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In the New Normal Supply Chain, Firms Must Pivot Quickly

supply chain

In the New Normal Supply Chain, Firms Must Pivot Quickly

What will our supply chains look like after the impact of the pandemic has turned from an all-hands-on-deck crisis to some sort of new normal? Will either demand or supply patterns return to pre-COVID-19 levels? And should that happen, will it be in carefully managed phases, or more rapidly?

Many consumer-market experts speculate that we may find some of the changes in consumer buying—such as increased adoption of food home delivery or stocking cupboards with monthly visits to large-format stores—habit-forming, even after restaurants, hotels and fast-food outlets are once again operating at max capacity.

To imagine the future, we can look at what’s happening in the present crisis—astonishing, even heroic acts of supply chain flexibility.

-An industrial gases company pivoted so it was able to deliver a month’s worth of desperately needed medical oxygen in three days.

-A chain of currently shuttered department stores has loaned its distribution facilities and assets to a supermarket chain under pressure to keep food shelves full, as far more of us than usual eat three meals a day at home.

-A plastics molding company designed, developed and distributed a foldable, portable intubation shield within weeks.

These businesses have something in common—they have been able to use data and industry-specific software solutions to quickly adapt to shifting fulfilment and delivery operations, often over and over.

The need for flexibility in making and distributing goods is and will be, most obviously on show at the delivery end, where goods and services reach the point of purchase or consumption. Today’s newly responsive, efficient supply chain needs to stretch all the way to the supermarket shelf or patient’s bedside.

That won’t be possible without the ability to access and analyze extraordinarily detailed data about delivery operations. For distribution companies, this will be the key to competing and winning in a post-COVID-19 business landscape, where the ability to pivot quickly will be most prized.

What’s absolutely crucial is that companies can quickly model multiple potential new distribution strategies before they make actual changes. When granular-level information about what was delivered where and when yesterday is fed into delivery-planning software, it can help supply chain executives run myriad what-if scenarios to determine what resources to deploy tomorrow. What inventory, trucks and drivers would be required if sales volume dropped 50 percent, or doubled? What if orders are fulfilled out of a different distribution center?

Purpose-built route planning software like Aptean’s answers these and other questions in a matter of minutes—a superpower we are all going to need in the future. For example, it means a retailer can pivot quickly and easily, back and forth between replenishing outlets and delivering to homes, or rapidly increase service to demand hotspots. Regarding the “new normal” in delivery operations, the only certainty will be uncertainty. The ability to deftly manage this unpredictability will be a huge competitive advantage.

And yet, for a large number of businesses, delivery operations remain hampered by a lack of visibility or fine-tuned control. Too many rely on rudimentary distribution planning tools, or even paper-based systems to plan and assess their delivery operations. This means they are caught flat-footed when circumstances demand rapid change. Worse, the critical information about particular customer needs and demands too often resides in the head or heads of delivery planning staff, and becomes unavailable when those workers go sick or leave.

We need to pay heed to the lessons we’re learning during this challenge. The supply chain, like the virus, is global, but its effects are ultimately felt in individual businesses and homes. For companies reliant on delivery operations, if management of the final mile wasn’t a strategic imperative before COVID-19, it is now. It’s time to wake up to that reality and build delivery capabilities that are more flexible, more collaborative and, above all, data-smart.

To learn more about how to automate your route planning, contact info@aptean.com.

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Nicole O’Rourke has 25 years of success in building strategic marketing organizations and is responsible for leading Aptean’s global marketing and communications efforts as Chief Marketing Officer. She previously held the position of Senior Vice President and CMO for Manhattan Associates. Before that, she served as CMO at Covance Inc., and in senior strategic marketing roles at Aetna and Johnson & Johnson. O’Rourke holds a Master of Business Administration from Northwestern University’s J.L. Kellogg Graduate School of Management and a Bachelor of Arts in English Literature from Cornell University. She resides in Atlanta, Georgia, near Aptean’s global headquarters. Nicole can be contacted directly on LinkedIn or via info@aptean.com.

shipments

Best Ways to Keep Track of Your Freight Shipments

When shipments are late, so much becomes inconvenienced. Production stops, work gets backed up, further shipments are delayed. Then, the phone calls arrive with customers wanting to know the status. If you have ever had to ask “Where is my freight?” then, it’s time to learn about the best ways to keep track of it.

Fortunately, there are plenty of options that are helpful for tracking freight from the moment it leaves the original location all the way to the final destination. Many of them are under your control. If you follow best practices and meet the needs of shipping company regulations, you shouldn’t have to worry too much about where your freight is, as it should arrive on time.

Tip #1: Accuracy Matters with Time and Cost

When you ship freight, the accuracy of the information improves your shipping speed. Your shipments need to have accurate measurements of length, width, height, and weight. If you have fractions, they should be rounded up.

