MOONBEAM ELECTRONICS PROFITING FROM A FOREIGN TRADE ZONE
Located in southwest Missouri,Moonbeam Electronics is a manufacturer of small electrical appliances, such as toasters, toaster ovens, can openers, mixers, and blenders.Moonbeam assembles these products in its Springfield,Missouri,facility using a number of foreign suppliers for component parts.Virtually all products are assembled from parts from Japan,Taiwan, Korea, and China.
All of Moonbeam's production occurs in the Springfield facility,and the company employs over 400 people.Although labor costs might be lower in Mexico or Asia, Moonbeam has never considered moving its production operations out of the country.Wages and benefit costs are moderate and the workforce is productive. Moonbeam exports approximately 25 percent of its production output to Latin America, Europe, and Asia.
The company hopes to increase its export potential with some product design changes and increased international marketing efforts. Jim Harrison, vice president of logistics for Moonbeam, has been communicating with an old college friend who recently took a job at the Toyota production facility in Kentucky. Jim's friend told him that Toyota utilizes a foreign trade zone (FTZ) and that Moonbeam could benefit from one as well.
After further discussions on the telephone, Jim decided to fly to Kentucky to see the Toyota facility and learn more about the FTZ concept. Jim learned that Toyota imports from Japan component parts for its automobile manufacturing,and that by utilizing an FTZ the company avoids paying any customs duties on the component parts until the cars leave the FTZ. If the autos are exported out of the United States,then Toyota pays no tax on the component parts at all.
It was explained to Jim that an FTZ is an area in the United States that is considered to be international territory, and therefore US customs duties do not apply. Jim has further learned that there are two types of FTZ, a general-purpose trade zone and a subzone.The general-purpose trade zone operates for the benefit of several different companies and the subzone is established for one company's use exclusively.
Toyota has a subzone for its production operations in Kentucky.From his visit Jim has decided that there are three benefits to operating in an FTZ:
(1) delay of payment of custom duties,
(2) possible elimination of custom duties,and
(3) the bypassing of US Customs regulations.
He is confident that Moonbeam can realize all three benefits, but he wants to further investigate this idea before he formally presents a proposal for adoption to senior management.
CASE DISCUSSION
1. Research foreign trade zones and determine if Jim is correct in his assertions concerning the potential benefits.
2. Specifically, how might Moonbeam benefit from the establishment of an FTZ? Are there any disadvantages?
3. Would you recommend that Moonbeam establish a subzone? Explain.