Investment project analysis of e customs for the authorized economic operator

To apply E-customs for authorized economic operator with advantages in customs clearance process, Vietnam Customs proposes the new E-Customs standard, which is different to E-Customs for

TR NG I H C M TP HCM UNIVERSITÉ LIBRE DE BRUXELLES

HO CHI MINH CITY OPEN UNIVERSITY SOLVAY BRUSSELS SCHOOL

MBAVB4

DO NGUYEN SON KHIEM

INVESTMENT PROJECT ANALYSIS OF E-CUSTOMS FOR

THE AUTHORIZED ECONOMIC OPERATOR

MASTER PROJECT MASTER IN BUSINESS ADMINISTRATION

(PART-TIME)

Ho Chi Minh City

(2011)

ACKNOWLEDGEMENT:

I would like thank to all professors from Solvay Business School, they gave the value knowledge which help me a lot during doing the thesis and also in daily work

Besides, I would like to say thank you to professors, doctors of the Ho Chi Minh City Open University for the basic knowledge which I did not have during my engineering degree The basic knowledge helps me a lot during most of courses of the MBA

I highly appreciate for all of the help from counselors of Solvay Business School and Ho Chi Minh City Open University

Especially, I would like to say thank you to Dr Nguyen Minh Ha, my tutor of the final thesis His guidance, information, patience are invaluable My thesis will not be completed without his tutoring

My family, especially my daughter, supports a lot during past two and half years studying With all of family‟s encourage, supporting, sympathizing, I finished the program

Last but not least, thank for all of patience, supporting, opening, guidance from my classmates and colleagues