When your measurements are inaccurate, the shipping company has to make adjustments which can be costly in both time and money. Shipping companies do not set their own freight weight regulations; the Department of Transportation does. Companies have to comply with the DOT rules. If you give the shipping company inaccurate dimensions, they have to make adjustments that could cause your shipment to be delayed.

Tip #2: Package Properly for Pallets

Another reason your items could be delayed is another one that is under your control. When you ship freight, you should expect that it will sit on a typical 40” x 48” pallet. Your best bet for timely shipping is to package your freight to fit on a standard pallet. If you cannot do that, then you should take time to talk to your freight company for the best advice. If the freight company has to take care of poorly packaged items, they are slowed.

Tip #3: Learn About AEI Tags

Shipping companies of all types rely on Automatic Equipment Identification (AEI) tags. These passive tags help shipping companies see where their rail cars and semi-trucks are when they are in transit. With various types of AEI readers, real-time information about the location of the freight cars and the items they are carrying can be shared with shipping companies and their customers. AEI tags can help you not only see where your freight is in real-time, but they can also provide you with alerts when the shipment is expected to be delayed.

Tip #4: Use a Transportation Management System

Freight or transportation management systems help you keep track of what you are shipping, where it is, and when it arrived. They are designed to create helpful reports in real-time, and they can help you manage all of your freight to optimize your business. Some systems can be connected with AEI readers to create timelines for arrivals and to show what is happening when shipments are delayed.

Tip #5: Put Your Smartphone to Use

Along with a transportation management system, mobile apps can help you track your freight. Businesses rely on apps that provide GPS tracking and confirmation. Delivery logs are helpful, too. Some freight companies offer their own branded, specific apps to follow shipments. Some apps even get down to fuel efficiency and how to save money that way. When you are able to see all the data regarding your freight and shipping, you will be able to save more money in the long run.

Tip #6: Know Where Your Freight is Going

Sometimes, when things go too well, it can be too good to be true. Imagine the freight that is packaged perfectly and arrives on time to the destination without any hitches along the way. But, once the freight arrives, no one is there to meet it and assist in unpacking. Then, there’s no loading dock. It is just as important to know where your freight is going, so there aren’t any unexpected delays at the arrival end.

Tip #7: Watch the Road Conditions

There are times and places where road conditions become impossible to maneuver. When the weather is bad or traffic is at a stand-still, freight companies cannot do anything about it. But, when they use apps or tracking software, you can find out where your freight is and realize the problem.

If you require shipments to arrive on time and weather could affect your production, then you should do what you can to plan your shipments in advance. For example, it can be tough to trust the road conditions in the northern United States in the middle of January. So, planning for delays should be part of your production design.

global

How to Take Your Business Global

Companies around the world have increased their comfort level and ability to participate in international trade. Thanks to significant improvements in communication technology, infrastructure, and more numerous and adept service providers to support companies engaging in global business, the opportunity for U.S. companies to expand beyond our borders has never been better.

If you are considering taking your business global, the infographic below, Are You Ready for International Business Expansion? is a superb reference. It presents a concise overview of how to get started and the pitfalls to look out for when marketing products and services in other countries and cultures. The infographic is sufficiently broad to help businesses pursuing anything from straight exporting to local-market manufacturing, and yet it zeroes in on all the key issues to consider.

Preparation and planning make all the difference in any new enterprise, but for international business expansion, danger lurks in unexpected places. For instance, even sophisticated, Fortune 100 companies have gotten tripped up by using product names that appeal to U.S. customers — but repel customers in the foreign markets they were aiming at.* Language and cultural differences from one country to another, or even one region within a country to another, can create unintended consequences for every aspect of your sales, branding, marketing, operations and financial management.

Despite the challenges, companies can get plenty of help to overcome the hurdles and create new revenue streams from customers in faraway places. On the customer service side, companies have overcome language barriers by partnering with customer support organizations with multilingual skills — much more cost-effective and far faster than trying to build a multilingual internal team from scratch. Along similar lines, U.S. companies wishing to export can work with any number of experienced export firms with the knowledge to navigate the confusing and complex issues of local trade regulations.

Given the complexity of global operations, along with the increased costs and risks, it’s natural to ask, is going global worth it? Many organizations have correctly concluded that it is. Establishing positions in foreign markets enables companies to establish new and potentially vast revenue streams. It allows a company to shift focus from slowing markets to growing markets and maintain dynamic growth, rather than being anchored to the fate of a single national market. It enlarges the company’s talent pool, facilitates new product development, and establishes a competitive advantage over companies doing business locally or nationally. To learn more about what it takes to go global, continue reading below.

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Author Bio: Anita Lee is Marketing and Sales Director for Callnovo, an outsourced contact center service provider specializing in customer services and technical support. She has five years of experience in the industry, and focuses on e-commerce customer service and call center operation. 

