opening new markets for your products - mark hardison

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Opening New Markets for Your Products

Mark Hardison, CPIM, CSCP

April 11, 2007 1

Presentation Agenda Tariffs and why they are used What is a Foreign-Trade Zone (FTZ)? The Banner Pharmacaps FTZ Story Questions

Tariffs and why they are used What is a tariff?

• A tax that adds to the cost of imported goods• A form of international trade policy

Why are tariffs used?• To protect . . .

Domestic employment Consumers Infant industries Certain industries of strategic importance

• To retaliate against an unfair trading partner

How do tariffs affect prices?

Domestic price is found at DP World price is found at WP At the lower WP price:

• Domestic consumers will consume more (WQ)

• Domestic manufacturers will produce less (DQ)

Imports make up difference (WQ-DQ)

Price without the influence of a tariff

How do tariffs affect prices?

A tariff increases WP to DPT Under the price increase:

• Domestic consumers will consume less (WQ)

• Domestic manufacturers will produce more (DQ)

Overall effect is:• Reduction in imports• Increased domestic

production• Higher consumer prices

Price under the influence of a tariff

WHAT IS A FOREIGN-TRADE ZONE?

The following slides courtesy of . . .

Craig M. Pool President

Foreign-Trade Zone Corporation

What is a Foreign Trade Zone?

A specially designated area, in or adjacent to a U.S. Port of Entry, which is considered to be outside the Customs territory of the United States

Established by Congress under the Foreign-Trade Zones Act of 1934

Purpose is to Expedite and encourage foreign commerce Create jobs and capital investment in the United States

What May Be Done in an FTZ?

Assembly Storage Manufacturing

Relabeling Mixing Repairing

Repackaging Cleaning Destroy

Processing Display Sampling

Testing Manipulation Salvaging

WHERE DO THE FTZ SAVINGS COME FROM?

Financial Benefits

Relief from Inverted Tariffs Duty Deferral No Duty on Re-exports Duty reduction or elimination on scrap Duty elimination on waste and yield loss Reduction in Customs Fees

Duty Reduction / Elimination

Calculating Inverted Tariff Relief

Motor admitted to zone– HTSUS 8501.10– Duty rate = 5.3%

Motor manufactured into vacuum cleaner– Cleaner HTSUS 8479.89– Duty rate = FREE

Duty rate applied to motor would be FREE Duty reduction = 5.3%

Inverted Tariff Relief Benefit

MOTOR IMPORTEDFROM CHINA

DUTY RATE5.3%

NEW AGE VACUUMSSUBZONE FACILITY

5.3% REDUCTION IN DUTY ON DOMESTICALLY SOLD PRODUCT

VACUUM SOLD IN DOMESTICU.S. MARKET

DUTY PAID AT FREE VACUUM RATE

Inverted Tariff Relief Benefit – Vendor Managed Inventory

MOTOR IMPORTEDFROM CHINA

DUTY RATE5.3%


VACUUM SOLD IN DOMESTICU.S. MARKET

DUTY PAID AT FREE VACUUM RATE

G.P. ZONEWAREHOUSE

5.3% REDUCTION IN DUTY ON DOMESTICALLY SOLD PRODUCT

Financial Benefits


No duty is paid until the merchandise enters the commerce of the US

Duty Deferral Benefit

MOTOR IMPORTEDFROM CHINA IN JANUARY, 2011

DUTY RATE5.3%


MOTOR SOLD AS SERVICE PART IN DOMESTIC U.S. MARKET ON

AUGUST, 2011

DUTY PAID AT 5.3%, BUT ONLY AFTER SOLD

THE DUTY ON THE MOTOR IS DEFERRED FOR 7 MONTHS

Financial Benefits


U.S. Duty is not paid on merchandise exported from the distribution zone

Re-export Benefit

MOTOR IMPORTEDFROM CHINA IN

DUTY RATE5.3%


MOTOR SOLD AS SERVICE PART AND SHIPPED TO EUROPE

NO DUTY IS EVER PAID5.3% SAVINGS

THE DUTY IS NEVER PAID ON EXPORTED MERCHANDISE

Financial Benefits


US Duty is not paid on merchandise destroyed or lost in production in the zone

TANK OF CHROMOZINE10% DUTY RATE

VALUE OF $300,000$30,000 DUTY PAID

GREENCHEM INC.BEFORE BECOMING SUBZONE

TANK OF TRIGOLFERINESOLD IN DOMESTIC U.S.