TABLE OF CONTENTS

ACKNOWLEDGEMENT: i

COMMITMENTS ii

TUTOR‟S COMMENTS iii

TABLE OF CONTENTS iv

LIST OF FIGURES vii

LIST OF TABLES viii

ACRONYMS x

EXECUTIVE SUMMARY 1

CHAPTER ONE: INTRODUCTION 3

1.1 Problem statement: 3

1.2 Objective of the study 6

1.3 Scope of study: 7

1.4 Method and data of study 8

1.5 Significance of this study 8

1.6 The project structure: 9

CHAPTER TWO: INTRODUCTION TO COMPANY AND THE PROJECT 10

2.1 Overview of company 10

2.2 Overview of project 12

CHAPTER THREE: THE PROJECT ANALYSIS 15

3.1 Market analysis: 15

3.1.1 Demand from authorized economic operator in Vietnam 17

3.1.2 Supply to authorized economic operator in Vietnam 20

3.2 Technology analysis 21

3.2.1 Steps to make one declaration: 24

3.2.2 Technical requirement: 25

3.2.3 Investment: 27

3.2.4 Operating cost: 29

3.3 Labor and organization analysis: 32

3.3.1 Organization chart 32

3.3.2 Project team chart: 33

3.4 Financial analysis 35

3.4.1 Capacity of the application 37

3.4.2 Revenue of the project 38

3.4.3 Labor cost 39

3.4.4 Cost of Goods Sold (COGS): 40

3.4.5 Operating expense: 41

3.4.6 Pro income statement: 42

3.4.7 Working capital: 44

3.4.8 Pro cash flow statement: 45

3.4.9 Project evaluation: 48

3.4.10 Risk analysis 51

3.4.10.1 Financial perspective risk: 51

3.4.10.2 Technical perspective risk: 59

3.4.11 Simulation 60

CHAPTER FOUR: CONCLUSION AND RECOMMENDATIONS 65

4.1 Conclusion 65

4.2 Advantages of the project 66

4.3 Recommendations 67

REFERENCES: 68

APPENDIX 71

Appendix 1: Salary expenses 71

Appendix 2: Revenue and COGS 72

Appendix 3: Investment and Expenses 73

Appendix 4: Cash flow statement of the normal case 75

Appendix 5: Cash flow statement in the good case 77

Appendix 6: Cash flow statement of the bad case 79

Appendix 7: Cash flow statement of the case of volume of cargo reduced 50% 81

Appendix 8: Cash flow statement in the case of inflation 83

Appendix 9: Sensitive analysis of price and volume of CDS to NPV 85

Appendix 10: Examples of quotation 87

Appendix 11: IT equipment technical specifications 89

LIST OF FIGURES

Figure 1-1: Topology of E-customs 6

Figure 1-2: Process of project 7

Figure 2-1: Corporate structure 11

Figure 2-2: Project timeline 14

Figure 3-1: Market share of freight forwarder 15

Figure 3-2: AFR market share 15

Figure 3-3: OFR market share 16

Figure 3-4: E-Customs message flow 22

Figure 3-5: XML routing for import 23

Figure 3-6: XML routing for export 23

Figure 3-7: Organization chart 32

Figure 3-8: Project chart 33

Figure 3-9: Operation team 34

Figure 3-10: Macroeconomic data and forecasts of Vietnam 49

Figure 3-11: Macroeconomic data and forecasts 56

Figure 3-12: Price assumption 60

Figure 3-13: NPV in the case of price changed 61

Figure 3-14: Volume of CDS changed 62

Figure 3-15: NPV in the case of volume of CDS changed 62

Figure 3-16: Price assumption 63

Figure 3-17: Volume of CDS changed 63

Figure 3-18: NPV in the case of volume of CDS changed and price changed 64

LIST OF TABLES

Table 1-1: Real GDP growth 3

Table 1-2: Logistics Performance Index 4

Table 2-1: Customs declaration method comparison 12

Table 3-1: Volume of CDS of the project during 6 years 18

Table 3-2: Volume of CDS declared as service during 6 years 19

Table 3-3: Total investment 27

Table 3-4: Onetime cost 27

Table 3-5: ICT equipment 28

Table 3-6: Depreciation and amortization („000USD) 29

Table 3-7: Maintenance cost 29

Table 3-8: Power consumption 30

Table 3-9: Price of electricity for corporations 30

Table 3-10: Power consumption expense – operator usage 30

Table 3-11: Power consumption expense – IT usage 31

Table 3-12: Office rental expense for operator 31

Table 3-13: Office rental expense for IT 32

Table 3-14: Cost for labor during project implementation (in 6 months) 33

Table 3-15: Salary expenses, number of labor required for production 34

Table 3-16: Advantage and Disadvantage of financial evaluate method 37

Table 3-17: Revenue of the project ('000 USD) 38

Table 3-18: Salary expense during 6 years production („000 USD) 39

Table 3-19: Salary for direct labor for customs clearance service („000 USD) 40

Table 3-20: Salary for indirect labor of customs clearance service („000 USD) 40

Table 3-21: Expense for CDS per year 41

Table 3-22: Cost of Goods Sold (COGS, „000 USD) 41

Table 3-23: Operating expense in 6 years („000 USD) 42

Table 3-24: Pro income statement of the project („000 USD) 43

Table 3-25: Account receivable, account payable, cash balance („000USD) 45

Table 3-26: cash flow statement for freight supplier („000 USD) 46

Table 3-27: Financial figure in normal case 50

Table 3-28: Payback period in normal case 50

Table 3-29: Financial figure in good case 51

Table 3-30: Payback period in good case 51

Table 3-31: Financial figure in the case of increasing one line per year 51

Table 3-32: Payback period in the case of increasing one line per year 52

Table 3-33: Financial figure in the case of volume of cargo is reduced 52

Table 3-34: Payback period in case volume of cargo is reduced 52

Table 3-35: Sensitive analysis of price and initial investment to NPV 53

Table 3-36: Sensitive analysis of price and volume of CDS to NPV 54

Table 3-37: Financial of project with inflation impact („000 USD) 57

Table 3-38: Financial figure in the case of inflation impacts 58

Table 3-39: Financial figure in the case of no inflation impacts 58

Table 3-40: Payback period with inflation impacts 59

Table 3-41: Table of standard deviation 61

Table 3-42: Table of standard deviation 63

Table 3-43: Financial figures summary 65

Table 3-44: Risk cases summary 66

ACRONYMS

AEO : Authorized Economic Operator

APEC : Asia-Pacific Economic Cooperation

AS2 : Applicability Statement 2

ASEAN : Association of Southeast Asian Nations

ASEM : Asia–Europe Meeting

BCP : Business Continuity Plan

BOM : Bill Of Material

CDS : Customs Clearance Sheet

COGS : Cost of Goods Sold

CPV : Communist Party of Vietnam

EDI : Electronic Data Interchange

EDIFACT : Electronic Data Interchange For Administration Commerce

And Transport EPV : Equity Points of View

GDP : Gross Domestic Product

IRR : Internal Rate of Return

MDN : Message Disposition Notification

MOF : Ministry of Finance

SEV : Samsung Electronics Vi t Nam

SHTP : Saigon High-Tech Park

SQL : Structured Query Language

SSL : Secure Sockets Layer

SWOT : Strengths Weaknesses Opportunities Threats TIP : Total investment points of view

TVM : Time Value of Money

URL : Uniform Resource Locator

XML : Extensible Markup Language

WCO : World Customs Organization

WTO : World Trade Organization

EXECUTIVE SUMMARY

Starting from the requirements of integration and development trends of international customs, Vietnam Customs need to fulfill international commitments related to customs within the framework of WTO, ASEAN, APEC, ASEM, WCO and other international organizations Performing customs clearance simple, transparent and providing information quickly, openly, especially to clear the goods faster to reduce costs for businesses are basic requirements for Vietnam Customs The number of foreign trade is increasing while the number of customs officers could not rise in proportion; in the other hand, information technology and e-commerce in many areas is developing, a new method of customs management procedures is the need, it is the e-customs procedures