*Source: https://www.inc.com/geoffrey-james/the-20-worst-brand-translations-of-all-time.html

delivery

Is your Ecommerce Caught Between Delivery Delays and Voided Service Guarantees? Strategies to Survive this Situation.

The pandemic has disrupted ecommerce businesses in unique ways. While a few ecommerce stores went bust, others doubled their revenue overnight. Regardless the parcel volumes continue to soar. The parcel volumes are so high that even major shipping carriers like FedEx and UPS are overwhelmed. For example, FedEx alone saw a 35%-40% increase in B2C deliveries. An unprecedented rise in shipments has forced both the carriers to resort to undertaking stringent actions.

Carriers Suspend Service Guarantees

FedEx and UPS have suspended money-back guarantee for ground and priority services. Let’s take a minute to understand what this means for merchants. An escalation in order volumes directly impacts the carrier’s on-time delivery performance. It is almost a given that merchants will experience a minimum of 20% increase in delays. An explosion in sales, impatient customers, and shoddy delivery experience. Add to it, COVID uncertainty and unaccountability resulting from voided service guarantees. Sounds like a disaster in the making?

When delays are imminent

With the growing volume of residential deliveries clogging their network, carriers may redirect traffic to relieve congestion. Suspension of guarantees also means that FedEx or UPS can switch your priority shipments to lower-cost ground mode without notice. Expect more delays for overnight and priority shipments. While you pay for a premium service there is no way you can hold carriers accountable.

Watch out for COVID-19 Surcharges

In order to mitigate the strain on their delivery network, UPS followed by FedEx has come up with peak volume surcharges. A $30 surcharge as additional handling charges and $0.40 for services like FedEx SmartPost or UPS surepost. But the surcharge that retailers must be most concerned about is the residential area surcharge. A surcharge of $0.30 will be levied on all orders that are to be delivered to residences.

Strategies to survive

The disastrous combination of delivery delays and rising shipping costs can ruin your sales revenue. It is crucial to take steps to mitigate the impact of COVID on your shipping costs as well as customer experience.

Here are a few strategies to follow:

1. Re-negotiate your shipping contract: UPS or FedEx can’t spring a surprise charge. Especially during these trying times. Work through your shipping profile to figure out the impact of these charges on your costs. Negotiate with your FedEx or UPS rep and draw up a special contract for the COVID situation.

2. Consider charging for order delivery: Free and fast delivery has been your brand’s USP. However, if including a shipping fee helps your business stay afloat, don’t shy away. Don’t let the additional surcharge eat into your profit margin.

3. Delays should not deter you: Factor in for delays while revisiting the estimated date of shipments on your shipping page.  Communicate well in advance to your customer support team. Mention the changes to delivery times due to COVID On your home page.

4. Over-communicate with your customers: Let your customers know at all times where their package is. Stay on top of your orders at all times. Act quickly in case of a delivery exception.

5. Audit your invoices: Businesses are slashing all the excess spending. As for ecommerce, you should start by auditing your shipping invoice. It is more critical than ever to examine each and every line item on your invoice. This can help you save 10%-12% of your shipping costs.

The peak volume surcharges and service guarantee suspension are supposedly temporary. When things go back to normal, FedEx and UPS are likely to reinstate these service guarantees. However, with no clear timeline in businesses must prepare to navigate the status-quo as long as it lasts.

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Simon Perkins is a Shipping Cost Management expert at AuditShipment.com, a real-time parcel monitoring and AI-powered audit service that provides businesses with deep shipping intelligence and actionable cost recovery insights.

tariff exclusions

What Your Business Needs to Know and Do About Tariff Exclusions

As COVID-19 continues to wreak havoc on the world economy, it’s prudent to find ways to keep your shipping business afloat by finding economic relief if and whenever possible. First off, being aware of the changing complexities of the China-U.S. trade war is essential. According to the Census Bureau’s Foreign Trade Statistics, China is one of our country’s largest trading partners, which means companies large and small are likely affected by the trade situation. Last year, the U.S. imported $452 billion from China, which made up about 14% of overall U.S. imports by value.

Section 301 of the Trade Act of 1974 allows the U.S. to impose trade sanctions as recourse for unfair foreign trade practices. In 2017, China was under investigation for issues regarding innovation practices, intellectual property rights, and technology transfer. Since then, retaliation measures have been put in place for the past couple of years and remain in effect for an indefinite amount of time. While the USTR recently announced reductions on some tariff measures and a suspension of others, about two-thirds of U.S. imports from China are still taxed an additional 7.5% to 25%, covering about $350 billion worth of product. Keep in mind, the average duty rate for U.S. imports is only 2%; thus, China’s products are incurring additional costs on top of that.

