6. Case Examples
Semiconductor Co.: Global Chip Manufacturer Deals with Customs Delays and Other Obstacles in Finished Goods Sales
Semiconductor Co. has manufacturing facilities, suppliers and customers throughout the world. Among its challenges as a global operator are:
- Managing inventory and delays – Long customs procedures in some countries create bottlenecks in Semiconductor Co.’s supply chain, making it difficult to manage inventory levels and finished-goods shipments.
- Operating in uncertain business environments – In some countries, business regulations are not standardized and poor business practices hamper operations.
These barriers have significant impacts on Semiconductor Co.’s business, including its ability to meet customer demands. The company also uses a sophisticated model for investment decisions about production that takes the barriers into account.
Semiconductor Co. designs and manufactures microprocessors and chipsets. Its products are used in a range of applications, from personal computers to medical devices. The company sells to original equipment manufacturers (OEMs), original design manufacturers (ODMs), and industrial and communications equipment manufacturers around the globe. It employs three different sales models: DTD (door-to-door), DTP (door-to-port), and delivery outside the country. Semiconductor Co.’s economic models for investment decisions about production and sales take into account not only ordinary business factors, but also the magnitude of supply chain barriers in each country under consideration. Semiconductor Co. may negotiate with governments for incentives that compensate the company for these barriers.
Certain barriers are common to many countries. Regulations may be unclear or inconsistent. Security levels are often low, increasing the risk of theft. Export licenses may be hard to obtain – an issue that is becoming more serious for Semiconductor Co. as some of its products are radiation hardened and may fall under munitions control laws. Local-content and technical-standards requirements (often leading to the same) are growing more stringent as countries attempt to move up the value chain and develop their own high-tech industries.
Customs delays are a particular problem: though shipments are typically sent by air, they may be held at customs for several days. Delays generate higher costs for working capital, administration and warehousing, and lead to lower customer satisfaction.
Our customers are constantly demanding a cut-off time of 12 noon or even 2:00 pm for same-day delivery. With the current Customs operating hours, Semiconductor Co. will never be able to offer that stretched service level.
– Supply Chain Capability Manager
China is central to Semiconductor Co.’s supply chain. The company’s main issues in this country are regulations and customs delays, specifically between bonded zones.
Some regulations in China are vague and inconsistently enforced. For example, regulations require that bonded assets – items that receive tax exemptions – be kept under customs control. But there are no clear rules for tracking these items, or even for which items fall under the regulation. Moreover, many areas are not covered by sufficient regulation, creating uncertainty regarding compliance requirements.
Where imports are concerned, customs are by far the greatest bottleneck, more significant than other possible obstacles, such as the State Administration of Foreign Exchange (SAFE) or the Economic Development Authority (EDA) (see figure). Since there is no official feedback mechanism to the General Administration and Customs authorities, companies such as Semiconductor Co. may have little recourse in addressing concerns.
Typically, both imports and exports require half a day at customs. But mismatches are common and often lead to delays of a day or more. At Chengdu, for example, the error rate is between 1% and 2% in customs declarations, and there are many other areas where mismatch is possible – for example, incorrect or missing paperwork. Since many mismatches are due to human error, this could largely be resolved by electronic declarations. Customs offices do not operate 24/7, even though factories work around the clock and customers demand same-day delivery. Inventory levels must be kept relatively high to compensate for the customs schedule.
Bonded zones – Customs crossings between China’s special economic zones, known as bonded zones, are particularly problematic. Bonded zones offer tax benefits and other incentives and are managed by a customs entity. Compliance requirements for bonded zones are burdensome, and delays are endemic. “Air shipment between two bonded zones usually takes four to five days,” says a Semiconductor Co. executive, “while our customers usually request one-to-two day delivery.” In some cases it is easier and faster to export goods first (to Hong Kong) and then import them back to China, rather than transporting them between bonded zones.
Vietnam develops an electronic customs clearance system
In collaboration with Semiconductor Co. and its suppliers, Vietnam has developed an IT customs infrastructure that automates customs paperwork for Semiconductor Co.’s shipments. Its objective is to shorten the entire clearance process to just a couple of minutes. Because this system is new, customs officials designed it to allow manual intervention, so the full transition to an automated system is not complete. Still, the automated database has already reduced the customs process to about two hours, in some cases only 20 to 40 minutes.
Recently, Japan gave Vietnam two grants, totalling US$ 40 million, to transition to an electronic clearance system like that used in Japan.73 This system will automate declarations, duty fees and screening processes, and will greatly shorten the processing time between declaration and approval for all shipments, including those of Semiconductor Co. Vietnam aims to complete the transition by the end of March 2014.
Barriers have a big impact on Semiconductor Co.’s sales models. If customs or other issues are too complex, the company will ship DTP instead of DTD, and will sacrifice control over part of its supply chain. The issues vary from one country to another.
Semiconductor Co.’s sales in Russia are inhibited by complicated regulations and long custom delays. The company ships its products to Finland, where Russian distributors arrange for pickup and transport. Since shipments to Russian distributors have payment terms of net 30 days (starting before Russian customs clearance), the distributors must tie up a lot of cash in inventory. This negatively affects their return on investment and increases their risk.
Customs clearance can take from 14 to 21 days. Customs regulations are subject to interpretation, which often leads to disputes between customer, company and customs agents. Customs delays significantly increase distributor inventory levels. As inventory grows old, customer returns are at the highest allowable level (3%), and as Russia has an export fee, customers can’t ship the product back and 98% needs to be scrapped.
Brazil and Argentina
DTP sales in Brazil and Argentina are significantly hindered by security issues and general uncertainty. An unpredictable regulatory environment makes the cost of doing business high. Labour disputes and general instability disturb the supply chain. Security is often a major problem, with serious risk of theft at several points in the chain; corruption is also a concern.
DTP in India represents a large but still underdeveloped potential market. But customs creates delays and customers face security issues. Import procedures are one hindrance for customers: products are frequently held at customs, and though clearance should require only about two working days, most customers assume one week. These delays increase costs and can lead to missed sales for the customer. Random delays because of customs inspection are particularly risky, and may lead to scrapping the product.
India is also one of the most risky destinations from a security perspective, with the most theft in Asia. The main point of risk is at the warehouse monitored by customs. The forwarder or importer cannot see the cargo when it arrives. The consignee (customer) often receives paperwork indicating the shipment is there, but when it gets through customs it may be in bad shape or partly stolen.
Note: EDA – Economic Development Authority
Source: Expert interviews, Bain analysis.