Geopolitics and the Need for an Intelligent Supply Chain · 2020-02-27 · 2019 U.S. Cross-Border Tax Conference May 14 – 16, 2019 tax.kpmg.us Geopolitics and the Need for an Intelligent

2019 U.S. Cross-Border Tax ConferenceMay 14 – 16, 2019

tax.kpmg.us

Geopolitics and the Need for an Intelligent Supply Chain

2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761

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The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Notices

AgendaChallenges to current Free Trade systems

Use of tariffs as push for change

Developing enterprise wide risk mitigation strategies

01

02

03

04 Q&A


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Today’s presentersName Title Firm/Company Name Email

Doug Zuvich Principal, Trade & Customs Global Leader KPMG [email protected]

Brett Weaver Partner, Value Chain Management Leader KPMG [email protected]

Jerry Thompson Principal, Value Chain Management KPMG [email protected]

mailto:[email protected]




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— Post World War II trade regimes are being challenged aggressively— Industries and companies have grown accustomed to these practices as

a way of life— Investments, sources of supply and operating models are predicated on these rules— Adapting to a new set of rules can be difficult, painful and costly in order to maintain

competitive advantage, source of supply and profitability— Immediate action may be necessary to address the fallout from tariffs and trade

barriers while simultaneously laying the groundwork to manage through future geopolitical and operational uncertainty.

Current state of play

Today’s session will focus on the current landscape and potential actions for your organization to help mitigate consequences and demonstrate to stakeholders that your organization is prepared to act and react.


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Popular support for free trade has eroded

Trump taking a different approach to global trade

policy

Big geopolitical shifts are forcing changes on

global trade

Why are trade tensions heating up now?

Rise of China challenges the current system

The role of the U.S. in the world is changing

Technology now emerging as national security concern

Some Americans think free trade has hurt the country

Fewer political leaders willing to risk supporting free trade

Skeptical of multilateral approaches (like the WTO)

Preference for bilateral deals

Focused on bilateral trade deficits (and willing to take risks!)


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Tariff policy background

Steel/Aluminum, Automobiles

April 2017: Investigation begins, and in March 2018, Trump announces tariffs on steel and aluminum. There are currently limited source country exemptions.May 2018: Second national security investigation launched and potential raise on imports of auto parts

National security threat

Section 232

$34B in products

Response to China for unfair trade practices; potential IP theft, tech transfer, & innovation

List 1

Section 301

List 2 List 3

$16B in products


$200B in products


Solar panels and washing machines

October 2017: Findings announced from earlier investigation and "global safeguard" restrictions recommended

U.S. RATIONALE

TARGET

Harming U.S. industries

Section 201

Other active tariff and non-tariff mechanisms used by the US include anti-dumping, countervailing duty (“CVD”) orders, quotas and “voluntary” restraint orders


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Overview of global retaliatory tariffsCHINA (FOR §232)

Tariff rate: 15% and 25% depending on the goodEffective date: April 2ndHTS codes affected (Qty): 128Import value affected ($): $2.4 billionProducts targeted: Wine, fruit, ethanol, steel tubes, drill pipes, aluminum waste.

MEXICOTariff rate: 5% – 25%Effective date: June 5thHTS codes affected (Qty): 266Import value affected ($): $3 billionProducts targeted:Pork, potatoes, whiskey and other products

TURKEYTariff rate: Ranges up to 140%Effective date: June 21stHTS codes affected (Qty): 22Import value affected ($): $1.8 billionProducts targeted: Coal, paper, tobacco, automobiles, cosmetics, machinery, petrochemical products.Aug. 2018: In response to U.S. doubling steel tariffs, Turkey doubled some tariffs, e.g. alcohol, cars, tobacco.

EUROPEAN UNIONTariff rate: 25%Effective date: June 22ndHTS codes affected (Qty): 340, (effective June 22nd)Import value affected ($): 3.4 billion (effective June), $3.6 billion (under review)Products targeted: Steel, whiskey, coffee, motorcycles, motorboats, apparel and peanut butter

CANADATariff rate: 25% or 10% depending on the goodEffective date: July 1stHTS codes affected (Qty): 229Import value affected ($): $12.6 billionProducts targeted: Steel, iron, motorboats, musical instruments, yogurt, bourbon, ketchup, pizza, dishwasher detergent and various other items

CHINA (FOR §301)Tariff rate: 25%Effective date: July 6thHTS codes affected (Qty): 659Import value affected ($): $34 billion. Additional $16B scheduled, with $60B potentially planned.Products targeted: Soy, corn, wheat, cotton, beef, pork, poultry, fish, dairy, nuts, and vegetables, as well as manufactured goods including passenger cars, and off-road vehicles.