VALUE OF CHROMOZINE LEFTAFTER PRODUCTION $210,000

30% OF CHROMOZINELOST DURING PRODUCTION

DUTY IS PAID AT THE TIME THE MATERIAL COMES INTO THE U.S.

Duty on Waste and Yield Loss (No FTZ)

Elimination of Duty on Waste and Yield Loss TANK OF CHROMOZINE10% DUTY RATE

VALUE OF $300,000$30,000 DUTY NOTPAID WHEN ADMITTEDTO THE ZONE

30% OF CHROMOZINELOST DURING PRODUCTION

GREENCHEM INC.SUBZONE FACILITY

TANK OF TRIGOLFERINESOLD IN DOMESTIC U.S.

$ ONLY 21,000 DUTY PAID ON REMAINING CHROMOZINE IN FINISHED PRODUCT

NO DUTY PAID ON PRODUCTION LOSS

FOREIGN-TRADE ZONE SAVINGS= $9,000

Financial Benefits


A process called “weekly entry” can reduce the merchandise processing fee

Reduction in Customs Fees

Customs entries made on per shipment basis

Every entry is charged a fee based on 0.21% times the value of the merchandise

There is a cap on the fee of ($485) per entry

Zone admissions are not Customs entries, therefore not subject to Customs fees

MPF with No Zone

OLD AGE VACUUMSFACILITY

MonMPF=$485

TueMPF=$485

WedMPF=$485

ThuMPF=$485

FriMPF=$485

TOTAL MPF WITH NO WEEKLY ENTRY = $2,425

MPF with FTZ (Weekly Entry)


ONLY ONE ENTRY ISMADE FOR ALL THE WEEKS SHIPMENTSTOTALMPF = $485

Mon

Tue

Wed

Thu

Fri

SHIPPED TODOMESTIC U.S.Mon

MPF=$0

TueMPF=$0

WedMPF=$0

ThuMPF=$0

FriMPF=$0

SAMPLE COST/BENEFIT ANALYSIS

Acme Corporation’s: Net Savings at a Glance

YEAR 1 YEAR 2 YEAR 3

Total FTZ Savings $1,050,666 $1,050,666 $1,050,666

Total FTZ Costs $195,000 $100,000 $100,000

Net FTZ Savings $855,666 $950,666 $950,666

Customs Duty and Fee SavingsYEAR 1 YEAR 2 YEAR 3

Cash flow $62,619 $62,619 $62,619

International returns, obsolescence, waste, scrap

$109,584 $109,584 $109,584

Re-exports $226,766 $226,766 $226,766

Merchandise Processing Fee savings

$389,596 $389,596 $389,596

Brokerage fee savings $262,100 $262,100 $262,100

Customs Duty & Fee Savings

$1,050,666 $1,050,666 $1,050,666

FTZ Sample Implementation & Operation CostsTYPICAL COSTS YEAR 1 YEAR 2 YEAR 3

Fees Charged by FTZ Board N/A N/AFees Charged by FTZ Grantee Consulting Fees include:

• Obtain FTZ Authority• Activate with CBP• Training

N/A N/A

FTZ Administration Software• Software Implementation N/A N/A

SaaS Annual Fee In House FTZ Personnel Estimated Total Cost $195,000 $100,000 $100,000

NET SAVINGS FROM FTZ OPERATIONS

$855,666 $950,666 $950,666

STEPS TO REALIZING FTZ BENEFITS

1. Obtain Foreign Trade Zone Status For Distribution Firms

– You must be located in an existing FTZ or– You must apply for Foreign-Trade Zone status by

• Expanding or Modifying a General Purpose Zone• Apply for Subzone Status

For Manufacturing Firms– Even if you are located in an existing FTZ

• Apply for Foreign-Trade Zone Manufacturing Status• Apply for Subzone Status

All applications and requests for FTZ status are made to the Foreign-Trade Zones Board in Washington, D.C.

