Back

The Importance of Compliance when Working in Emerging Markets

Emerging markets offer tremendous growth opportunities for manufacturers. But expanding into new markets brings risks as well as rewards. In the latest Precision Report we look at how manufacturers can mitigate compliance risks and the benefits of automated solutions.

Emerging markets are changing where — and how — manufacturers do business. Changing demographics, including the growth of the middle classes, means that consumers in these markets have more money to spend than ever before. McKinsey & Co. forecast that 65 percent of the world’s manufactured goods will go to emerging markets by 2025.

Unsurprisingly, the United States still dominates the global economy. In 2017, the US accounted for just under 25 percent of the world’s GDP. For the same period, China — the second largest economy — contributed just under 15 percent of global GDP.

A PWC analysis predicts that emerging markets in seven countries could grow twice as fast as mature economies to dominate GDP by 2050. The E7 countries — China, India, Indonesia, Brazil, Russia, Mexico and Turkey — are expected to account six of the seven largest economies by 2050.

Global trade is not static, and certainly not immune to politician wrangling. Predicting the future is an uncertain business. Having said that, growth minded high tech firms, OEMs and other manufacturers cannot afford to ignore the opportunities that emerging markets represent.

Opportunities and Risks

China has long been a manufacturing powerhouse. But when it comes to high tech products, China does not simply make them, but avidly consumes them. Other promising markets for high tech manufacturers include India, the Middle East, Eastern Europe, and former Soviet states — all places where demand for high tech products is growing.

In addition, Africa is home to some of the world’s fastest growing economies. Ethiopia topped the list in 2017 according to the World Economic Forum. Despite high growth, poor logistics infrastructure can make it difficult for manufacturers to do business in many African countries.

Then there are geopolitical considerations. Issues, in some emerging markets may include political unrest, wars, weak democratic environments, and in some cases, corruption.

The ability to navigate these issues is a key requirement for manufacturers that want to succeed in emerging markets. Manufacturers — particularly those in the technology sector — can face trade compliance challenges when they expand into an emerging market.

Products may face significant export restrictions, given their potential for dual use. Furthermore, there’s the risk that sensitive information — such as encryption methods — could be shared with unfriendly governments or rival organizations. In short, ensuring that your trading partners are trustworthy is a key consideration.

Why Manufacturers Should Automate Trade Compliance

Manufacturers need to know the risk factors that exist in each market. Due diligence includes reviewing the political situation and legal framework in the country, as well as any cultural concerns.

Compliance, however, is an ongoing requirement. Published lists of sanctioned individuals are subject to frequent changes. An automated trade compliance solutions that offers up-to-date information will help companies navigate a rapidly changing regulatory and legal environment.

When conflicts occur, trade sanctions, increased regulations, and new compliance and documentation requirements generally result. All of these factors create more work and headaches for shippers. Non-compliance is not an option — the penalties can be severe.

The US Treasury Department’s Office of Foreign Assets Control (OFAC) maximum civil penalty for violations of the International Emergency Economic Powers Act is $284,582 per violation, or twice the value of the transaction, whichever is greater. Then there is the US Department of Commerce, Bureau of Industry and Security (BIS). BIS can impose fines of up to $289,238 per violation, or twice the amount of the transaction, whichever is higher.

Keep in mind that those are the fines for negligence. If authorities believe that violations were wilful, companies can pay $1 million per violation. In 2018, a Chinese telecoms firm paid a fine of $1.4 billion to the US Department of Commerce. This fine was levied for failure to comply with trade sanctions against Iran and North Korea.

The Benefits of Automating Trade Compliance

Automated trade compliance software helps ensure that every shipment and business partner receives the due diligence required to reduce risk.

Automated solutions offer updates in real time of trusted content from regulatory agencies. This includes licensing lists, and lists of sanctioned countries, entities, and persons. This allows companies to ensure that customers and trading partners are not subject to embargoes or sanctions, and that they are authorized to handle your shipments.

Trade compliance solutions streamline compliance processes by:

  • Offering real-time monitoring of changes to compliance regulations against international and government lists.

  • Automatically running background checks on countries, carriers or prospective partners. This mitigates the risk of engaging with any parties with red-flags or embargos

  • Recording compliance data and license information. As a result, shippers can quickly identify and complete license requirements with minimal manual research or input

  • Track and report past compliance metrics to continuously improve compliance processes and workflows

Compliance is not merely the cost of doing business. By investing in compliance software solutions, companies can gain new efficiencies, better shipment visibility and decreased trade related costs — as well as improved risk management. By using data driven visibility tools, manufacturers have access to operational statistics, metrics and trends. This allows them to respond accordingly. Done right compliance leads to improved profit margins and competitive advantages.

All shippers need to ensure that they operate within the letter of the law. When you are working across multiple regulatory environments, mistakes can be easily made. By leveraging automated trade compliance as they expand into emerging markets, manufacturers can make the most of the opportunities this offers, while mitigate the risks.

About Precision Software – Trusted Global Trade and Transportation Execution

Precision Software, a division of QAD Inc., provides industry-leading global trade management, transportation execution and multi carrier shipping software solutions from a single, integrated platform. Preeminent industry leaders in every region of the world rely on Precision’s global support centers to leverage thousands of carriers and manage millions of shipping transactions every day. Our open architecture easily integrates with Enterprise Resource Planning, Warehouse Management Systems and legacy solutions. An ISO-certified company, Precision Software assists companies to minimize shipping costs, optimize first mile and last mile deliveries, automate free trade agreement compliance, avoid customs delays and mitigate the risks associated with dynamic trading environments to maximize their competitive advantage. Precision Software’s customers span multiple industries including banking and finance, life sciences, high technology, retail, industrial, automotive, higher education and public sector as well as logistics providers. For more information about Precision Software, visit www.precisionsoftware.com.

SUBSCRIBE TO PRECISION

To subscribe to the Precision Report, or to receive notifications about Precision events, webinars and news, please click here.