RUSSIATariff rate: 25% – 40%Effective date: July 6thHTS codes affected (Qty): 79Import value affected ($): Total amount TBDProducts targeted: Construction, oil and gas, metal processing and fiber optics

INDIATariff rate: 25% or 27.5%depending on the goodEffective date: September 18thHTS codes affected (Qty): 30Import value affected ($): $240 millionProducts targeted:Apples, walnuts, chickpeas, and some chemical and metal products.

USMCA/NAFTA 2.0 – Steel and Aluminum Tariffs RemainAustralia, Argentina, Brazil and S Korea (KORUS) - Agreed to Steel Quotas = No TariffsSeeking Bi-lateral Agreements with – UK, EU and Japan

Developing enterprise wide risk mitigation strategies


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Developing your geopolitical risk mitigation strategy

Holistic, enterprise wide view is required

Deep Data Driven Analysis

Risk, Controls and Change Management

MitigatingRemedialExposure

Geopolitical

Supply Chain

Cost Optimization

Revenue/Pricing Impact Analysis


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Step 1: Determine immediate geopolitical exposure to your business


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Determining duty rates

HTS Classification

Country of Origin

Duty Rates(§201)(§232)(§301)

(Regular)

Determining origin based on manufacturing processes, e.g. what steps occur where.

Determining classification of the item based on technical characteristics and use.

Different classifications have different duty rates, and different countries are subject to §301/§232/§201.

Confirm using correct codes Confirm correct COI

Consider changes to production/mfg processes


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Determining duty rates

Duty Rates(§201)(§232)(§301)

(Regular)

$$$$Tariffs Due

$$$$

Customs value is based on specific rules but is often the price paid or payable by the importer plus certain additions and deductions.

Duty rate is fixed for all imports of a given classification from a given country and each is assessed in addition to the others.

Tariffs to be paid.

Are duties cumulative? Including only dutiable costs?

Consider duty exemption request or use of first sale?

Customs Value


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Supplier reviewSu

pplie

r Ris

ksCurrency

Internal & SC stability

Insolvency Handle insolvencies

Ensure internal stability

Mitigate currency risks

Environmental standards

Social standards Ensure human rights

Environmental protection

Information & Systems

Capacity

Dependency

Logistics

Quality Avoid inadequate technical specifications

Ensure delivery reliability

Avoid or mitigate dependencies

Ensure stable B2B systems integration

Optimize demand variability

Commercial Compliance

Contract Management

Law & Regulations Preventing bribery and corruption

Monitor regulations & shape contract texts

Preventing unfair competition (e.g. corruption)

Price risks

Political risks

Geographical risks Rapid response to catastrophes

Identifying country risks

Countering price fluctuations and market volatility

Innovation Exploit the innovative potential of suppliers

Financial stability

Sustainability

Operational excellence

Compliance

External market risks


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Choosing the right balance— Every effective supply chain needs to balance

the level and variability of Service it offers to its customers with Cost and Quality

— Increasing tariff costs may lead to plans to change existing suppliers/ manufacturing processes

— Companies should be very careful to ensure plans do not compromise quality or service levels

— Adherence to established quality and sourcing standards is essential

In the right business context

Service

Quality

Cost


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Step 3: embed geopolitical risk into supply chain risk management (“SCRM”)

The Client Challenge

• The top challenges of business leaders around the world are enabling growth, driving cost down, managing risk and achieving operations efficiency while being responsive to its customer as customer experience is becoming undeniably more important. One of the biggest threats to growth is a supply chain that fails to deliver.1

• In addition, companies are facing an increasingly complex regulatory environment requiring the risk management of global regulations, bribery and corruption, cyber threats, human rights, etc.

The Role of SCRM

• The role of SCRM matures: Leading organizations have moved on from pure supplier risk management activities to end-to-end SCRM networks which include enterprise partners from Finance, Tax, and IT, as well as third parties to manage increasingly vulnerable end-to-end Supply Chains

• Focus is required in a few imperative areas including the boards’ risk oversight role, and the need to establish a risk appetite, combined with processes, accountability and assurance.

The SCRM Challenge

• Operational risk is continuously increasing as institutions adapt business models, transform technology and operating processes, respond to increasing cyber threats, increased reliance on third party relationships, and expand into new products and services that require specialized risk management and compliance processes and skills

• Historically, many of these risks were considered in isolation. Successful SCRM programs going forward require an understanding of the many operational and compliance risks and to manage them on an integrated basis.

How KPMG can help

• KPMG’s has a global footprint comprised of 2’500 SCRM multi-disciplinary professionals located in all major geographic markets serving clients across all industries. These professionals are organized to provide strategy development, risk evaluation, capability building, global transformations, and risk management services.

