Today’s supply chains are slower and less predictable due to a host of issues including COVID, the US/China trade conflict, the Russian/Ukraine conflict, port congestion, and economies in recession. This lack of certainty requires companies to hold more inventory – and that added inventory is costing you millions in carrying costs and tying up your cash.
If your supply chain runs through Asia, storing inventory in an FTZ bonded warehouse in China or other Asia-Pac country can help reduce inventory carrying costs, defer or avoid duty payments, and shrink your overall cash cycle. Let’s look at how a bonded warehouse or free trade zone (FTZ) can take red tape, time, and cost out of your supply chain.
What’s the difference? Bonded warehouse vs FTZ
A bonded warehouse is operated by a private company under the supervision of a country’s customs agency. It allows companies to store imported goods close to customers but to defer payment of duties on these imports until the goods are sold.
FTZs afford similar benefits as bonded warehouses in China and elsewhere. The benefits of FTZs mainly apply to shipments that will end up being exported to another country for sale.
Use of bonded warehouse and FTZ services: 5 common examples
Dimerco operates multiple warehouses across Mainland China, Hong Kong, Taiwan and Southeast Asia, including bonded, non-bonded, and FTZ locations. In China, all Dimerco bonded space is within an FTZ. Companies capitalize on our FTZ bonded warehouses for multiple business reasons. Following are some of the primary use cases, including some specific examples.
Import hub – defer duty payments until final sale
FTZ bonded warehouses in China and Southeast Asia are ideal for companies that wish to hold inventory at a regional distribution center for rapid distribution to local customers. They can import these goods and defer duty payments until a final sale is made to a local customer, thus keeping cash longer.
For instance, a global manufacturer of high-tech components imports products into the Shanghai Pudong International Airport (PVG). The company had been paying duty and tax to China Customs immediately upon import. Today, shipments move in bond from PVG to Dimerco’s Shanghai-area FTZ. Only orders that ship out to final customers are declared, with taxes due.
VMI hub – reduce safety stock of supplier inventory used to feed assembly line
FTZ bonded warehouses in China can help streamline the flow of products into a factory. For a manufacturer of RF integrated circuit products, Dimerco operates a vendor managed inventory (VMI) hub within the Beijing Airport Free Trade Zone. The facility stores inventory and provides real-time replenishment for 2 company factories nearby. The solution has reduced factory safety stock significantly, driving down supply chain costs. Also, by not taking ownership of components until they are needed for production, this customer has sharply reduced its cash cycle.
Export hub – avoid duty payments on imported components that will be re-exported
A leading cyber security company uses Dimerco’s FTZ warehouse in Taiwan to consolidate supplier inventory from Taiwan and other Asian countries and prepare products for export. The company avoids duty payments on the inbound supplier shipments. Also, shipments from its own manufacturing plants in Taiwan into the FTZ are regarded as exports, so they can request a duty refund from the government.
Third-party trade in China – obtain a refund of VAT payments on products that are imported, then repackaged and exported
One product reseller based and registered in China imports goods from other countries into China and sells those same items at a markup to buyers in other countries. Products are held at an FTZ bonded warehouse in China, where staff repackage and change product labels before exporting the goods out of China. The company pays duty and VAT for the imports to China. When product is exported, the company applies for an export VAT refund, which includes VAT paid to Customs for the import of materials before processing in China. The refund is based on the VAT refund rate, which is determined by the custom’s commodity code (HS code).
Transshipment – avoid tax and duty payments when shipping products globally from a foreign gateway
After the COVID pandemic began, a consumer product manufacturer in Vietnam struggled to reliably ship FCL loads from its home port in Vietnam to its major customers in the US. As an alternative, the company began to ship cargo via cross-border road freight from Vietnam to Dimerco’s FTZ bonded warehouse in the Yantian District of Shenzhen in Southeast China. There the cargo was prepared and shipped via FCL to US buyers. Since the product remained in bond during this transshipment process, the company avoided tax and duty payments in China. Additionally, the company was able to ship more reliably at a much lower ocean freight cost.
Bonded warehouses and free trade zones are important for companies that use an entrepot trade strategy. An entrepot is a port or city where merchandise may be imported, stored or traded – usually to be exported again. Singapore, for instance, has become a popular entrepot between the Far East and Western markets because its ports have direct connections to so many global gateways. Dimerco’s FTZ warehouse in the Airport Logistics Park of Singapore enables duty and tax exemption when cargo moves through Singapore to and from Southeast Asia countries.
Trade freely, preserve your cash
Bonded warehouses and free trade zones are ways that governments remove red tape and costs for companies that trade globally. By understanding the rules and requirements for bonded and FTZ space, it’s possible for importers and exporters to reduce supply chain cycle time and keep their cash longer.
If you need help understanding bonded warehouses vs FTZs and want to understand if and how an FTZ or bonded warehouse in China or Southeast Asia could benefit your business, talk to a Dimerco shipping expert today.