Atty. Rami Hourani
There are five key areas that you need to be aware of in order to transition from a local manufacturing enterprise to participating in the export market. The article will assume that you make a product that sells well in your country. It will also assume that you are aware of how to penetrate the export market. The article will focus mostly on the nuts and bolts of how to get your items from your country to the other side of the world.
Packaging & Labelling
The nature of containerized cargo imposes a very strange constraint on businessmen. Imagine for a moment that for 30 days your products are going to fill a space around 8×8.5×40 feet. Imagine again that someone on the other side of the world is going to, using identifying stickers and bar codes, have to unload each of the containers that your product comes in and organize them int heir own warehouse for shipment. These challengers are met with: Packaging and Labelling.
The packaging often has two components: Outer and Inner Packaging. The outer packaging is sometimes referred to as the master box. The inner packaging can be more varied, ranging from pattern paper, cardboard, or rigid plastic supports. In special instances no cardboard might be used, such as when heavy objects like vases are stacked on top of each other which requires wooden frames to surround the objects and permit them to be stacked on top of each other. Well executed packaging makes it so that it is possible for our products to see the other side of the world.
The labelling is a mix of things. There can also be inner packaging labels and outer packaging labels. The inner packaging labels serve to both identify the items and for certain regulatory purposes. For example, it may be required that certain items bear the mark “Choking Hazard!!! Keep out of reach of children below the age of 5.” Due to how affordable labor is in the Philippines, your buyer may even request that you include the promotional materials such as hang tags or header cards on your products. The outer labels serve purely to identify the items and their origin. They permit both a customs agent or an employee of the importer or freight forwarder to be able to inspect the contents with a view to eventually unloading the cargo.
Important things to remember in this aspect is that hand-in-hand with the packaging and labelling of your items is the generation of a packing list. A packing list enumerates the contents of a container. It is important because the constraint of containerized cargo makes it so that one purchase order may be shipped across multiple containers or multiple purchase orders are shipped in a single container. The packing list keeps track of all of these.
Regulatory Compliance and Buyer Requirements
This category captures a broad range of requirements that apply specifically to your product. Let’s break them up in to a few categories: Buyer Requirements, Legal Requirements, Audit Requirements.
Buyer Requirements are largely the subject of your purchase orders and your negotiation with the buyers. Your compliance with those requirements is properly contemplated by your sales staff and you QA/QC processes. These entail your ability to keep up with the standards
Legal Requirements are those which are imposed by the administrative agencies or legal system of the nation which your product will go to. This is not to be confused with the packaging and labelling requirements. This largely contemplates registration of your product for the purpose of being importable in the destination country. For example, if you are exporting wood, the European Union wants to be sure that the wood was not illegally logged and whether you merely purchased from a wholesaler and/or cut the wood yourself, they will ask the importer to register you as their source of the item with wood content. Another easy example is a HALAL Certification in the case of food products which certifies that the food you export can be sent to Muslim countries.
These differ industry-to-industry, are largely the concern of your customer abroad, but will require you to actively cooperate with them.
Audit Requirements are those which require an inspection of your worksite. There are many kinds of audits that can be deployed. Some of them will inquire into the state of your labor standards compliance, hygiene & sanitation, others still will inspect your subcontractors. They will differ wildly based on the requirements of your buyer and/or the needs of international commerce with respect to your specific industry. These are really buyer requirements by another name but because of the level of preparation involved they deserve their own entry in the list.
Customs Formalities and Applicable Fees
The Bureau of Customs is the last governmental authority that goods will intersect with on their way out of the country. There are very specific things that you need to be familiar with in order to contemplate this specific requirement. They are: Export Declaration – Single Administrative Document (ED-SAD), HS Codes, and Free Trade Agreements (FTAs) or General Scheme of Preference (GSP).
An ED-SAD is a solemn document participated in by the Bureau of Customs where you attest to the contents of a given container. It is submitted the the port. The information required is comprehensive, requiring things like: Exporter, Importer, Consignee, addresses, FOB Value, Foreign Currency Total Value, Exchange Rate, etc. etc. This document must be prepared will in advance of the actual shipment itself. The document is essential for international commerce and will be relied upon across jurisdictions. This means that even small errors will lead to large penalties. In order to avoid these, your business process must be structured such that your administrative staff can communicate with your production, packaging, QA/QC, and other departments that participate in the shipment prior to its containerization to ensure accuracy of the entries in the ED-SAD.