E-Customs not only changes the customs management method following the modernization trend, in accordance with international customs practices, but also holds the important role in foreign trade, import export developing and attracting foreign investment

In order to attract foreign investment with huge capital, Vietnam government

in general and Vietnam Customs in particular grant the advantage for some corporates, which meet the requirement about finance, law criteria, as the authorized economic operator with many advantages in customs procedure

To apply E-customs for authorized economic operator with advantages in customs clearance process, Vietnam Customs proposes the new E-Customs standard, which is different to E-Customs for normal business Freight forwarder which provides import export services to authorized economic operator may invest the customs clearance system under new standard Since this is the pilot project,

no one knows exactly how good it is, the project should be analyzed on several aspects such as technical, market, and financial perspective

Technical perspective provides the understanding about requirement of system, how freight forwarder utilizes resource for technical; besides, freight forwarder needs to have the market overview on this special segment; together with aspects about technical and market overview, financial figure of project should be analyzed by popular methods: Net Present Value (NPV), Internal Rate

of Return (IRR) and Payback Period (PBP); based on result from financial analysis, investors make the decision whether or not to invest in

Under financial perspective, the project is analyzed in normal situation and inconvenience situation Since the result in normal situation gives NPV positive, IRR greater than discount rate and PBP shorter than duration of contract, it is optimistic to say to invest in the project is the right decision Besides the financial analysis in normal situation, where the project is in good condition, the study also brings some risk cases (e.g inflation, business growth not good, more competitors) that might lead the project fails; the results bring clear picture about financial perspective It helps investors easy to make a decision to invest in

CHAPTER ONE: INTRODUCTION

1.1 Problem statement:

Stance on economic reforms will continue over the coming years Vietnam‟s socioeconomic target for 2011 indicates an increased focus on achieving macroeconomic stability and controlling inflation, and also target for the real GDP growth at 7.5% Vietnam also stances on economic reforms continue over the coming years

The direction of Vietnam‟s economic policies would remain unchanged, continue to center on opening the economy to foreign competition, addressing corruption, promoting trade and upgrading the country‟s infrastructure and technology, also remains dedicated towards continuing the „Doi Moi‟ (meaning

„renovation‟) process of market-oriented reforms, tries to become a fully industrialized economy by 2020 Vietnam will continue to move in the direction of a market-based economy (Business Monitor International, 2011)

The economy of Vietnam is growing fast within period from 2000 to 2010 with average of GDP growth 7.2%

Table 1-1: Real GDP growth Year 2008 2009e 2010e 2011f 2012f 2013f 2014f 2015f Real GDP growth,

% change y-o-y 6.3 5.3 6.8 6.3 7.2 7.2 7.2 7.2 Notes: e: estimate, f: forecast

Source: Business Monitor International, 2011

Based on the growth of GDP from table 1-1, it is optimistic to say the economics of Viet Nam is stable, safe, and well growth; with the good economic environment, Vietnam attracts foreign investment in many factors, it premises the developing of logistics segment

Picture of Vietnam Logistics and Freight:

Business Monitor International (BMI) forecasts 2011 GDP growth of 6.3% (down from 6.8% in 2010) Outlook for 2012 is for growth to accelerate again to 7.2% In the five years to 2015 growth is expected to hit the average 7.0% per annum, confirming Vietnam as one of the fastest-growing economies in Southeast Asia

According to Logistics Performance Index (LPI), Vietnam ranked at 53rd out

of 155 countries Besides, total revenues from logistics services estimated at about 15%-20% of Vietnam's GDP (about 12 billion USD per year)

Table 1-2: Logistics Performance Index

Int Country LPI Customs Infrastructure International

shipments

Logistics competence

Source: World Bank, 2011

Many huge corporations of high-tech manufacturing are investing billions of dollars in Vietnam since last ten years, especially after Vietnam became the 150thmember of WTO Japanese investors arrived Vietnam earliest with many projects from huge corporations (e.g Canon, Sony, Fujitsu, Toshiba, Panasonic, Nidec, etc), and currently are pouring more capital to expand the business For instance, Nidec invested 100 million USD for factories at Tan Thuan Export Processing Zone (HCMC), 50 million for two factories at SHTP (Saigon High-Tech Park), these projects are just a small part of the plan of 1 billion USD investments to SHTP of Nidec Corporation Another Japanese corporation invests in the north of

