6. Case Examples

PC Co.: Managing Supply Chain Barriers to Trade to Reach Attractive Growth Markets

Like most global manufacturers of mass-market technology products, PC Co. is unencumbered by traditional trade barriers like quotas and tariffs on the goods it exports around the world. PC Co. must, however, contend with a wide range of supply chain barriers to trade in the form of local content requirements, rules-of-origin restrictions and pilferage at the border crossings, which can stretch out customer delivery times and result in significant losses. PC Co. has tried to mitigate the barriers by reconfiguring how goods travel in its supply chain and by making business decisions based on the unique challenges of the markets where it sells its goods.

A leading personal computer company, PC Co. books annual revenue of over US$ 15 billion from sales of its technology products to consumers in more than 150 countries. The company employs a large workforce in over 50 countries to produce its commercial and consumer PCs, as well as servers, workstations and a portfolio of mobile Internet devices. 

Like other big PC manufacturers, PC Co. sees the fast-growing Middle East region and Indonesia as a hotspot for its own growth plans. The Gartner Group forecasts that PC sales in these markets will grow at a pace of better than 20% through 2016 to some 34.5 million units. In none of these attractive new markets do traditional quotas and tariffs present a significant barrier. In the Middle East, duties on imports are uniform and low, at just 5%. As a party to a free-trade agreement with China, Japan and India, Indonesia accepts most shipments of imports duty free. 

A wide range of non-tariff measures, however, add complexity to the supply chains of high-tech importers like PC Co. that drive up the direct and indirect costs of doing business. Strict rules of origin and local content, which vary from market to market, involve elaborate inspection procedures and significant amounts of paperwork. In Saudi Arabia, for example, the Saudi Arabian Standards Organization requires importers to apply for certification by an accredited lab and inspection of sample products before goods can be produced and shipped. In Egypt, by contrast, the General Organization for Export and Import Control requires importers to produce its goods prior to inspection and certification. Large, well-known companies like PC Co. can receive certification relatively quickly, but the process can take up to three weeks for smaller companies. 

In addition to complying with documentation rules about the products they sell, importers must satisfy requirements about the labelling on their products – notably the requirement that products shipped to some Middle East countries be labelled in Arabic. The added complexity increases the likelihood of border delays if labels for products destined for one country are confused in PC Co.’s factories, where workers do not have knowledge of Arabic, with goods going to another market. The mix-up can result in weeks of delays by customs authorities while the labels are replaced. 

Maybe even more problematic are the way rules are implemented. The Saudi Arabian government authorities can implement new regulations without giving companies time to react. Often a circular is received only couple of days before implementation. For example, a rule that all the importers must submit proof of payment to customs before clearing the cargo was circulated early November and very strictly adhered to the next day.

Administrative challenges at many Middle East border crossings like Saudi Arabia cause further delays and sometimes the loss of goods, particularly when customs offices shut down during the celebration of seasonal festivals (see figure). The observation of a one-week festival like Eid, for example, can result in delays of up to three weeks when the additional two weeks needed to clear the kilometre-long backlog of trailer trucks held up at the borders are added. The long period when border activity ceases during festivals also sees a big jump in the normal 1% to 2% incidence of pilferage, particularly of high-value tech products like phones and laptops. Having no good alternatives, PC Co. simply stops the movement of all of its goods transiting between Dubai and Saudi Arabia during holiday periods, warehouses them in Dubai, and resumes shipments only after it can confirm that the post-holiday backlog has been cleared.

Figure 33: Pilferage and damage to goods increase costs of Middle East border crossings 

Beyond goods being stolen, the damage they suffer due to the lack of proper cargo handling facilities at border crossings can be significant. For example, the need to unload pallets of cargo from trucks for customs inspection owing to a lack of forklifts causes damage to more than 5% of goods when shipped to Saudi Arabia compared to a less than 1% damage rate in Europe and the US. Together, pilferage and damage add between 6% and 9% of PC Co.’s costs of moving goods across the border from Dubai to Saudi Arabia.

PC Co. experiences similar challenges in the licensing and customs clearance process at Indonesia’s borders. The company estimates that it takes four weeks for its products to make their way from Shanghai to Indonesia. For each container held at the port, PC Co. incurs charges averaging some US$ 200 each day and tripling to US$ 600 daily after one week.

Seeking a safe haven in Dubai

To alleviate some of the challenges that come with serving individual countries directly, PC Co. sidesteps supply chain barriers by making business-friendly Dubai its hub for the Middle East region. Ranked first among Middle East nations by the World Economic Forum’s Global Enabling Trade Report 2012, Dubai draws importers like PC Co. with simpler and more flexible customs and inspection procedures that help reduce delays.  

But PC Co. pays a price for those advantages, since routing goods through Dubai results in a transport process that the company estimates is more than 1.5 times longer than it would face were it able to ship directly. Were other Middle East markets to remove the supply chain barriers that impede direct shipment, PC Co. believes its supply chain performance would significantly improve. In particular, shorter lead times would be a boon for PC Co.’s retail customers who demand short turnaround times from the placement of orders to receiving delivery of finished goods.