Executive Briefings

Sales to the Military Often Can Bring Big Headaches                          

International Truck confronts the challenge of meeting the U.S. State Department's strict rules on the sale of commercial and military items.

The rewards for expanding into international markets can be substantial. So is the price tag, in terms of government regulations that must be followed. And when the military is involved, the situation becomes even more complex.

The progressive involvement of International Truck and Engine Corp. in military sales to Afghanistan and Iraq has resulted in ever-higher levels of compliance that must be met. In truth, though, the company opened itself up to a slew of potential headaches the moment it sold a single item with military application-whether a complete vehicle, service part or even technical expertise.

International's entry into the military market over the last two years "was a fairly organic process," says Ben Bauman, manager of global logistics and compliance at International. It began by selling commercial trucks to the army. Then it added strictly military features, such as armor and gun mounts, some for use by third-party contractors. Finally, the company developed its own armored personnel carriers based on commercial chassis, which were modified by integrators for the battlefield.

The military bidding brought International smack up against the wall of the U.S. State Department's International Traffic in Arms Regulations (ITAR). That regime has imposed tight scrutiny over military sales in the post-9/11 world. Failure to comply with its rules can result in heavy fines.

It had been years since International was a regular supplier of equipment to the military overseas. As International Harvester, the company played a major role in World Wars I and II, but shed much of its knowledge in that area when its farm and construction equipment division was sold to Tenneco Corp. in 1984. The remaining operations, mostly involving the production of commercial trucks, engines and parts, became Navistar, which today is the parent company of International Truck and Engine.

With the first military sale, International joined the ranks of civilian providers that were in need of regulatory help. It turned to JPMorgan Chase Vastera, an expert in the bureaucratic requirements of international trade. (Vastera, then a stand-alone company offering clients software, consulting and a database of trade regulations worldwide, was acquired by JPMorgan Chase Bank, N.A. in 2005. The trade-management unit is based in Dulles, Va.)

International's parts universe consists of some 600,000 items, of which 100,000 are active and potentially affected by government rules on military sales. The company must segregate parts for commercial vehicles from those meant for products that come under ITAR jurisdiction. A simple hose, cut one inch shorter to fit into a truck equipped with a machine gun, is considered an ITAR part, Bauman says.

 

Parts 'Scorecard'

Vastera helped to guide International through the thicket of regulations and agencies that oversee the transfer of military technology to overseas buyers. The firm's first task was to scope out all of the manufacturer's applicable products, from the smallest part to fully assembled vehicles.

Vastera came up with an initial "scorecard," listing around 100 International programs, products and contracts, matched with the government agencies that oversaw each one, according to trade management consultant George Rao. His company had been working for several years with International on general issues of trade compliance, including proper documentation and management of International's activities under the North American Free Trade Agreement (NAFTA).

Scoping out the product line and categorizing individual items "is the easy part," says Bauman. Then the exporter must put into place agreements that allow designated foreign employees and partners to exchange sensitive technical data. For each controlled item, it must closely monitor all license requirements. In Afghanistan, for example, a given vehicle requires one license that allows local dealers to possess technical specifications, and another to ship service parts to the dealers.

"Any program can have an unlimited number of licenses associated with it," says Bauman. In the six months prior to January of this year, notes Rao, International obtained 28 license approvals from the State Department and had 11 more pending.

Vastera steps in, not only to gather information and classify each product, but to draft license requests as well. (Under government rules, the actual request must be submitted by an employee of International.) Rao has become the company's "go-to person" for new product identifications and license requests, says Bauman. The vendor handles any technical questions that might arise, and reviews all dealer contractors and screening activities.

Vastera also conducts training of key executives, as well as individual divisions of the company. It provides International with "extra bandwidth" to supplement the client's internal expertise, Bauman says. "Vastera does the lion's share of my company's export compliance."

In theory, International could have acquired the knowledge and resources to handle compliance issues totally in-house. But Bauman says the "make-or-buy" decision was a fairly straightforward one. In building its own compliance program, the company would have had to start from scratch. Vastera, meanwhile, already had the necessary systems and templates in place. That proved to be a crucial factor in turning around license requests quickly. Sometimes approval is sought after a contract is won, Rao notes. Delays caused by unfamiliarity with government procedure could jeopardize that business.

 

Military Sales Soar

The rapid ramp-up was made necessary by International's aggressive plans for the military market. In a short time, says Bauman, the company grew from zero to more than $1bn in sales to that sector. Not surprisingly, International went from taking about 5 percent of Rao's time to 95 percent today, making him a virtual dedicated asset.

Vastera has been busy educating companies about the requirements of ITAR. In a recent paper, global product executive Bernie Hart describes a "large chasm" between the myth that ITAR doesn't apply to commercial firms, and the actual regulatory environment. "The slightest change [to a product], no matter how small to a traditionally commercial item for a military application, will shift jurisdiction for that item from the Commerce Department to the State Department," Hart writes.

Included under the ITAR umbrella are technical data, software and services required for the design, production, operation, repair, testing or modification of a defense-related item. ITAR enters the picture "even if a company does not consider the information its intellectual property," Hart says. Foreign interests are not permitted to view design data for any item that is intended for military application, without State Department authorization.

Bauman expects to draw on Vastera's services even more heavily, as International boosts its military sales. He sees the possibility of supplementing Rao with an entire team of Vastera employees, placed on site to shoulder the additional workload. Those individuals could help out with bookkeeping, information gathering and training. Vastera could vary their numbers in line with International's needs of the moment.

What Vastera or any other vendor can't do is take over ultimate responsibility for compliance. Bauman and his internal team remain deeply involved in the intricacies of ITAR, maintaining an "action-tracker" which identifies all issues within the company to be addressed. They are acutely aware of who pays the price for any mistakes. Stresses Bauman: "You can't outsource accountability."