Vietnam, Canon, with 100 million USD for printer factory at Thang Long Industry zone (Ha Noi), and 200 million for other factories at Que Vo Industry Zone (Bac Ninh) Same place with Nidec is Intel, the US giant semiconductor corporation, with the investment of 1 billion USD; and Jabil with 100 million USD joined the SHTP Not only Canon invests to Bac Ninh, but also several huge electronics corporations like Foxconn which provides electronic component for most of famous brand name such as HP, Lenovo,Nokia; Foxconn is investing to Que Vo and some other locations with total investment of 5 billion USD; Samsung Electronics Vietnam with 1 billion USD for the cell phone factory with capacity of 1.5million set/month In year 2012, Nokia will arrive Bac Ninh with 200 million Euro (Hung Minh, 2011)

In order to deliver high-tech product quicker and safer, high-tech companies prefer using air freight to lift their cargo The pilot authorized economic organization also needs the procedure of customs clearance to be speeded up as much as possible

Starting from the requirements of integration and development trends of international customs, Vietnam Customs needs to fulfill international commitments related to customs within the framework of WTO, ASEAN, APEC, ASEM, WCO and other international organizations Requirements for Vietnam Customs are to perform customs clearance simple, transparent and providing information quickly, openly, especially to perform fast clearance in order to reduce costs for businesses While the numbers of export import goods, passengers increasing, the number of customs officers could not rise in proportion, on the other hand with the development and application of information technology and e-commerce in many areas, the E-Customs procedure is a new method of management of customs procedures

As a part of administrative reform, in line with Decision 149/2005/Q -TTg dated 20/06/2005, the E-Customs procedures were implemented by Vietnam Customs 15/12/2009, Vietnam Customs decided to expand the pilot for E-Customs following Decision 103/2009/Q -TTg and Circular 222/2009/TT-BTC

The E-Customs procedure is not only applied for normal business organizations but also is applied for the authorized economic operator (AEO) To

give more advantage for the authorized economic operator with huge investment, Vietnam Customs proactive to issue special decisions that help a declaration procedure simpler, clearer (i.e Decision 1608/Q -TCHQ for pilot authorized economic operator)

Figure 1-1: Topology of E-customs

1.2 Objective of the study

This study describes the project of implementation system of E-Customs with special standard at import export organizations, freight forwarders in order to support to the pilot authorized economic operator

The study is chosen in order to show how good benefit of project brings to freight forwarders based on technical perspective and financial perspective

In order to prove that the project should be invested in, the study shows the full picture of following aspects:

 Supply and demand for authorized economic operator

 How the system looks like

 Capacity of the system

 Estimation of labor cost, initial cost

 Total investment cost

 Calculation of NPV, IRR, PBP

 Showing risks may impact to result of project

 Analysis results give conclusions whether investor should implement this project

1.3 Scope of study:

The project is a kind of the implementation of information technology project based

on the need of business The process of project is described as figure 1-2

Figure 1-2: Process of project

Source: Frailey, 2005

The E-Customs mentioned in this project is E-Customs for authorized economic operator Another customs declaration using internet which so-call E-Customs may be out of this scope

Limitation of the study:

In order to prove that the project of implementation system of E-Customs for authorized economic operator is the key element for freight forwarders which provide services for authorized economic operator and the decision of investment this project is value decision

1.4 Method and data of study

Primary data: Because the segment for authorized economic operator is currently

in pilot stage, no historical data; besides, this study links to confidentiality business information of freight forwarder itself, customer, counterparts; so key information is collected through directly interviewing from high level colleagues, colleagues who are supporting the first authorized economic operator, internal sales team; also from people are working for customer, counterpart who have the information,

knowledge about the project

Secondary data: Business Monitor Magazine is the main source of economic, political, country outlook

macro-General Department of Vietnam Customs, Ministry of Finance and Vietnam Government portal provide sources about legal documents, circulars, decrees, decisions

Other information is based on realistic of company report, competitor report

1.5 Significance of this study

In overall, this study is aimed to:

 Describe the new electronic data interchange (EDI) technology to transfer to Vietnamese electronic business solution

 Possibility to provide more effective service to customers

 Possibility to give a chance to improve company market share and competitive advance by having new standard E-Customs system

 Provide the figure to make a decision whether to invest in the system in freight forwarder

1.6 The project structure:

The project has four chapters, chapter one introduces why the project becomes an objective to be researched, where supporting data come from, and scope of the study The overview about freight forwarder and the project are illustrated in chapter two Chapter three brings the detail about technical, market, and financial analysis Finally, chapter four contains the conclusion and recommendations for the project

CHAPTER TWO: INTRODUCTION TO COMPANY AND THE PROJECT

The freight forwarder is operating in Vietnam under the status of foreign trade, customs, which is mentioned in chapter one And based on this status, the project is proposed applying at the freight forwarder to support its daily business The overview about the freight forwarder and the project are introduced in chapter two

2.1 Overview of company

The freight forwarder in this study is a global famous freight forwarder, holding top position among foreign forwarders in Vietnam (top of airfreight market share); since 2007, with the 10 million USD investment within 5 years for the expansion of facilities, employee training, upgrading of information systems and the introduction of an enhanced range of services for businesses in Vietnam It provides all main service such as:

