Motorola hires JP Morgan Vastera to manage import trade operation
Motorola, the world’s number two manufacturer of cell phones and a global supplier of wireless infrastructure, cable and broadband equipment, has signed a major contract to outsource its North American import trade management operation to JP Morgan Chase Vastera, according to a logistics industry source familiar with the deal.
The contract comes one year after financial services giant JP Morgan Chase acquired Vastera to create a one-stop shop for cash management, trade and logistics services for international traders. Vastera provides software, consulting and outsourced services to help companies comply with import/export regulations around the world in a way that minimizes costs and shipping delays.
Under the five-year contract, JP Morgan Vastera will handle all of Motorola’s customs compliance and trade management programs for inbound lanes into the United States and Canada.
Global trade management firms such as JP Morgan Vastera help steer customers through the complex maze of trade regulations. They provide services such as:
* Classifying goods for tariff purposes.
* Sourcing from countries with the lowest duty rates.
* Determining a products country of origin.
* Exploiting free trade and other preferential agreements, duty drawback (or refund), foreign trade zones and other options to reduce duty payments.
* Calculating total door-to-door delivery cost of goods by taking into account transportation charges, insurance and government fees such as value-added taxes and Most Favored Nation duty rates that are levied on international shipments.
* Obtaining import licenses including quotas and visas.
* Producing all necessary documentation.
The goal is to minimize the risk that customs authorities will delay shipments from entering commerce because of incomplete documentation or concern that shipper is smuggling goods or trying to evade certain trade restrictions.
JP Morgan Vastera will also overlay an audit regime over the daily operations, the source said. Part of that regime will include administering Motorola’s customs brokers to make sure they are complying with Motorola’s processes, procedures and best practices as well government regulations. Vastera plans to enhance automation with the brokers, the parties that actually complete and file the entry forms with Customs, by integrating systems to improve the efficiency of communication and transmitting documents.
Many global trade management firms today provide automated trade management and customs tools to companies in cross-border trade, along with some consulting. But Vastera takes the model one step further by offering importers and exporters the option of transferring compliance work to an outside supplier. Other companies that provide some form of outsourced trade management services include the trade advisory services arm of law firm Sandler, Travis & Rosenberg, and third-party logistics providers such as FedEx Trade Networks, UPS Supply Chain Solutions and BAX Global (now part of German state-owned railroad and logistics giant Deutsche Bahn).
JP Morgan is also a major lender to Motorola. It now ties together financial, information and lending services required by Motorola for supply chain purchasing. Last October, Motorola incorporated JP Morgan Chase’s Paysource technology for automatically processing payments for international third parties.
The core premise of the Vastera acquisition is that logistics and finance divisions within companies require much of the same data to populate the documents and databases used to support import and export transactions. Just as many companies benefit from dealing with an integrated logistics provider such as UPS or DHL that controls each link in the transportation and distribution network, JP Morgan is betting that companies will want to integrate their cash management, compliance, and trade management to speed up the issuance of letters of credit, and streamline the payment of suppliers, brokers, freight forwarders and customs administrations..
About 20 people in Motorola’s North American compliance division will be outsourced as a result of the JP Morgan Vastera contract, said the source, who was granted anonymity because no one has been authorized to speak about the contract and individuals could face repercussions.
Word of the deal is beginning to circulate among logistics professionals as Motorola employees who have been, or will be, laid off circulate their names in an effort to find new jobs.
JP Morgan and Motorola have remained mum since signing the deal in early May. Motorola spokeswoman Pattie Schiele would not confirm the company had hired JP Morgan Vastera to handle its U.S. import management, saying, “We don’t really discuss supplier relationships.” However, Motorola allowed JP Morgan at the time to announce the Paysource technology contract.
A spokesman for Vastera, John Murray, said, “It is our corporate policy that we do not discuss relationships with our customers without written consent from our customers.”
Motorola is in the midst of a large-scale reorganization of its supply chain organization to consolidate thousands of employees into a single division and data from all its third-party logistics providers. In its first quarter earnings report filed with the Securities and Exchange Commission, Motorola said it is implementing “various productivity improvement plans aimed principally at reducing costs in its supply-chain activities.”
Motorola determined that import compliance was not a core competency. The JP Morgan contract allowed it to free up head count and move some personnel into more strategic supply chain management positions, the source said.