 

The rewards for expanding into international markets can be substantial. So is the price tag, in terms of government regulations that must be followed. And when the military is involved, the situation becomes even more complex.

The progressive involvement of International Truck and Engine Corp. in military sales to Afghanistan and Iraq has resulted in ever-higher levels of compliance that must be met. In truth, though, the company opened itself up to a slew of potential headaches the moment it sold a single item with military application-whether a complete vehicle, service part or even technical expertise.

International's entry into the military market over the last two years "was a fairly organic process," says Ben Bauman, manager of global logistics and compliance at International. It began by selling commercial trucks to the army. Then it added strictly military features, such as armor and gun mounts, some for use by third-party contractors. Finally, the company developed its own armored personnel carriers based on commercial chassis, which were modified by integrators for the battlefield.

The military bidding brought International smack up against the wall of the U.S. State Department's International Traffic in Arms Regulations (ITAR). That regime has imposed tight scrutiny over military sales in the post-9/11 world. Failure to comply with its rules can result in heavy fines.

It had been years since International was a regular supplier of equipment to the military overseas. As International Harvester, the company played a major role in World Wars I and II, but shed much of its knowledge in that area when its farm and construction equipment division was sold to Tenneco Corp. in 1984. The remaining operations, mostly involving the production of commercial trucks, engines and parts, became Navistar, which today is the parent company of International Truck and Engine.

With the first military sale, International joined the ranks of civilian providers that were in need of regulatory help. It turned to JPMorgan Chase Vastera, an expert in the bureaucratic requirements of international trade. (Vastera, then a stand-alone company offering clients software, consulting and a database of trade regulations worldwide, was acquired by JPMorgan Chase Bank, N.A. in 2005. The trade-management unit is based in Dulles, Va.)

International's parts universe consists of some 600,000 items, of which 100,000 are active and potentially affected by government rules on military sales. The company must segregate parts for commercial vehicles from those meant for products that come under ITAR jurisdiction. A simple hose, cut one inch shorter to fit into a truck equipped with a machine gun, is considered an ITAR part, Bauman says.

 

Parts 'Scorecard'

Vastera helped to guide International through the thicket of regulations and agencies that oversee the transfer of military technology to overseas buyers. The firm's first task was to scope out all of the manufacturer's applicable products, from the smallest part to fully assembled vehicles.

Vastera came up with an initial "scorecard," listing around 100 International programs, products and contracts, matched with the government agencies that oversaw each one, according to trade management consultant George Rao. His company had been working for several years with International on general issues of trade compliance, including proper documentation and management of International's activities under the North American Free Trade Agreement (NAFTA).

Scoping out the product line and categorizing individual items "is the easy part," says Bauman. Then the exporter must put into place agreements that allow designated foreign employees and partners to exchange sensitive technical data. For each controlled item, it must closely monitor all license requirements. In Afghanistan, for example, a given vehicle requires one license that allows local dealers to possess technical specifications, and another to ship service parts to the dealers.

"Any program can have an unlimited number of licenses associated with it," says Bauman. In the six months prior to January of this year, notes Rao, International obtained 28 license approvals from the State Department and had 11 more pending.

Vastera steps in, not only to gather information and classify each product, but to draft license requests as well. (Under government rules, the actual request must be submitted by an employee of International.) Rao has become the company's "go-to person" for new product identifications and license requests, says Bauman. The vendor handles any technical questions that might arise, and reviews all dealer contractors and screening activities.

Vastera also conducts training of key executives, as well as individual divisions of the company. It provides International with "extra bandwidth" to supplement the client's internal expertise, Bauman says. "Vastera does the lion's share of my company's export compliance."

In theory, International could have acquired the knowledge and resources to handle compliance issues totally in-house. But Bauman says the "make-or-buy" decision was a fairly straightforward one. In building its own compliance program, the company would have had to start from scratch. Vastera, meanwhile, already had the necessary systems and templates in place. That proved to be a crucial factor in turning around license requests quickly. Sometimes approval is sought after a contract is won, Rao notes. Delays caused by unfamiliarity with government procedure could jeopardize that business.

 

Military Sales Soar

The rapid ramp-up was made necessary by International's aggressive plans for the military market. In a short time, says Bauman, the company grew from zero to more than $1bn in sales to that sector. Not surprisingly, International went from taking about 5 percent of Rao's time to 95 percent today, making him a virtual dedicated asset.

Vastera has been busy educating companies about the requirements of ITAR. In a recent paper, global product executive Bernie Hart describes a "large chasm" between the myth that ITAR doesn't apply to commercial firms, and the actual regulatory environment. "The slightest change [to a product], no matter how small to a traditionally commercial item for a military application, will shift jurisdiction for that item from the Commerce Department to the State Department," Hart writes.

Included under the ITAR umbrella are technical data, software and services required for the design, production, operation, repair, testing or modification of a defense-related item. ITAR enters the picture "even if a company does not consider the information its intellectual property," Hart says. Foreign interests are not permitted to view design data for any item that is intended for military application, without State Department authorization.

Bauman expects to draw on Vastera's services even more heavily, as International boosts its military sales. He sees the possibility of supplementing Rao with an entire team of Vastera employees, placed on site to shoulder the additional workload. Those individuals could help out with bookkeeping, information gathering and training. Vastera could vary their numbers in line with International's needs of the moment.

What Vastera or any other vendor can't do is take over ultimate responsibility for compliance. Bauman and his internal team remain deeply involved in the intricacies of ITAR, maintaining an "action-tracker" which identifies all issues within the company to be addressed. They are acutely aware of who pays the price for any mistakes. Stresses Bauman: "You can't outsource accountability."