 International and domestic cargo freight forwarding services by road, rail, waterways, oceans, air and multimode transport contracts

 Freight transportation (marine and airline) agency services

 Logistics services (labeling and packaging services, other supporting and auxiliary transportation services)

 Storage and warehouse services

 Customs clearance services

 Container station and depot services

 Domestic cargo transport services by road, railway, sea, inland waterway and airlines (using services of licensed cargo transport providers, no direct involvement in cargo transport)

The corporation now a day is the result of several times of merger and integration from mailing, forwarding companies; global forwarding is one sector among four main business sectors of the corporation (Internal report 2009)

Figure 2-1: Corporate structure

Because the main service between freight forwarder and authorized economic operator is air freight, the customs clearance service is just the additional service Although being not mentioned in this study; however, air freight

is main service so the SWOT of air freight impacts on business between freight forwarder and authorized economic operator, and also impacts on customs clearance service SWOT of the company on air freight segment is stated as below:

Strengths:

 Holding the number one position of air freight in Vietnam

 Getting best service from many strong airlines

 Having experience about special goods shipment

Weaknesses:

 Depending third party trucking company

 Lacking of man power

Opportunities:

 Logistics segment is developing

 High tech corporations are investing in Vietnam

 Vietnam government plans to open new airport and expand current international airports

Threats:

 Fuel prices are not stable

 Inflation rate is high

 Exchange rates are not stable

SUPPLY

FORWADING

 More competitors arrive

 Vietnam remains one of the world‟s most corrupt countries Its score in Transparency International‟s 2010 Corruption Perceptions Index was 2.7, placing it in 22nd place in the Asia Pacific region

2.2 Overview of project

To become the key supplier of transportation for the authorized economic operator with the three year contract, freight forwarder has to provide a transportation service parallel with providing the customs clearance service under new procedure, E-Customs for authorized economic operator Not only to be the advantage to get a contract as key supplier, but also the E-Customs system is the advantage condition for contract renewal after three years and helps freight supplier wins another new business

Therefore, to develop the E-Customs for authorized economic operator is the key factor to keep a good deal with pilot authorized economic operator, and win business with other authorized economic operators in future

Here below is a table of comparison of manual customs clearance and customs clearance, it show how the advantage the E-customs brings to freight forwarders in general, and particularly E-customs for authorized economic operator

E-Table 2-1: Customs declaration method comparison Normal customs declaration E-Customs

declaration

E-customs for authorized economic operator (B2B solution) Process Within business day (8 hours),

or next business day if submitting the declaration in the afternoon

Immediately Immediately

Reject due to

wrong data

depend on numbers of broker/company waiting to get result, sometimes, have to wait few hours to get the result

Immediately Immediately

Acceptance ID depend on numbers of

broker/company waiting to get result, sometimes, have to wait few hours to get the result

Within 30 minutes

Within 15 minutes

CDS ID depend on numbers of

broker/company waiting to get result, sometimes, have to wait few hours to get the result

Within 30 minutes

Within 15 minutes

Lane Depend on numbers of

broker/company waiting to get result, sometimes, have to wait few hours to get the result

Three lanes: green lane, yellow lane, red lane

Within 30 minutes Three lanes:

green lane, yellow lane, red lane

Within 15 minutes Two lanes: green lane, red lane, but

normally is green lane Archiving

on server

Archiving is put on tape/DVD

All data, transaction is on server

Archiving is put

on tape/DVD

The project is implemented within six months with key steps: internal development and testing, systems end to end testing, user acceptance test (UAT), pre-deployment, Go Live

Figure 2-2: Project timeline

CHAPTER THREE: THE PROJECT ANALYSIS

The first two chapters introduce the status of foreign trade, customs in Vietnam, the overview about the freight forwarder, the project and the methodology to research the study In chapter three, the project is analyzed detailed under financial, risk and technical perspective

3.1 Market analysis:

According to Trung Chau (2011), among approximately 900 logistics firms

in Vietnam, 20% are joint ventures with foreign businesses However, up to 80% of total revenue currently falls into the pocket of foreign logistics companies

Figure 3-1: Market share of freight forwarder

Source: Trung Chau, 2011

Foreign logistics companies have much experience about ocean freight and air freight; they hold top positions of international import export

Figure 3-2: AFR market share Air – Top 5

Figure 3-3: OFR market shareOcean – Top 5

1 Kuehne & Nagel (11.2%)

2 DHL (7.0%)

3 DB Schenker (6.2%)

4 Panalpina (3.7%)

5 DSV (3.2%)

Source: Toll Global Forwarding, 2010

Customs declaration service and status of E-customs in Vietnam:

Freight forwarder not only provides freight service, but also provides customs clearance service; the fee for one customs declaration form, which follows manual procedure, is 45 USD not including inspection fee; price from 40USD to 50USD is a market price after interviewing some foreign freight forwarders and local freight forwarders (example quotations: appendix 10), this price is also applied for the case of using E-Customs for declaration

According to Hoai Ngan (2011), a report on the implementation of customs, within eight months of year 2011, although still under experimental stage, businesses nationwide have been actively using this form of customs declaration; there are 43,168 businesses registered to use e-customs for declaration at 13 customs province offices nationwide; number of customs declaration sheet were declared though e-customs process reached 1,58 million customs declaration sheet (CDS), 70% of total number of customs declaration sheet According to Le Ngan (2011), 100% departments of Customs Department

e-of Ho Chi Minh City were applied E-customs process with number e-of customs declaration sheet were declared though e-customs process reached 80% of total number of customs declaration sheet

Currently Vietnam Customs defines two kinds of E-Customs standards: for normal business and for the authorized economic operator:

 Normal business: according to Decision 149/2005/Q -TTg, since 2005

“Pilot Implementation of Electronic Customs” was deployed at Hai Phong Customs and Ho Chi Minh City Customs, after that it was implemented in many provinces, and will review in November 2011 This kind of E-Customs may not in scope of this study

 The authorized economic operator: according to circular 222/2009/TT-BTC, standard of E-Customs for authorized economic operator has many different points with another business Therefore, suppliers have to tailor the application in line with requirement from Vietnam Customs and authorized economic operator In this study, E-Customs for authorized economic operator is focused and analyzed

3.1.1 Demand from authorized economic operator in Vietnam

At the time being, only one authorized economic operator gets the approval from Vietnam Customs and Ministry of Finance (MoF) for pilot using an E-Customs standard for authorized economic operator Besides, General Department of Vietnam Customs is considering allowing Samsung Electronics Vietnam (SEV), and Nokia Vietnam becoming the next corporations using authorized economic operator E-Customs standard

The pilot authorized economic operator company with the plan of reaching revenue 20 billion USD in 2015, with the roadmap of increasing 3 product lines per year within totally 52 product lines

In September 2010, Samsung Electronics Vietnam (SEV) gained an export turnover of 1 billion USD After over five months of strives for production and investment, by the end of February 2011, SEV doubled its export turnover to 2 billion USD Currently, the company‟s localization rate reaches 20 percent With an export turnover of 300 million USD per month, the company expects to gain an export turnover of 5 billion USD by the end of 2011 and become one of foreign-invested firms with biggest export turnover in Vietnam Samsung Electronics Vietnam hits 8.4 million item per month in August 2011, and forecast in October; the capacity would be 11.5 million items per month (Viet Nam Business News, 2011) Samsung Electronics Vietnam (SEV) is the one of first nine businesses

becomes authorized economic operator; these nine businesses were selected among 40,000 businesses which meet the high requirement about law and business (Phuong Diem, 2011); (N.Quang, 2011)

Besides, declaration on behalf of another freight forwarder who has not broker certificate for authorized economic operator is a potential demand for freight forwarder who is holding the broker certificate

Volume forecast for the project:

 To declare for the freight forwarder itself:

As per internal business plan, in the first year, the pilot authorized economic operator customer starts with 1 production line, after that, increases to 52 lines with roadmap 3 lines per year As customs clearance report based on declaring by free E-Customs software, capacity of goods from one production line brings approximately 100 CDS

Table 3-1 shows the forecast volume of CDS during 6 years based on the business plan and capacity of production line of the pilot authorized economic operator and result of customs clearance declaration by free software

Table 3-1: Volume of CDS of the project during 6 years

CDS/year 1,200 4,800 8,400 12,000 15,600 19,200 Source: Business plan of the pilot authorized economic operator

 To declare on behalf of the freight forwarder has not got broker certificate for authorized economic operator: Forecast revenue in normal condition based on sales contract between two freight forwarders internally, and volume of CDS currently is declared by the freight forwarder which does not has a certificate Table 3-2 reflects Volume of CDS declared as service during 6 years

Table 3-2: Volume of CDS declared as service during 6 years

CDS/year 960 3,840 6,720 9,600 12,480 15,360 Source: Business plan of the pilot authorized economic operator and contract between two freight suppliers

As per positive forecast of revenue coming from customs declaration service for the pilot authorized economic operator; this service can be considered

as a potential segment in logistics market That is a reason why after first three years contract, freight forwarder tries to get another three years contract

Demand of overall market

According to E-Finance (2011), in 2011 the number of business operator took part in using E-Customs for normal business is 46,919; achieving 116.42 times more than the number of businesses in 2009 Total number of customs declaration sheets is declared by E-Customs reached 2,510,153; getting 135.89 times more than in 2009; import export turnover reach 198,932.94 million USD, 101.65 times more than in 2009 Particularly, in Ho Chi Minh City, number of customs declaration sheet is 879,723; import-export turnover reaches 54,026 million USD