• KPMG’s SCRM expert network is built across the firms practices from Management Advisory, Risk Advisory, Technology Advisory, Finance Management, Tax and Audit


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Utilizing predictive SCRMP-SCRM addresses risk challenges facing supply chains by using a real time digital platform that utilises advanced predictive analytics

Managing risk is a key priority for Supply Chain leaders. Challenges include: — No holistic views with risks views

in silos— Vulnerability to unplanned events,

with risk profiles not evolving over time— Increasing operational complexity

through demand variability— Reactive risk mitigation processes— Limited transparency over end to end

supply chain risks— Manual reporting with no predictive

capability

KPMG’s PSCRM approach:— Enables proactive management

of risks— Utilises external ‘smart data points’

through a live digital platform— Improves collaboration with external

suppliers and partners— Increases real time connectivity and

responsiveness

Benefits

EfficiencyProactive management results in fewer incidents majorly impacting operations which will decrease waste consumption and increase revenueAutomated reporting with predictive capabilities enabling risk profiles which change over time

EffectivenessIncreased collaboration with external supply chain partners through increased connectivity and real time connectivityImproved performance by moving away from historical data and towards a predictive supply chain

StrategyEnhance operational and financial performance by applying insights from customers, suppliers, third party providers and other external data pointsImproved decision-making and interoperability through holistic and transparent supply chain platform


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Using a real time digital platform that utilizes advanced predictive analytics

SECURITYMICRO-SERVICES

DATA PLATFORM

Data ingestion, Seamless integration,Auto generated analytics, Big data capabilities

Real-time data stream processing for anomaly detection,Time series data collection, Natural language processing

ADVANCED APPLICATIONS OF DATA CONSUMPTION02

PredictiveRisk Profiles

Network Mapping

Risk Events

Real-time Data Insights

SupplierPerformance

01 Ingest and integrate various data sources (internal & external) through micro services, ARWIN platform processes data using advanced analytics.

NON-TRADITIONAL DATA SOURCESTRADITIONAL DATA SOURCESBilling Systems ERP data Sales Data Meteorological Data News Feeds Social MediaPlanning data

01 ADVANCED PREDICTIVE ANALYSIS OF SMART DATA POINTS

02 Advanced analytics enables real time predictive analysis of risk events impacting supply chains from Financial, Regulatory, Operational, Geopolitical, and Natural Disaster focuses. Tool offers network information from source of component material through to ‘in-market’ distribution centres.

Use insights to proactively manage risks, enhance/ remodel network, and empower business planning processes.


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Provides detailed insight into suppliers, raw materials and products to understand the impact and risk of forecasted events

Document Classification: KPMG Confidential

Executive dashboard Supplier, product and raw material view

Forecast events Critical events

The Dashboard in the home screen shows a number of important parameters with respect to the Organization’s supply chain health check.

The real power of our solution comes into play when you consider the predictive capability to forecast events. Unlike traditional risk management approaches, our solutions forecasted events are not predicted based on historic data alone, but rather on the use of internal and external smart data points enabled by digital supply chains.

Solution highlights the number of components that’s being supplied by a Supplier, along with supplier performance details such as lead times, risk ratings, revenue at risk, and alternative suppliers.

The Critical Events tab shows the number of events that are likely to impact the overall health of the Supply Chain and how many of those are critical


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User Story – regulatory changes impacting market shareUsing external data points from Bloomberg, Dun & Bradstreet, Thomson Reuters and synthesio; the tool is able to forecast economic and regulatory risks and resulting impact to market share and suppliers

Wait and see

Contingency

Solution forecasts potential EU Trade Agreement event will impact suppliers and could impact over 10% of sales

Solution forecasts event over 12months in advance to provide warning.

Logistics planner identifies risk and raises concerns with leadership

Senior leadership given 12months to contingency plan alternative suppliers, or to adopt a ‘wait and see’ approach.

Solution identifies alternative suppliers of affected products

Solution captures mitigate actions for next similar event

Solution monitors risk and raises prioritisation of risk over time

Procurement agreements arranged with alternative suppliers

Situation monitored daily through solution – live updates and impact analysed through advanced analytics


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In closing

Companies will need to develop insights into their ability to pivot around new tariffs, protectionist stances or whatever the next wave will be while considering their current contingency plans and risk diversification opportunities.

In doing so, it’s important to assemble a cross-functional team with deep subject matter experience to provide insights and recommendations regarding the potential impacts to a company’s— Supply chain footprint

strategy— Operating model— Brand strategy — Capital structure— Trade and tax positions

Companies should be prepared to answer questions such as:

How might we be affected?

What are our options?

What should we do now?

Questions

Thank you

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

Documents

Geopolitics and the Need for an Intelligent Supply Chain · 2020-02-27 · 2019 U.S. Cross-Border Tax Conference May 14 – 16, 2019 tax.kpmg.us Geopolitics and the Need for an Intelligent