The current tariffs are extremely broad and cover many industries including food/beverage, industrial supplies, transport equipment, consumption goods, and fuels and lubricants. As of this month, the U.S. Customs and Border Protection (CBP) reports collecting $52 billion in Section 301 duties since the trade remedies took effect.

This is a hot issue for importers and we’re currently seeing more industry associations and companies pushing for relief from these measures. While the period to request exclusions from the Section 301 tariffs is now closed, it is a great time to confirm that you are doing all you can to potentially recover duties previously paid, and potentially apply on a go-forward basis the exclusions that the USTR has been granting against certain products.

How to seek relief now and in the future

Cost savings and refunds are top of mind for all, so to help provide some relief, the USTR has released many tariff exclusions shippers can apply for. The important thing to keep in mind here is that ample work is involved. It’s not just a one-time process, because you’ll likely need to continuously apply for new exemptions where applicable. Some of the exclusions being granted are product-specific whereas some are granted at the HTS classification. You’ll also want to be ready in case CBP asks for proof of eligibility. Staying organized is paramount to identify the opportunities and defend against CBP scrutiny.

Each exclusion round also has a validity period, and many of those expiration dates are coming up fast! We’re seeing the USTR opening several new short-window comment periods to consider extending previously granted tariff exclusions. This could be your chance to drop commentary to protect and extend your granted exclusions or to oppose competitors, if applicable and necessary so that your company is not left at a disadvantage.

What are the eligibility requirements?

Eligibility is simple – companies affected by the China 301 tariffs.

Exclusions can be granted based on sourcing, impact on U.S. jobs and product type and need. Producers of goods used to combat COVID-19 can also be eligible for exclusions.

Also, tariff exclusions are retroactive to the date the tariffs were first applied, and exclusions generally expire after one year from the date of publication of the granted exclusion.

Important Reminder for Process

The customs entry and liquidation process is complicated, spanning a lengthy period. It can take up to 480 days and is broken down into these windows of time:

1. Day 1: Customs entry is filed

2. Day 1 – 300: Post Summary Correction (PSC) – can be filed to request refund prior to the entry liquidating

3. Day 300: PSC no longer eligible as entry is deemed liquidated (importer may request suspension or extension of liquidation prior to this point).

4. Day 301 – 480: Entry is liquidated, and protest must be filed to request a refund

5. Day 480+: Entry may be past protest period and is no longer eligible for a refund request via PSC or protest.

Since the process is lengthy, make sure you consider these tips when conducting your duty recovery analysis:

-Know your product (10-digit HTS codes and know the barcodes toward the products)

-Apply their qualifications

-Narrow down lists of products impacted by tariffs

-Identify which ones have exclusions granted – work with that list

-Run a report and gather import activity

-Start looking at validity dates

-Make sure brokers are applying it to the new shipments of the products

-File petitions if you want to continue to take advantage of it

Insights for the future

The trade war is not ending soon and it’s hard to unravel, but we know it’s an important issue that we can expect to see in the spotlight for the foreseeable future. Customers are advised to stay close to this and to pay attention to the advisories from C.H. Robinson and USTR.

To check for exclusion status against your products click the resources here:

1. $34 Billion Trade Action (List 1),

2.  $16 Billion Trade Action (List 2),

3. $200 Billion Trade Action (List 3)

4. $300 Billion Trade Action (List 4)

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shippers'

Shippers’ New 2020 Priorities

While cities and states are slowly reopening, there is still significant uncertainty surrounding the global economy and when we’ll head towards recovery. Shippers are experiencing never-before-seen challenges and, in maneuvering them, realize it’s vital to understand the change in consumer behavior and how it impacts the supply chain.

A recent Consumer Brands’ Association Coronavirus Survey found 68% of Americans are optimistic about the next 6 months and the United States’ ability to reopen the economy. Despite consumer mentality improving, shippers’ concerns on COVID-19’s impact on the supply chain remain top of mind.

While some industries experienced a surge in demand, including healthcare, grocery and consumer packaged goods (CPG), this hasn’t been the case across the board. Some faced a reduction or, in some cases, a complete halt in business. These new challenges and concerns have led shippers to shift their strategies and develop new priorities for the rest of 2020 and beyond.

Shippers’ Top Priorities

As reported in the recent Q2 2020 Coyote Curve Market Forecast, the truckload market has likely already hit the bottom in Q2 at a -9% spot rate, and contract and spot rates should more or less converge from here. Due to the circumstances, the rate environment will most likely be more forgiving than usual, but it will definitely be volatile; and, with rates regularly fluctuating, shippers must keep their key priorities top of mind.

First and foremost, shippers’ top priority is keeping their people safe during this unprecedented time. They’re also focusing on keeping team members productive despite disruption, making necessary strategic shifts in production, managing rapid and frequent shifts in demand, and maintaining operational efficiency.

