Industryweek 13875 Prod Development

Export Compliance: Why SMBs Need to Understand their Role

Jan. 30, 2017
Small and midsize manufacturers should consider global and domestic standards early in the product development process.

Hydro-Thermal Corp. CEO Jim Zaiser recalls he was once late for a meeting in China because “a few thousand goats” caused a traffic jam. It’s one of the many, albeit more amusing, challenges he’s faced as a small manufacturer exporting overseas. The goats prove you can’t prepare for everything, but manufacturers should be ready to comply with export rules and standards to be successful in foreign markets.

Hydro-Thermal, based in Waukesha, Wis., produces and designs direct-steam injection heating solutions. The company relies on exports for a significant part of its business. But company leaders must carefully consider what materials they use and product designs so they meet standards for individual countries, according to Zaiser. 

The road to exporting can be a bumpy one for small and midsize firms, such as Hydro-Thermal, if they aren’t prepared to meet various compliance, certifications and standards required by both the U.S. and their target markets.

In fact, 24% of small and midsize firms cite regulatory barriers and complexity as a main barrier to selling their goods and services to foreign markets, according to a survey published in 2016 by the National Small Business Association and the Small Business Exporters Association.

Manufacturing leaders who understand their responsibilities early in the process can increase their market opportunities and reduce noncompliance risks. Some of these include understanding terms of agreements, funding sources and material selection, as well as taking corrective actions as soon as an issue arises.

Design for Compliance

Depending on the industry, SMEs may need to consider alternative sourcing or additional testing to verify products meet foreign standards.

For example, when Hydro-Thermal ships to Canada, the company must meet pressure certifications, including standards for each province, Zaiser says. In the European Economic Area (EEA), the company must also meet CE standards. CE is a marking that indicates products sold in the EEA meet high safety, health, and environmental protection requirements.

This doesn’t mean all products sold to Europe must bear the CE marking, so manufacturers need to conduct due diligence, says Sophie Lignier, counsel at Foley & Lardner LLP and member of the firm's government and public policy, antitrust, and international practices.

“When developing a product intended to be sold in the EEA, manufacturers should check the relevant CE marking legislation applying to their products as well as any other more specific EU legislation that may apply to their products,” Lignier says.

Products that Hydro-Thermal markets to the food industry face even more complex standards. 

“For example, the seals within the equipment are required to be FDA-approved material, Zaiser explains. “In Europe, there is a similar but different authorized body. Recently, in France, an additional requirement of local demand was added. The material we recommend is FDA approved, but not European.”

Hydro-Thermal meets the challenge through experience, partnerships and multiple design templates.

“We’re now able to leverage the experience and approval from very complex projects to expedite the compliance process because once some of these forms are created, it creates a stickman document for the next project,” Zaiser says. “In fact, in the most complicated projects with documented project management, risk analysis, paint specifications, shipping requirements and packaging material--like certified bug-free wood--our compliance package is over prepared.”

Other design standards to consider that are more specific to the electronics industry include the Restriction of Hazardous Substances Directive, or RoHs, and the EU Waste Electrical and Electronic Equipment Directive.

Export Compliance At Home

Standards don’t just apply to requirements set by an exporter’s final destination. In the U.S., manufacturers face potential fines and other penalties if they don’t comply with various federal laws. Certain products may be subject to International Traffic in Arms Regulations (ITAR) and the Export Administration Regulations (EAR).

EAR includes Items that might have “dual-use”--both commercial and military-–applications, says Nancy Fischer, partner, Pillsbury Winthrop Shaw Pittman LLP. ITAR is administered by the State Department and includes items that are more military specific. 

Fischer suggests manufacturers pay careful attention to how their products are funded during the development stage and review the contracts. For example, if the Department of Defense or another government agency funds a project, they might need a license to export the product.

“If that technology is deemed an ITAR item and you try to incorporate it into a commercial item then that commercial item is also ITAR,” Fischer says.

Certain countries, including China, are prohibited from receiving ITAR products, Fischer says.

“It’s important at the time of the contract to have as much clarity around that so IP rights or other types of technology developments are not impeded,” she says. “That affects the market for your product,” Fischer says. 

Prior to entering into a contract, Fischer recommends that manufacturers ask themselves:

  • How does the contract affect my market?
  • What kind of licensing do I need to think about?
  • Did I understand what the controls are on those technologies?

Manufacturers should identify the export jurisdiction and classification of their products during the development phase to avoid issues later in the process, says Marwa M. Hassoun, an associate at Arent Fox LLP. 

“Make sure your intended customers and end users are not prohibited in any way and determine early if you will need a license so you can plan accordingly and manage customer expectations,” Hassoun says.

Take Action Early

Manufacturers also should ask themselves: “Did I get it right?” says Fischer. 

“Did you send the product to China or Germany and was license required and do I need to make disclosure to the government in terms of violation?” Fischer says. “It happens a lot when merging companies.”

If manufacturers realize they’ve violated export laws they should take action immediately to avoid costly penalties, suggests Omari Wooden, assistant division chief for the Census Bureau’s Trade Regulations and Outreach department. Wooden discussed export compliance issues during a recent webinar hosted by IndustryWeek and sponsored by the Export-Import Bank of the United States.

When it comes to shipping, document every step of an export transaction and retain that documentation, Wooden says. For example, if a manufacturer initially stated it intended to ship 10 units and actually shipped six units, the manufacturer must be able to document why, he says. Also, make sure all parties--whether it’s the manufacturer or forwarder, for instance--understand who is responsible for documentation, Wooden says.

For Hydro-Thermal, the ability to understand export requirements continues to help the company grow globally. On average, exports now account for 40% of the company’s business, Zaiser says. Annual international sales growth has been about 15% for many years, but it’s declined recently because of the exchange rate, Zaiser says. 

“It has been frustrating in the past, but now we are experienced and prepared for just about any additional expectation,” Zaiser says. When Zaiser spoke with IW, he was preparing to visit customers in Israel and Germany, which import very few components from the U.S., he says.

“But we are now specified in as the sole supplier,” he says. “We work very hard to make sure these customers experience us without complexity, delay and minimal distraction.”

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