Comparing between demand about E-Customs from authorized economic operator and from normal business on overall market

Based on numbers showed above, many business operators use Customs, this number is increasing in next few years when E-Customs is fully deployed and manual declaration is terminated Besides, after first nine corporations becoming authorized economic operator, General Department of Vietnam Customs and MOF are considering approving more corporations become authorized economic operator Optimistically, the demand from authorized economic operator is potential

E-3.1.2 Supply to authorized economic operator in Vietnam

To reduce risk from freight forwarder, the pilot authorized economic operator is using same services from several freight forwarders Among these freight forwarders, only two freight forwarders have a broker certificate to declare

by using authorized economic operator standard e-customs clearance During the stage of pilot within three years, each freight forwarder holds only one portion for shipment, either import or export; it can say in this period there is no competitor Two freight forwarders, which have broker certificate to make declaration for authorized economic operator, are foreign corporations, holding top position of air freight in Vietnam; it can be considered that capacity of these two freight forwarders is the same

Vietnam Customs is considering allowing more freight forwarders getting broker certificate for authorized economic operator In near future, suppliers on this segment may increase and it may cause a reduction of CDS volume of two pilot freight forwarders It would be the advantage for freight forwarders who enter this segment early, because they can get a lot of experience during providing service, also can get good revenue when currently the market has not many players

Foreign freight forwarders in Vietnam market, currently apply the price for one CDS without inspection from 40USD to 50USD This price is not only applied for normal business but also for authorized economic operator

Supply for normal business:

After interviewing, foreign freight forwarders offer a price for one CDS without inspection for normal business is also from 40USD to 50USD

Based on the similar price for one CDS for authorized economic operator and for normal business, it is easy to recognize that with the same price, service for authorized economic operator brings better benefit than service for normal business based on time, resource and effectiveness perspective

Comparing between Demand and Supply

Based on business forecast of the pilot authorized economic operator, and number of pilot freight forwarders, it is easy to recognize the demand is high Besides, when other authorized economic operators start to use an E-Customs for authorized economic operator standard, the demand increases significantly comparing with number of suppliers

With the demand is higher than supply many times, it is optimistic to invest

to the segment of providing customs clearance service for authorized economic operator

3.2 Technology analysis

E-customs system for authorized economic operator is built based on Business to Business (B2B) solution with Electronic Data Interchange (EDI) technology

According to Thiebaut (2011) the EDI systems may bring advantages:

 Shorter delays

 Less manual process and paper

 Less errors and corrections

 More efficiency

 Economies in administration costs

 Competitive advantages (links with partners)

Characteristics: standardized exchange of structured data between computer applications inside the company or with external partners

Major challenge: to standardize the xml messages (protocols of communication, format).Normally following international standard, EDIFACT

Decision 2869/2009/QD-TCHQ defines the standard structure of data file based on EDIFACT/XML, relevant parties have to follow

The requirement for systems for relevant parties of the project:

 Set up the EDI systems in order to exchange the xml file which contains the information of the declaration between parties

 Secure the xml file by AS2 (Applicability Statement 2) technology

 Secure the connectivity by the digital certificate (2048 bits)

Figure 3-4: E-Customs message flow

Each party may need the own system that can generate xml file:

1 The authorized economic operator system generates xml which contains the information about finished good to be exported then send to freight forwarder

2 The freight forwarder system generates xml which contains the information about import export declaration, bill of material (BOM), import export table list, scraping notification, fix asset termination and request for response

3 Vietnam Customs system generates xml which contains the information about the acceptance ID; rejected message, customs clearance ID, lane code, and finished process

After xml file is generated, it is pushed to relevant parties through internet connection by the AS2 software, which provides the mechanism to exchange data securely and reliably over Internet; security is achieved by using digital certificates and encryption

Freight forwarder system generates two copies of xml then sends to customer and customs at same time, in order to help customer easy to keep track what kind of product, transaction to be sent to Customs Once Customs system receives xml file from freight forwarder, it generates two copies of answer

message, in order to let freight forwarder knows the status of the declaration, and also help the customer understand about the status of their cargo

The xml is sent to relevant receiver by AS2 software with SSL certificate AS2 software encrypts xml file with private key which provided by SSL certificate, then sent to receiving party through Internet; at receiving party, MDN message is turned back to sender in order to let the sender acknowledges that receiver already received xml file, xml file is decrypted by public key

Figure 3-5: XML routing for import

Figure 3-6: XML routing for export

3.2.1 Steps to make one declaration:

To declare one CDS, brokers follow steps as below sequentially; these steps are defined based on business process and regulations of Vietnam Customs

