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SCRC Meeting – Patrick Fox from VF Corporation: “Creating a Global Trade Playbook”

Patrick Fox, Senior Director for Customs and Trade Strategy for VF, presented at the SCRC and made a number of excellent observations about the current trade environment.  Patrick noted that in his long career at VF, he serves in a number of roles that allowed him to understand the complexity of global trade.  The magnitude of this task was expressed in his presentation as follows.

VF is composed of 23 different brands, the three largest of which are Vans, North Face, and Timberland.  It has a long tail of smaller brands including Dickies, Altra, Bulwark, Eagle Creek, and many others.  VF is a 120 year old company, currently at $14B in revenue with 75,000 employees, and its largest brand, Vans, is a $5B  brand that sells over 100,000 pairs of shoes every year!   The diversity of the brands make them difficult to support, as they all have global supply chains, and the leverage is not the same.

The volumes shipped by VF are incredible.  The company annually produces 400 million units of products that traverse borders at least once or twice on their way to customers.  Patrick notes that “We woke up one day and asked ourselves how much do we pay in duties globally?  Do we have a crystal ball, and a system to produce a dashboard of every unit crossing a border where we pay a duty, and how much we are paying different countries like Japan, Malaysia, Vietnam or any of the hundreds of different countries we do business in today with suppliers or distributors?

“When we woke up to that question and started to do the math, we realized that we pay more in customs duty than we pay in corporate income taxes!  That was an ah-ha moment!  We have 400M pieces that cross borders – and border politics is no longer theoretical, it is real politik!  WE had to begin to put in systems to manage the process, and develop experts to understand the granularity of customs issues, such as the movement of material through the Port of Los Angeles, across our own systems, those of our 3PL’s, the paperwork of a truck driver, and all the other minutiae and systems involved.”

“Part of my job is to protect decision-makers from themselves – and when you get into trade and customs -I have to think about compliance with customs rules involved in the US Code Title 19 on Customs.  We normally work with customs agencies and some of them will run us around, so we also have to manage that part.

The current trade wars are almost an existential crisis -and we are living through this together.  Our CEO, Eric Wiseman, once noted that we are a 120 year old company, and have lived through many wars and great recessions, and we will get through this as well.  This is all very real.  We work at the intersection of sourcing, logistics, legal, finance, and government affairs, and I spend 25% of my time helping our GA team form trade affairs strategies.  They come to me and say what does this mean?  In the Fall of 2016, when our new CEO was appointed, Steve Rendle, we were focused on TPP, and it was going to be a big deal. We were sitting in DC watching the election, and someone asked the question – what if Trump wins?  What happens?  Well, after election night, with NAFTA and China lurking in the background, TPP went away.  The side effect was that a lot of players were already migrating to Vietnam and migrating out of China.  It was happening industry-wide, regardless of the elimination of TPP.

Section 301 is the trade statute they invoked to deal with a lot of these remedies – it is an Industry Protection statute.  There were four different tranches of tariffs starting with the steel and aluminum tariffs, and a year ago these lists started coming in.  So we had to ask ourselves with apparel, should we be passive, or aggressive.

VF is lucky, we didn’t have a cohesive government affairs organization 3 or 4 years ago, but we cobbled it together and the idea at first was to let the brands do what they wanted, and we will sit in the background.  However, we soon realized that we have to grow up and put a cohesive strategy in place for global trade to deal with these issues which impact all of our brands.  We hired Washington consultants, and joined industry associations like the American Apparel and Footwear Association who are plugged into DC, to become more active on the Hill, and engage with legislators.  We spend most of our time educating them, to ensure that they understand our presence in districts with operations.    Most are clueless about the impact of tariffs on apparel operations.

On June 4 of this year, we appeared in DC to provide testimony.  We know  that the US will start rolling out tariffs on China based apparel, and we needed to testify.

We face many many different global trade issues that are popping up, and for each one, we are createing a “decision tree”, that allows us to map out a strategy based on the many different events that will unfold.  This is the only way we can deal with the whiplash of events.

For instance, there is a European GSP review of Cambodia in January, one of our second or third largest footprints.  We know a lot of apparel we produce in Cambodia is destined for Europe, and we currently have significant duty savings due to GSP.  This is under review because of issues occurring in Cambodia, and the GSP could easily be stripped.  What is the trigger point?

Brexit is another decision tree, and so are the labor issues in Xinjiang China.  A lot of the discussion revolves around cotton, and whether it is produced with forced labor in this region, as there are customs laws that you cannot import cotton produced with forced labor.  We also need to look at the path forward for the new NAFTA, as Mexico imports 98% of cotton from the U.S.  WE also airfreight goods from China with FedEx, and they could be caught up on the black list as well.  There are so many different issues percolating around the world, and we have to be aware of all of them and their impact on trade. China is transshipping a lot of their product to Vietnam, but Vietnamese inspectors are increasing customs delays, and China is our largest footwear shipper.  Every contain is being inspected!  And so on… lots of different issues..and this is complicated by all of the misinformation flying around.

In our June 4 testimony, we emphasized that U.S. consumers are ultimately paying the price of tariffs, as incremental duties are simply passed along the supply chain, and end up crowding out US investment that companies could make in high-paying US jobs, IT, and other business expanding investments.  “WE ask ourselves in the cost of tariffs to US companies and consumers cause more harm than the problem they are trying to solve.”   This refers to the fact that there are not good rules that say what you can and cannot do, because it gets very complicated for textile goods as there is a tariff number for yarn, but a different one for sweaters!

We run five general purpose Free Trade Zones, and we use them simply to divert tariffs as long as we can.  They don’t help a lot, because if your goods are subject to Chinese tariffs, you have to enter them as “privileged status”, and the tariff assigned to them sticks onto that inventory as long as it is in your zone.   A manufacturing free trade zone ostensibly import components, makes them into something different and then it becomes a “made in USA” good, which is not subject to a Chinese tariff.

In the end, we have had to set up playbooks for each of these situations, which we do through our sourcing organization in China.  We give them the data, the risks, and the impacts to the brands, and we build a single PPT deck that outlines the strategy.  This is the only way we can communicate to every one of our brands what the “playbook” strategy is for the region.  Everything we are dealing with is in the playbook, and we update them based on tweets, front page newspaper stories, or other factors.  That is the only way to cohesively manage all of our brand expectations through a single pipeline of information, but it is getting more complicated every day.