An electronic communications company intending to establish an after-sales service centre in Africa came to us with the concerns that it would be subject to US export controls as some parts had a high proportion of US components.

We first asked about the company’s development plans in Africa in the coming years, target markets and countries, etc., before tackling the issue of export control. An after-sales service centre must be set up to align with the sales and development needs of the business, and may need to serve several major sales markets. One example would be a global healthcare company. At that time, one of the healthcare company’s global service centres was located in Singapore, serving as an independent company to provide after-sales service to customers. Some goods made by factories in Beijing and Shanghai had to be shipped to Singapore for after-sales repair. In this case, we would consider if one after-sales service centre might concurrently support North Africa, Southern Europe and the Middle East regions. We then needed to look at which country or region is the best for the establishment of an after-sales repair centre only after considering if it meets the needs and future development plans of the company. Export control is a very important factor which cannot be ignored, but from a business point of view, there is much more to consider, including market access, tax and tariff costs, trade facilitation in and out of the country and local policies.

Car manufacturers, white goods companies and communications manufacturers came to us for ready-to-use solutions to greater risks.

There is nothing wrong for companies to be vigilant in times of peace. The principle of succession of liability for the successor prescribes that any subsequent adjustment to the supply chain, especially a short and quick one, may be considered by US authorities as an act of circumvention. This will subject the successor to continue to fulfil the responsibilities and penalties to be borne by the predecessor.

In the process of supply chain adjustment, other aspects of business opeartion, such as procedures completed for government review,  will not be easily adjusted without sufficient preparation and resource support. Other aspects that might be integrated in the process of supply chain adjustment may include supplier selection and review, legal due diligence, bank credit, bidding regulations, personnel adjustments, liability for breach of contract, and brand protection of the ongoing projects. We once helped a company on the Entity List to adjust its domestic and foreign operations. The success of the adjustment mostly hinged on the fact that the company had sufficient resources at its disposal, and made reasonable arrangements in advance. A hasty response is likely to trigger the succession of liability, and those involved may be penalised by the US for deliberate circumvention.

A domestic auto parts manufacturer and a robot manufacturer came to us for a solution to the dual-loop system where the domestic factory produces goods to support the domestic market while the foreign factory produces goods to support the foreign market.

The dual-loop system is probably to be made available in these two companies. From a trade compliance perspective, however, whether the above arrangement can achieve a more independent operation under such system, i.e. the principle of independence in distinguishing corporate responsibility in US export controls and sanctions, requires in-depth considerations and reasonable planning by the companies.

In many enterprises nowadays, the management, such as general managers and chairmen, of subordinate companies are designated or appointed by the parent company. When it comes to the internal control procedures for major decisions, subordinate companies need to report major matters to their parent company for decision or approval. The borrowing and management of funds within the group are generally led by the headquarters. In addition, in actual production and operation, there is a common issue that different entities exchange technology and materials as part of the business operation. This may affect the independent operations of different subsidiaries within the corporation group. If the offshore company is not actually independent under the dual-loop system, will it be considered by US authorities to have committed an act of circumvention?

The answer to this question involves judgement and necessary adjustments based on the actual operation and arrangements of the enterprises. The dual-loop system is an option, but it is important to pay attention to the internal details and priorities.

Advising a well-known TMT company on its first export project,  a civil aircraft R&D and manufacturing company on the development of an internal compliance control system, and a Taiwan chip manufacturing company, a US packaging company, Chinese and US pharmaceutical companies on their internal trade compliance control, involving various factors affecting overall supply chain security and corporate responsibility.

The above-mentioned companies are all leaders in their respective industries, with a wide range of businesses and complex structures and supply chains. In summary, their business covers transactions in physical goods, services, technical collaboration, after-sales service, testing of products, outsourcing, etc. In a typical trade in goods, there will be technology-based deliveries; in a service contract, there will be deliveries in physical goods and also service-based deliveries involving the upgrading, commissioning and training; and in a technical transaction, there will be more technology-based trade in services, etc. However, whatever the type of cooperation and delivery, companies need to focus on the deliverables, the interconnectedness of the partners, suppliers and vendors, including the interplay under various export controls and sanctions.  

Enterprises usually have a primary and a secondary supplier. We may, however, be faced with such situations as there is a sole supplier; a company within a group has been included in various control lists by the US, which affects transactions with other companies in the group; and suppliers have different export control requirement for the same provision. These all have an impact on the construction and security of the supply chain. Companies have to consider various possibilities and potential risks in order to find the best possible solutions.

On the one hand, Chinese companies are getting bigger and stronger and expanding overseas. On the other hand, the long-armed and extraterritorial jurisdiction of the US affects both the domestic and overseas supply chains and sales chains of Chinese companies. The US has come up with different reasons and requirements to impose control measures. All these have posed new challenges to Chinese companies.

Importantly, we have noticed many misunderstandings, including the US may not interfere with or penalise domestic companies if they conduct offshore operations without an offshore presence; sourcing from a company included in the Entity List violates US export control laws; and the various US military-related list restrictions are the same. Misunderstandings often cause unnecessary impediments to supply chain operations that could otherwise be conducted normally.

A technology leader put its chips into production for market expansion with a view to preparing for its proposed listing in the next few years and potential challenges; an image recognition software company adjusted its supply chain after being included in the Entity List.

US export controls and sanctions have a five-year retroactive period for violations. In other words, the US will look at developments and changes of the targets in the last five years in its investigations. For enterprises, “temporary" changes that are not fully commercially reasonable are likely to be considered by the US as typical acts of circumvention and will only invite more severe penalties.

Enterprises need to be farsighted in ensuring supply chain security. For the technology leader above, after discussing with the management about its current raw material procurement, technology acquisition, production, sales and technical exchanges within and outside the country, as well as the existing overseas technical resistance in this field, the relevant control and sanction regulations, and the potential impact, we developed an advanced work plan. As for the image recognition software company, it faced the risk of being cut off by the supplier after being included in the Entity List. Fortunately, an arrangement in its organizational structure many years ago provided an antidote to the supply chain crisis. Therefore, the advance work plan is essential for the sustainable development of modern enterprises.