The priorities for those experiencing an influx of demand are quite different from those seeing a decrease. Shippers in surging markets are focused on supporting frontline employees by ensuring their facilities have necessary crucial safety items like personal protective equipment (PPE), testing kits, and sanitization products.

The industries experiencing a downturn, such as durable goods, have been focused on keeping their businesses operating and their people productive. They’ve had to prioritize repurposing available capacity to streamline operations, while others have turned to private fleets to haul less-than-truckload or full truckload shipments. To support COVID-19 relief efforts, some industries even shifted their production lines completely, like automotive manufacturers producing ventilators or clothing manufacturers making masks and scrubs.

Other shipper priorities include managing increased production output, despite lower processing rates. These lower rates come from new facility regulations mandating safety procedures, social distancing, and fewer employees per shift, resulting in less efficiency. Shippers are also dealing with a less frequent transportation schedule and imbalanced inventory, adding to the struggle of keeping supply chains running smoothly.

A new 2020 for shippers

Regardless of the industry a shipper operates within, the outlook for the remainder of 2020 is much different than originally planned. The entire supply chain realizes the importance of developing new strategies to adhere to the current situation and prepare for future disruptions.

Shipping processes will inevitably change to improve supply chain visibility and automation and update future inventory and warehousing procedures. These new plans and strategies focus less on short-term, cost-based decisions, and more on proactivity, flexibility, and efficiency.

Shippers have rewritten their 2020 plans to address these new priorities. While some tactics have higher initial costs, investing now will allow shippers to better recover from future disruptions. Other new strategies include:

-Collaborating with other shippers to garner insights and best practices

-Creating pop-up fleets at surging origin points

-Focusing productions on the lines making the most, the fastest

-Working with 3PL providers that offer flexible, instant capacity to haul freight

-Moving live-load pick-ups and deliveries into temporary drop trailers

-Reducing number of SKUs to eliminate unnecessary variety

What comes next

 Some shippers have found it easy to identify ways to better prepare their businesses for future disruption and have established new processes to do so. However, this doesn’t mean they have avoided uncertainty altogether. Shippers are asking themselves three key questions:

-How do I keep my employees healthy and safe?

-How do I keep my facilities up and running efficiently?

-How do I limit disruption to my supply chain?

Since COVID-19, shippers immediately made shifts to maneuver the unthinkable. Unfortunately, there is no clear answer as to when or how shippers will see less market volatility, and they may even see more complexities in the meantime. This brings additional geographic and industry disparities.

As the economy moves towards recovery, we anticipate a surge in demand and a corresponding increase in volume. Industries, especially those whose shippers slowed down, will have lean inventories and, when demand rises, need to increase production. While shippers’ results may differ from their original 2020 goals, we believe a recovery in consumer demand will be here soon.

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Nick Shroeger is the Chief Network Solutions Officer at Coyote, a leading global third-party logistics provider headquartered in Chicago. Since joining the Coyote team in July 2009, Nick has been a key leader in identifying challenges of the supply chain industry and developing and scaling solutions. In his current role, Nick leads Coyote’s research and innovation efforts for both shipper and carrier solutions as well as network connectivity with Coyote’s parent company, UPS.

Global Trade Magazine Opens Nominations for 8th Annual “Americas 50 Leading 3PLs”

Global Trade Magazine has officially kicked-off its 8th annual “America’s Top 50 Leading 3PLs” nominations. This year’s selected nominees will showcase the most competitive movers and shakers transforming domestic and international logistics, exceeding client expectations while maintaining an exemplary company profile with competitive solutions.

Following last year’s focus on “needs-based” and “high demand” categories, the 2020 feature will spotlight specialty industries including E-commerce/Omni-Channel, Temperature-Controlled, Hazmat, Distribution, Freight Forwarding, and much more.

“It’s a measure of the quickly growing/changing/evolving global marketplace that arguably the most critical industry serving it, Third Party Logistic Providers (3PLs), continues to grow, change and evolve at a dizzying pace,” explained former senior editor Steve Lowery.

Global Trade Magazine will determine the final 50 nominations based on industry reputation, outstanding operational excellence, game-changing initiatives, disruptive technology solutions, and unmatched levels of innovation. This list showcases leading companies while providing a comprehensive list for businesses seeking new partnership opportunities.

“It’s easy to say that one must move faster, deliver services quicker, be more innovative and have organizational agility to flex with the world, but it takes something quite different to lead the cultural transformation that is required to make these goals a reality,” said Rich Bolte, CEO of BDP.

“Leadership will have to change as well. Leaders will be measured by their ability to innovate and create potential disruptions. The old paradigm of measuring only performance and execution has changed.”

To see a complete list of recipients, please visit globaltrademag.com to view the current issue.

Nominations are currently open and will be accepted through August 15 at 5 p.m. CST.

