auto manufacturers scrambling to identify and qualify alternate sources (1). In 2011, a tsunami and nuclear disaster in Japan forced the shutdown of nearly 40% of the world’s 12-inch semiconductor wafer production (2).

A few months later, massive flooding in Thailand disrupted production of a critical high-tech component supplier, forcing Honda Motor Company to cut vehicle production rates by 50% for several weeks (3). Labor unrest at a major electronics supplier in China, piracy in the Indian Ocean, freight and fuel cost volatility–it hasn’t been easy managing global supply chains recently. Although the practice of supply chain risk management has been around for many years, events and headlines of the past 18 months have moved discussion of supplier risk to the top of the agenda in many companies.

In addition to delivery disruptions, these events can carry devastating financial implications for suppliers and buyers. Munich Re, one of the largest global re-insurance companies, reported that 2011 was the highest ever loss year on record for commercial insurers (4). These losses force insurers to raise premiums and reduce coverage for shippers that are already operating under financial strains associated with the global economic slowdown. As a result, more and more suppliers–especially smaller suppliers–are forced to renegotiate contracts with customers or go out of business altogether. Supplier financial risk and continuity of supply have become major concerns for many companies.

So, what should companies with global supplier networks do to manage risk?

1) Define Risk Criteria

Supply chain risk can originate from a range of sources, including demand, product, transportation, compliance, and supplier risks. Companies need to carefully evaluate their supply chains to determine what factors can create risk in these categories and define what constitutes acceptable and unacceptable levels of risk for each. Not all risks are created equal. So, the risk definitions should be closely tied to the company’s strategic business objectives. For example, if business objectives depend on quick fulfillment of customer orders, then risk factors that can create stock-outs may be deemed more critical than cost risks related to inventory levels.

2) Identify All Risks

For each supply network, it’s important to identify all possible risks that could impact the operation, not just the obvious ones. Oftentimes, it can be an unexpected issue with a second or third tier supplier that creates a supply disruption. Had the auto industry recognized how collectively dependent their car makers were on one supplier in Germany, they likely would have developed additional supplier capacity to mitigate the risk of a production stoppage. Flow charts and process maps can be useful tools for visualizing the physical flow of materials and goods through the network.

3) Evaluate and Prioritize Risks

The next step is to assess the risks and classify them in an organized manner, usually in terms of likelihood of occurrence and impact on operations. Once the risk criteria are prioritized, they should be used commonly across the entire enterprise. The risk classification system does not need to be complicated. Experience has shown that a simple system of risk classification (e.g., critical, high, medium, low) is preferable, in that it is easier to communicate and will be used more consistently across the organization. Once the various risks are classified, the focus should shift to identifying root cause factors for the most critical risks.

4) Develop Risk Management Plans

A risk management plan is simply a documented plan that describes a particular risk or risk category, and provides alternatives and steps to be taken to eliminate or mitigate that risk. Detailed risk management plans should be developed for the most critical risks identified in the prioritization process. For supply chain risks, the plans should include elements such as alternate suppliers and transportation modes, contact information, internal and external notification requirements, inventory classification and control measures, and other tasks needed to ensure a smooth transition and continuity of supply. Best-practice companies use cross-functional risk assessment teams to develop plans for the most critical risk scenarios. Failure modes and effects analysis can be used for assessing the potential effectiveness of such plans before they are required to be put into action. This systematic process identifies potential failures in a process design and the countermeasures that could be applied to reduce or eliminate the effects of such failures. Whichever methods the organization decides to use, the plans need to be fully documented so that various functions in the company can be briefed on their roles should the plans be put into action.

5) Exercise & Maintain Plans

As with any form of contingency or back-up plan, risk management plans are only useful if they can be successfully executed. If a key component of plan is to activate an alternate supply source for a critical component or material, it makes sense to occasionally place orders with the alternate source to test the supplier’s ability to deliver to specification and on schedule. An alternate supplier who is never used may well turn out to be no supplier at all, just at a time when they are most needed. All risk management plans should be reviewed and refreshed at least annually by the cross-functional team, to ensure that the plans and assumptions are still viable. Forward-looking companies that rely on international sourcing networks are wise to take a proactive approach to supply chain risk management in the near term.

MGTA can help your company develop or improve a risk management plan. Click here to learn more about our risk management services.

Footnotes

(1) Nathan Bomey, “Auto Supply Chain Seeks Other Sources of Chemical,” Detroit Free Press, April 24, 2012: A14.
(2) Rick Becks, “Risky Business: Re-thinking Supply Chain Risk and Resiliency,” Supply Chain Brain, February 24, 2012.
(3) Mike Ramsey, “Honda to Restore Some North American Production,” The Wall Street Journal, November 8, 2011.
(4) Rick Becks, “Risky Business,” Feb 24, 2012.

© 2012 Mohawk Global Trade Advisors

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