Motorola outsourced its North American compliance operation to JP Morgan as a first step, but eventually wants to outsource trade compliance activities for Europe and Asia as well, according to the source. Ford Motor Co. took a similar phased approach when it enlisted Vastera in 2000 to assume control of its U.S. trade operations. One year later Vastera assumed responsibility for Ford’s Mexico and Canada global trade operations, and in 2002 it took over Ford’s trade operations in Europe.
Major companies that also have outsourced large portions of their trade management responsibility to Vastera include Nortel Networks, Lucent and GE.
Many trade compliance professionals say companies make a mistake when they outsource compliance functions because they can’t shift liability for violations of the law, and lose the expertise necessary to maintain oversight over business practices.
“All the people who don’t work in this field want to outsource compliance. They think they can save money, headcount and make it more efficient,” said Carol Fuchs, international trade counsel for Tyco International and a former compliance director for Motorola.
But the government will still hold the importer or exporter ultimately responsible for violations, not the vendor, and that could have ramifications for a company’s earnings or brand image, several customs compliance experts said.
“Many managers don’t recognize the importance of having someone in house to look out” for the pitfalls in international trade, Fuchs said. “Companies end up paying too much for outsourced services because there is nobody to monitor the activities once you hand them off. They run with it and you don’t know how much (is a fair price) because there is no internal expert. The outsourced company will do what they think is important and nobody knows if it is a good value or if work should be concentrated in a another risk area instead.”
“You can’t outsource liability, especially with Sarbanes-Oxley requirements” that holds corporate leaders accountable for the accuracy of their financial statements, said one corporate customs affairs director who is not allowed by his company to speak on the record. “If the outsourcer can do it cheaper, then the assumption is you are hiring less qualified people.
“You have to take your total value of imports and use that as your baseline of liability,” not just the company’s duty levels, because in extreme cases a company’s import privileges can be revoked, the customs affairs director said. “Would a company outsource product liability? Customs should be the same thing. (The importer) is a licensed operator. If you are dependent on imports and have a responsibility to your shareholders and you lose your right to import” the damage to the company could be severe.
Other ramifications short of losing import privileges could include higher examination rates for shipments, audits and penalties at the hands of customs authorities.
“You get very detached. You lose the touch and feel of your supply chain,” said Michael Laden, co-founder of consulting firm Trade Innovations and former president of Target’s customs brokerage subsidiary. “Nobody knows your company and processes like your own flesh and blood.”
Laden said he told several companies, including Vastera, that approached him for Target’s compliance work that “until I get a letter from the commissioner (of Customs and Border Protection) or the DHS (Department of Homeland Security) secretary absolving me for any violations there’s not a snowball’s chance in Hell I’m outsourcing.
“While the numbers may look good, and that’s how these companies sell it — you can lay off your entire import staff and pay us a management fee — the numbers never work out. You end up paying more for management fees and you lose visibility,” Laden said.
Companies should also be wary about handing over their import functions to a contractor who can borrow their best internal business practices and incorporate them into an improved managed services offering that may be pitched to competitors, Laden said.
Fuchs also cautioned that most service providers don’t have a network of offices to cover all regions of the world and therefore may only have local trade expertise in specific areas.
Vastera was losing money prior to being acquired by JP Morgan as it continued to invest in upgrading its customs and tracking software and open offices around the world. Motorola is the first known new customer that JP Morgan has signed up since buying Vastera.
After hitting a brick wall trying to convince compliance officers to let it manage import operations, Vastera in recent times has shifted tactics by marketing its services to the top company officers, according to logistics industry practitioners.
“Vastera got burned. Every time they went in for a technology deal, they’d push for a managed services contract, and the importers didn’t like it,” said Beth Peterson, who worked at compliance automation firm Open Harbor before its acquisition by TradeBeam, and now is a San Francisco-based trade consultant. “Vastera was proposing to help that person lose their job and take over trade compliance, and that’s a pretty quick way to kill a deal.”
Now JP Morgan Vastera’s model is to make its pitch at the corporate executive level, said another industry consultant. Sales are directed at the chief financial officer, for example, “who doesn’t really have a good command of customs intricacies and legal liability. Then (the executive team) rains down on the compliance department” to make changes.
The source said Motorola will retain a certain level of compliance staff to provide oversight rather than totally outsource responsibility to JP Morgan Vastera.
Whether a company has its own employees or subcontractors doing the compliance work, “you need some sort of audit system to make sure the work is being done correctly,” Peterson said. “You’ve got to start off with the right policies and procedures, then bring people in to work and audit against that. No one company or individual should necessarily do all three pieces,” she recommended.
Motorola hires JP Morgan Vastera to manage import trade operation