CLICK HERE TO NOMINATE YOUR 3PL

foreign

The Proposed Expansion of Mandatory Foreign Investment Filings During the Pandemic

In the midst of the pandemic, the Committee on Foreign Investment in the United States (“CFIUS”) has proposed several revisions to its regulations (“Regulations”) that change when short-form filings (called “declarations”) are required with respect to covered foreign investments of U.S. businesses which work with critical technology [2]. What is most significant for foreign investors is that the proposed rules expand the mandatory declaration and required CFIUS review to include critical technology transactions that range well beyond the 27 industries originally designated by CFIUS – to cover all sectors of the economy [3].

The raison d’etre for this proposed CFIUS rule change is not entirely clear. While the modification largely reads as being technical in nature, CFIUS does, however, observe that other, unspecified “national security considerations” are involved. Thus, a reasonable inference from current circumstances is that CFIUS seeks the ability during the Covid-19 crisis to review acquisitions by China in a broader range of business sectors in order to assess in advance the national security risk, if any, in situations where financially struggling U.S. firms with innovative dual-use technology might be more willing than before to consider such investments as a lifeline.

Interested parties in the business community should note public comments are due by June 22, 2020.

The Proposed Expansion of Mandatory Filings for Critical Technology Transactions

By way of background, under the existing Regulations, a mandatory declaration is required for transactions involving certain U.S. businesses that: 1) produce, design, test, manufacture, fabricate, or develop one or more “critical technologies”; and 2) use the critical technology in specified ways in one or more of 27 specified industries. Significantly, under the revisions, CFIUS eliminated the second prong of the requirement – i.e., the nexus to 27 industries, and refocused the requirement instead on companies that have critical technology that would require certain export licenses or other authorizations to export, re-export, transfer (in-country) or retransfer the critical technology to certain transaction parties and foreign persons in the ownership chain.

CFIUS indicates that the new focus of the mandatory filing requirement on export control requirements for critical technologies “leverages the national security foundations of the established export control regimes, which require licensing or authorization in certain cases based on an analysis of the particular item and end-user, and the particular foreign country for export, re-export transfer (in-country) or retransfer.” 85 Fed. Reg. 30894.

While that is true enough, in fact, the existing standard already is based on the export control standards. The term “critical technology” was and still is, defined as technologies that are subject to export controls (i.e., articles or services on the U.S. Munitions List, items on the Commerce Department’s Control List, and other specialized lists)[4]. Now, in addition to being subject to export controls (e.g., on one of the enumerated lists of controlled items), the technology must specifically be subject to a licensing requirement.

In effect, CFIUS has doubled down on export controls as the criteria for mandatory filing – the item must be on a controlled list and a license must be required for the particular foreign acquirer that is a party to the transaction.

The Significance of the Proposed Change in Mandatory Filing Requirement

Is this licensing requirement a meaningful distinction for foreign investors? While many of the items on these export control lists do require licenses or other authorizations for export, this is not necessarily the case for the export of all items to all countries for all uses. On some lists (e.g., the Munitions Lists), every article and service requires a license for export to all locations. On others (notably the Commerce List, the main list of “dual-use” technologies), items controlled are only licensable for certain countries and certain purposes to certain end-users, as designated on the list.

Overall, however, the universe of items on controlled lists versus those on the lists where licenses are required probably aren’t all that different – i.e., the range of mandatory filings is not very meaningfully limited by this change. Notably, for certain near-peer competitor countries like China and Russia, the distinction is particularly limited. Indeed, for these countries, many items on the Commerce List will require licenses in any event. Moreover, since China is under a U.S. arms embargo in place for many years, any export of an article or service on the Munitions List would certainly require a license (which would not be granted).

In any event, even if the new nexus to export license requirements narrows somewhat the class of critical technology transactions subject to mandatory declarations, this change is undoubtedly more than offset by the elimination of the required nexus to the 27 specified industries. Under the proposal, foreign acquisition of any U.S. business – regardless of what industry it works in – would require a mandatory declaration where the business utilizes critical technology provided that certain export licenses or other authorizations would be required to export such items to the foreign acquiring party.

On balance, this change is significant. It broadens the scope of the mandatory filing requirement to a wide variety of acquisitions involving critical technology applications from medical devices to commercial vehicles to a wide range of high tech sectors. Foreign investors thus would need to be considerably more diligent in considering the CFIUS risk with respect to structuring a broader range of these acquisitions.

Why the Expansion of the Mandatory Filing Requirement?

Why the expansion of mandatory declarations and does it relate to the pandemic?  CFIUS offers only vague explanations – noting its further consideration of public comments made in prior rulemakings, the Committee’s additional experience assessing mandatory declarations, and “other,” unnamed, national security considerations” [5].

One very possible set of such “national security considerations” is to afford CFIUS the ability to investigate a considerably broader range of transactions involving China where any critical technology requiring a license is involved. Since many dual-use items on the Commerce Control List and everything on the Munitions List do require licenses for China, the expansion of jurisdiction would be significant – as it applies without regard to the industry where the critical technology is used.