HS Codes area quasi-uniform set of codes that are used to classify products by customs authorities all over the world. They are standardized up to six digits. This means that they will always be uniform up to the 6th place. This means that a HS Code of 1234.56 will mean the same thing regardless of which country you are in. They appear in many configurations and lengths. It’s important to understand the significance of these codes because their improper or mistaken use can lead to large differences in the customs duties that will be imposed leading to heavy penalties with the Bureau of Customs in the receiving jurisdiction.
FTAs or GSP are ways by which your customs duties can be reduced in the country which you are exporting to. FTAs are the more broad term because they embrace an agreement, usually bilaterally concluded, that mandates that customs duties between two states are not subject of customs duties. GSP is a creature created by the European Union whereby countries, subject to certain conditions, may be granted low to no customs duties. These often require a registration and the submission of documents to your buyer more than your License to Export. It is worthwhile to check if countries you intend to export to have FTAs with the Philippines.
In a highly segmented value chain, an important consideration are Rules of Origin and re-export schemes. These are the rules which permit you to declare something as having been made in your country. They differ according to the laws and rules of the country which you send your goods to.
International Shipping by Sea and Air
Shipping by Sea or Air is not as simple as going to your local LBC and signing out the little consignor’s form that doubles as a remittance form on the back.There are many things alien to normal business processes that you need to know. They are: INCOTERMS, Freight Forwarders, and Logistics Providers.
INCOTERMS is short for International Commercial Terms. They are a uniform set of acronyms that are made by the international chamber of commerce. They define the precise moment that ownership and responsibility for goods transfers over the course of its delivery. A common one is FOB or Free on Board which means you’re considered to have delivered the goods once its in the shipping yard next to the vessel which will take it to the destination country.
Freight Forwarders are a service provider that mediates between the operations of your business and those of the various logistics providers you will engage. Technically, it is possible for you to coordinate between the trucker who will deliver your container, the trucker who will pick up the container, the shipping line, the trucker in the importing country, customs brokers and other service providers however it is a real drain on your time to have to do this yourself. These transactions have to be orchestrated in such a way that there is virtually no down time in the movement of the container to avoid heavy penalties. For all but the largest exporters, it is best to delegate this task to a dependable freight forwarder. In fact, your buyer, if they are a large and reputable buyer, will likely give to you a list of chosen or accredited freight forwarders that they want you to transact with.
Logistics Providers these are the individual companies that participate in some segment of the process of delivering the goods to your customer. There are many kinds but you should principally be concerned with Air and Sea Freight. Air Freight can be segmented into two purposes: Sample Delivery and Small High Value Shipments. Sea Freight contemplates your containerized cargo and Less than Container Load (LCL) and Full Container Load (FCL).
Small High Value Shipments, it is possible to operate as an export enterprise and never deal with containers. For Example, if you deal in gold jewelry a small box that weights 2 kilograms will likely be the largest thing you will ever ship.
Sample Delivery, your buyers may request that you furnish them with samples of your product before signing off on a larger shipment. These are often Others still often request Production Samples, or samples from your actual production run.
Less Container Load (LCL), as opposed to Full Container Load, occurs when your shipment does not fill the total container volume. A container can be 20 to 40 feet long. The internal volume of a container is large. You can ship 4 standard sized cars in a single 40 foot container and still have a lot of room. This is most often arranged by a common or nominated freight forwarder of the buyer and requires a bit more coordination because you need to communicate with your co-shippers.
Export Planning and Pro-Forma Invoices
The actual process of exporting is quite difficult and can pose many challenges. There are certain processes you can have in place though to prevent problems from arising. You should have good Export Planning and Pro-Forma Invoice production procedures.
Export Planning, depending on your industry, from the time you accept the order to its delivery you are looking at a period of 60 to 90 days or 90 to 120 days. There is a lot that can go wrong in that period of time. You can have a late delivery on. Your raw materials might be in short supply. Your cartons might not arrive. Your production might not be able to cope with the volume. Your working capital might dry up. The Bureau of Customs might not approve your ED-SAD on time. It’s important to be able to create standard operating procedures and map out and timeline these different processes so that it’s easy to see when something may become a problem.
Pro-Forma Invoices, invoices are the documents that are issued to evince portions of the transaction. Your buyer might issue a purchase order to indicate what items they want to buy. You will issue a sales confirmation. A packing list outlines the contents of a given container. These different files require the easy access by the staff assigned to communicate with buyers of the information that is generated by different departments. Your sampling department might be the one who has access to the dimensions. Your production department might have a better grasp of quantities. Your QC department will likely make adjustments to those quantities. Few things can cause greater issues than a hastily issued sales confirmation.
The foregoing are a sampling of the export specific aspects of your potential export business. I do hope it assists you!
Atty. Hourani practices law in Cebu City, Philippines. If you would like to set an appointment with him, you may reach him here.