2. Activate Your Facility Set up compliant procedures, and observe strict

audit trails required by U.S. CBP Possibly the most important part of activation is

choosing an FTZ Inventory Control System

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3. Implementation of Software Your company will need a robust Foreign-Trade

Zone inventory tracking and record keeping system to manage the day-to-day FTZ operations

The system will need to:– Meet U.S. Customs and Border Protection (CBP)

regulatory requirements– Print CBP reports, forms, and entry documentation– Perform many other tasks and processes unique to the

Foreign-Trade Zones program

THE BANNER PHARMACAPS FTZ STORY

VisionCreating superior health care products to serve our global community.

MissionTo become the world's most innovative and respected gelatin-based drug delivery and specialty pharma company.

Who we areBanner has done, and are currently doing, business with the majority of the top 15 pharmaceutical companies in the world

Business & Manufacturing Locations Around the Globe

Global Management Center

Gelcaps de México

Banner Pharmacaps (Canada) Ltd.

U.S. Corporate Headquarters

Unites States Manufacturing

Banner Pharmacaps (Europe)

Drug Delivery Technologies

Banner’s Business Case for an FTZ

Identified imported raw materials with substantial duties in late 1990’s

If raw materials were converted into “medicaments,” would “substantially transform” the product to HTS classification without duty

Task to implement appeared too difficult Banner backed away


Large customer came to Banner in 2007 Wanted Banner to develop a softgel with their

imported active pharmaceutical ingredient (API) Projected annual duty > $4 million USD Award of business contingent on Banner

establishing an FTZ with permission to manufacture


A substantial business opportunity

+ Banner’s own savings potential

= Banner pursuing a foreign-trade zone

Project Milestones Summer 2007 – Decided to pursue FTZ Fall 2007 – Evaluated of software and consulting

service providers January 2008 – Engaged FTZ Corporation February 2008 – FTZ Application out for public review April 2008 – Project funding approved

– FTZ Consulting Services– FTZ Compliance Software

September 2008 – Received approval November 2009 – Activated

External Expenses Prior to Activation

FTZ application filing fee FTZ consulting services FTZ administration software

– License– Implementation

Grantee fees– Activation (one-time)– Annual service charge

Internal Expenses Prior to Activation

Information Technology– Interface file program development– Dedicated server– Communications equipment (CBP)

Project Team – Labor

Signs– All entry ways– Property perimeter

Benefits Realized First Year

Improved cash flow Obsolescence, waste, and scrap Re-export of raw material Merchandise processing fee savings Brokerage fee savings Return on Investment Cash positive

What We Did Fairly Well Identified that we needed professional help Our due diligence was thorough

Chose single source for software and consulting Our partner anticipated everything we would encounter Example:

Significant time to test interface files More surprises that we thought

What We Did Fairly Well

Developed thorough understanding of difference in inventory systems

Built a relationship with the CBP Port Director and Grantee

Remained completely transparent with Port Director at all times

If We Were to Do it Over Again We Would Have . . . Engaged consulting services before starting Used an FTZ expert to develop our FTZ application Included all of our products in initial application filing Networked with other FTZ operators early on

(NAFTZ and local) Not have underestimated ALL potential inventory

transactions Dedicated full-time resources to project

If You Are Considering Implementing an FTZ . . . Get professional help to get results sooner and do a

better job of implementing Use a single solution provider for both the software

and consulting Assign daily responsibility to a customs compliance

specialist Build a relationship and trust with your CBP Port

Director along the way Train and communicate effectively with your

– Leadership | Employees | Suppliers

Questions?

[email protected]

Tel: +1 (251) 471-6725Fax: +1 (251) 471-6727

Foreign-Trade Zone Corporation

2062 Old Shell Road

Mobile, Alabama 36607

mailto:[email protected]

mailto:[email protected]

opening new markets for your products - mark hardison

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