The logic of this expanded approach would be that, under Chinese laws and policies on civil-military fusion, any Chinese company, regardless of industry, could be required to divert the critical technology it is acquiring to the state sector for military use. Thus, it arguably makes sense for CFIUS to seek to examine these technology deals across the board.

This action also would be consistent with a range of other recent Administration actions during the Covid-19 crisis – from restrictions on participation in the U.S. bulk-power infrastructure to additional export control restrictions on Huawei – all of which appear to be focused on limiting U.S. high tech engagement with China.

Why now? The pandemic has raised the specter of foreign firms from potential adversaries buying sensitive assets at steep discounts. Numerous European governments are very focused on protecting sensitive assets against distress buying.  In this context, recent comments by Ms. Ellen Lord, the Under Secretary of Defense for Acquisition and Sustainment, suggest concern that during the pandemic smaller U.S. companies that support the aerospace and defense sector could experience “significant financial fragility” and therefore be more vulnerable to acquisition by potential adversaries [6]. She also noted the prospect of “nefarious” acquisitions involving the use of shell companies during the pandemic and indicated a desire for CFIUS to have more authority to address these situations. Thus, it just may be that the proposed revision to the Regulations is an effort to address this felt DoD need.

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A partner in Eversheds-Sutherland, a global law firm, Mr. Bialos [1] previously served as Deputy Under Secretary of Defense for Industrial Affairs and co-chairs the firm’s Aerospace and Defense practice.

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References

[1] A partner in Eversheds-Sutherland, a global law firm, Mr. Bialos previously served as Deputy Under Secretary of Defense for Industrial Affairs and co-chairs the firm’s Aerospace and Defense practice.

[2] 85 Fed. Reg. 30893 (setting forth amendments to 31 C.F.R. §800). The mandatory filing requirements were established pursuant to the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”).  The proposed amendments also make clarifying changes with respect to mandatory declarations in transactions involving foreign States. Specifically,  section 800.244 of the Regulations (see 85 Fed. Reg 30898) would, among other things, change the definition of “substantial interest” with respect to transactions where a general partner, managing member or the equivalent is involved, to clarify that the foreign state’s interest is only relevant it applies only where a general partner, managing member, or equivalent “primarily directs, controls or coordinates the activities” of the entity that is the acquiring party.  In effect, this change narrows to a limited extent the range of transactions with foreign government involvement where a mandatory declaration is required.

[3] CFIUS accomplishes this expansion through a series of technical amendments to the Regulations: Section 800.254 (defining U.S. “regulatory authorization” to refer to the types of export licenses that require mandatory declarations); section 800.256 (introducing the concept of “voting interest” to include foreign persons in the ownership chain that would need to be analyzed from an export control standpoint to determine if a license would be required to transfer the technology in question to that party); and 800.401 (which re-scopes the mandatory declaration requirement for critical technology transactions).  See 85 C.F.R. 30895-8.

[4] 31 c.f.r. § 800.215.

[5] 85 Fed. Reg. 3894.

[6] See Transcript, Press Briefing of Ellen Lord, Undersecretary of Defense (A&S) Ellen Lord on COVID-19 Response Efforts (April 30, 2020).   Available at: https://www.defense.gov/Newsroom/Transcripts/Transcript/Article/2172171/undersecretary-of-defense-as-ellen-lord-holds-a-press-briefing-on-covid-19-resp/

mandatory declaration

CFIUS Proposes Changes to Mandatory Declaration Requirements

On May 21, 2020, the U.S. Department of the Treasury published a proposed rule that would amend the scope of mandatory filings before the Committee on Foreign Investment in the United States (“CFIUS”), an interagency body that reviews foreign investments into the United States to assess national security risks. The proposed rule follows the Treasury Department’s publication of the regulations implementing the Foreign Investment Review Modernization Act, a statute passed in 2018, which aimed to streamline and modernize the CFIUS review process.

We previously summarized the CFIUS regulations here and here. The proposed rule amends the scope of the mandatory declaration requirement for transactions involving U.S. businesses involved in critical technologies and makes clarifying revisions to the definition of “substantial interest” in the context of acquisitions involving foreign governmental involvement.

Modification of Critical Technology Rules for Triggering Mandatory Declarations

Most notably, the proposed rule would make three key changes to criteria triggering a mandatory declaration requirement in transactions involving a “TID U.S. business” involved in “critical technologies.” (For an analysis of what constitutes a TID U.S. business, please see our earlier alert here.) The current rule requires a mandatory declaration to be filed, among other circumstances, in a covered investment or covered control transaction of a U.S. business involved in critical technologies that are used or designed for one or more industries identified by NAICS codes in Appendix B to 31 C.F.R. Part 800. The proposed rule would, first, refine the scope of the critical technologies triggering the mandatory declaration by covering only those technologies that would require “U.S. regulatory authorization” for the export, re-export, transfer (in-country), or retransfer to the foreign acquirer involved in the transaction.

