Executive Briefings

In the Zone: Companies Show Renewed Interest in FTZs

Woe to the manufacturer who thought it could save unlimited amounts of money just by moving production to China, or a similar source of cheap labor. What began as a simple case of outsourcing has grown a lot more complex in subsequent years. Government keeps heaping on more regulations on imports, while rising fuel and labor costs have made offshoring strategies less attractive than they once were. So global companies with complex supply chains have to become more creative. One way is to move at least some production capacity closer to North American markets. Another is to take advantage of government programs that encourage production here at home, by offering breaks on duty and other costs that are borne by U.S. importers of finished goods.

A popular option is the foreign trade zone. Companies have been using FTZs for decades, to carry out storage, processing, exhibition and partial manufacturing of goods without the upfront payment of import duties in the host country. Now, as supply chains become more globalized and rules on compliance get tougher, FTZ activity is on the rise, according to Leon Turetsky, chief executive officer of QuestaWeb (www.questaweb.com) in Westfield, N.J.

FTZs aren't the only way to save money on duties. Both duty deferral and drawback - the refund of money previously paid, when certain requirements are met - are available through other programs. But in an FTZ, duty isn't payable until merchandise ships from the facility for U.S. consumption. Even then, the importer can choose to base its duty rate on the finished product or its individual components, whichever is lower.

An FTZ in the U.S. can be especially valuable when the importer needs skilled manufacturing labor that isn't readily available overseas. In the end, says Turetsky, companies could come out ahead by relying to some degree on domestic resources. When rising Chinese labor rates are added to the cost of transporting goods across the Pacific, "it may not be cheaper than the U.S." And that doesn't include the cost of implementing risk-management strategies, such as the hoarding of safety stock close to customers in the event of a supply chain disruption.

The biggest cost savings that arise from use of an FTZ come from the ability to file weekly entries with U.S. Customs & Border Protection, instead of each time that goods enter the country. That benefit sharply reduces the total merchandise processing fee that importers must pay when they take goods out of an FTZ. It alone accounts for between 50 and 60 percent of the savings generated by FTZs, Turetsky says.

Another hefty chunk of savings comes from a reduction in customs broker fees, which are non-existent if the importer files its own entries. Smaller but still significant reductions come from lower duties that result from less waste and scrap materials.

Finally, there's the cost of capital to be considered. Each item held in an FTZ represents a certain amount of money that the importer didn't have to lay out to afford immediate duties, Turetsky says. It doesn't need to borrow as much to keep imports flowing through its supply chain.

All of those factors add up to renewed interest by global companies in a venerable program, says Turetsky. But don't take his word for it. At the moment, there are more than 500 FTZs and subzones throughout the U.S. The value of merchandise handled by FTZs ballooned from around $225bn in 2001 to $490bn in fiscal 2006, according to the U.S. Foreign Trade Zones Board (http://ia.ita.doc.gov/ftzpage/). They might not be the complete alternative to offshoring, but FTZs clearly offer one piece to a puzzle that keeps on getting more complicated.

- Robert J. Bowman, SupplyChainBrain

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Woe to the manufacturer who thought it could save unlimited amounts of money just by moving production to China, or a similar source of cheap labor. What began as a simple case of outsourcing has grown a lot more complex in subsequent years. Government keeps heaping on more regulations on imports, while rising fuel and labor costs have made offshoring strategies less attractive than they once were. So global companies with complex supply chains have to become more creative. One way is to move at least some production capacity closer to North American markets. Another is to take advantage of government programs that encourage production here at home, by offering breaks on duty and other costs that are borne by U.S. importers of finished goods.

A popular option is the foreign trade zone. Companies have been using FTZs for decades, to carry out storage, processing, exhibition and partial manufacturing of goods without the upfront payment of import duties in the host country. Now, as supply chains become more globalized and rules on compliance get tougher, FTZ activity is on the rise, according to Leon Turetsky, chief executive officer of QuestaWeb (www.questaweb.com) in Westfield, N.J.

FTZs aren't the only way to save money on duties. Both duty deferral and drawback - the refund of money previously paid, when certain requirements are met - are available through other programs. But in an FTZ, duty isn't payable until merchandise ships from the facility for U.S. consumption. Even then, the importer can choose to base its duty rate on the finished product or its individual components, whichever is lower.

An FTZ in the U.S. can be especially valuable when the importer needs skilled manufacturing labor that isn't readily available overseas. In the end, says Turetsky, companies could come out ahead by relying to some degree on domestic resources. When rising Chinese labor rates are added to the cost of transporting goods across the Pacific, "it may not be cheaper than the U.S." And that doesn't include the cost of implementing risk-management strategies, such as the hoarding of safety stock close to customers in the event of a supply chain disruption.

The biggest cost savings that arise from use of an FTZ come from the ability to file weekly entries with U.S. Customs & Border Protection, instead of each time that goods enter the country. That benefit sharply reduces the total merchandise processing fee that importers must pay when they take goods out of an FTZ. It alone accounts for between 50 and 60 percent of the savings generated by FTZs, Turetsky says.

Another hefty chunk of savings comes from a reduction in customs broker fees, which are non-existent if the importer files its own entries. Smaller but still significant reductions come from lower duties that result from less waste and scrap materials.

Finally, there's the cost of capital to be considered. Each item held in an FTZ represents a certain amount of money that the importer didn't have to lay out to afford immediate duties, Turetsky says. It doesn't need to borrow as much to keep imports flowing through its supply chain.

All of those factors add up to renewed interest by global companies in a venerable program, says Turetsky. But don't take his word for it. At the moment, there are more than 500 FTZs and subzones throughout the U.S. The value of merchandise handled by FTZs ballooned from around $225bn in 2001 to $490bn in fiscal 2006, according to the U.S. Foreign Trade Zones Board (http://ia.ita.doc.gov/ftzpage/). They might not be the complete alternative to offshoring, but FTZs clearly offer one piece to a puzzle that keeps on getting more complicated.

- Robert J. Bowman, SupplyChainBrain

Comment on This Article