Second, as described further below, while focused in the first instance on the nationality of the foreign acquirer, if the foreign acquirer is itself subject to an ownership interest of 25% or more from a person in a third country, the export licensing requirements applicable to that third country person will also be relevant.  Third, the amendments would eliminate the current requirement that the TID U.S. business be listed as one of the industries identified in Appendix B.

Regarding the first element, the proposed rule would define the term “U.S. regulatory authorization” to include authorization required by the Department of State under the International Traffic in Arms Regulations (“ITAR”); the Department of Commerce under the Export Administration Regulations (“EAR”); the Department of Energy relating to assistance to foreign atomic energy activities; or the Nuclear Regulatory Commission related to the export or import of nuclear equipment and material. In most cases, the availability of a license exception under the applicable export control regime would not be given effect; that is, if the export requires a license to the applicable parties under the relevant export control regime, the availability of a license exception for export would not similarly provide an exception to the mandatory declaration rule.

There are, however, four carve-outs—the first concerns the general authorization under Department of Energy export controls, and the other three concern three license exceptions under Part 740 of the EAR (specifically, the Strategic Trade Authorization (STA); Technology and Software – Unrestricted (TSU); and paragraph (b) of the Encryption (ENC) license exceptions). Thus, for example, transactions with foreign acquirers from countries with favorable treatment under the EAR’s Strategic Trade Authorization (STA) license exception at 15 C.F.R. § 740.20(c)(1) may be exempt from mandatory declaration requirement under the proposed rule. Second, the proposed rule could potentially expand the scope of transactions that trigger a mandatory declaration based on the export license requirements applicable to owners of the acquiring foreign entity.

In this regard, the proposed rule would also make the mandatory declaration requirement applicable to transactions where there is a foreign person who holds or is part of a group of foreign persons that together hold, a “voting interest for purposes of critical technology mandatory declarations” in a foreign acquirer. The proposed rule defines the term “voting interest for purposes of critical technology mandatory declarations” as a 25% voting interest or, in the case of entities organized as partnerships, a 25% interest in the general partner, managing member, or equivalent of the entity.  Thus for, example, if foreign acquirer X of a TID U.S. business is from country to which a critical technology can be exported without a license, but X is 25% or more owned by Y in a third country to which an export license would be required, the mandatory declaration regulation would be triggered.

Finally, although not necessarily its intent, the proposed rule may actually broaden the application of the mandatory declaration requirement by removing the current Appendix B, such that the declaration requirement would no longer be limited to only those 27 industries listed in Appendix B. As a result, any acquisition of a U.S. TID business with the requisite involvement with a critical technology may trigger the mandatory declaration requirement, without regard to the industry in which the TID business operates.

Modification of Definition of “Substantial Interest”

The proposed rule would also amend the definition of “substantial interest” for purposes of transactions involving foreign governments. The current regulations require a mandatory declaration to be filed in transactions where a foreign person obtains a “substantial interest” in a TID U.S. business, and a foreign government (other than excepted foreign governments, currently only the U.K., Australia, and Canada) has a “substantial interest” in the foreign acquirer. The current definition of “substantial interest” applies, with respect to a foreign government’s interest in a foreign acquirer organized as a partnership or similar entity, when the foreign government holds at least 49% of the general partner, managing member, or equivalent of the entity.

The proposed rule would narrow that provision by applying it only when the general partner or equivalent entity primarily directs, controls, or coordinates the activities of the foreign acquirer. The current rule also contains a provision that any “voting interest” held by a parent entity in a subsidiary entity will be deemed to be 100%. Because there was some confusion as to whether this provision applied to non-voting partnership interests, the proposed rule would remove the term “voting” to clarify that this provision applies to such entities organized as both corporations (and equivalent entities) and partnerships (and equivalent entities).

Comments Due by June 22, 2020

Comments on the proposed rule may be submitted through June 22, 2020.  Parties with interests which may be impacted by the rule should strongly consider submitting comments prior to this deadline to ensure that all relevant industry insight is considered by CFIUS prior to the final rule becoming effective.

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shipping

BR Williams Trucking Shares Step-by-Step Guide for Shipping & Receiving

When it comes to a seamless and efficient process for managing the movement of goods, BR Williams Trucking knows what it takes. From accurately managing inventory, meeting timelines, and maintaining streamlined communications among workers, the below step-by-step process for shipping and receiving highlights why these steps are critical to supporting the health of the supply chain and developing a competitive advantage.

The Shipping & Receiving Process: A Step-by-Step Guide Infographic
Graphic provided by BR Williams Trucking