Import portion

Freight supplier, who handles import portion, creates the import table list, which states what kind of material, component, device which the customer may import, then sends to Customs under xml file

a If there is major error in basic information, then Customs system refuses with message 27, freight supplier has to edit and re-submit

b If basic information is correct, Customs system gives the Acceptance ID, then the approval on the Importable list

c Create the Import Declaration to submit to Customs If the Import Declaration meets basic requirement of Customs, then Customs system automatically gives acceptance ID If Import Declaration does not meet one

of requirement of high level requirement of customs regulation then customs officer turns back the rejection, freight supplier has to submit another customs declaration; if all requirements are matched, then customs officer turns back the CDS number, right after that customs officer gives the lane code (green lane) Once cargo leaves a monitoring area, the process

is finished and customs officer gives code for closing a process

Export portion

Freight supplier who handles export portion prepares:

a Create the Exportable list to submit to Customs Customs gives the feedback: If there is major error in basic information, then Customs system refuses with message 27, freight supplier may edit and re-submit; if basic information is correct, Customs system gives the Acceptance ID, then the approval on the Exportable list

b Create the Bill of Material (BOM) in line with Importable list which submitted before to submit to Customs Customs gives the feedback: : If there is major error

in basic information, then Customs system refuses with message 27, freight

supplier may edit and re-submit; if basic information is correct, Customs system gives the Acceptance ID, then the approval on the Bill of Material

c Create the Export Declaration to submit to Customs If the Export Declaration meets basic requirement of Customs, then Customs system automatically gives acceptance ID If Export Declaration does not meet one of requirement of high level requirement of customs regulation then customs officer turns back the rejection, freight supplier has to submit another customs declaration; if all requirements are matched, then customs officer turns back the CDS number, right after that customs officer gives the lane code (green lane) Once cargo leaves a monitoring area, the process is finished and customs officer gives code for closing a process

3.2.2 Technical requirement:

To support the requirement above, each party must have:

a Servers with high reliable quality,

b High speed internet connectivity,

c SSL certificate with 2048 bits which allowed and authorized by Ministry of Finance (MoF) of Vietnam,

d URL (Uniform Resource Locator),

e AS2 application,

f Database application (SQL, Oracle, DB2),

g To reduce the outage if there is any issue of production systems, the backup system has to be existed

To support for technical requirement, information technology vendors are chosen based on their profile, experience, quotation for devices, services

Vendors for the project:

G.O.L Company

The software is tailor-made by G.O.L, the software company; one among three companies got the authorization from Vietnam Customs to develop e-customs application which is compatible with standard of Vietnam Customs in line with Decision 2869/2009/QD-TCHQ (Website of Vietnam Customs)

Since 2005, G.O.L started to provide e-customs application for normal business with cheapest price

With the good proposal and price, G.O.L is suggested as the third party in order to develop the application under authorized economic operator standard After the system goes to production, G.O.L keeps source code and provides a maintenance service under a strict service level agreement

To use G.O.L as outsourcing from developing step to maintenance step helps freight forwarder reduces significantly cost for labor, and easy to control the service level agreement

FPT Company

IT equipment is provided by FPT, the biggest IT Corporation in Vietnam, at the best price because the freight forwarder has a global contract with Hewlett-Packard (HP), HP recommends their authorized distributor, in this case is FPT, to provide IT equipment with the lowest price within Vietnam IT market

Lac Viet Company

The well-known ICT Company in Vietnam, they provide the cabling service for this project because they got the HSE certificate (Health, Safety, and Environment) from the pilot authorized economic operator and are recommended

/n software

There are many companies providing AS2 application, /n software was chosen because its software meets requirement, scope of the project, cheap for license and easy to maintain

BKAV Company

Middle of 2010, Ministry of Finance allowed VDC and BKAV to provide digital certificate, digital signature for supporting E-Tax, E-Customs; following VDC,BKAV were Viettel, FPT, Nacecomm Only BKAV brings to commercial the SSL certificate with 2048 bits which adapts the requirement for E-Customs for authorized economic operator

Connection between special

customer and freight forwarder

AS2 License for testing and

production

Source: Quotation from vendors

At the beginning, freight supplier has to invest the amount of 65,043USD for fix asset, software, license, installation Several items in table 3-3 are items which just need to be invested at the first time – so-called onetime cost

Table 3-4: Onetime cost

costs(USD

Total (USD)

One time cost (USD) Cabling - fiber (Lac Viet) 1 10,500 10,500 10,500

Connection between special

customer and freight forwarder

Changing from HTTPS to FTPS 1 1,218 1,218 1,218 AS2 License for testing and

Source: Quotation from vendors

Depreciation, amortization and life cycle of IT equipment and application:

As per policy of corporate, the freight forwarder applies depreciation and amortization period is 3 years and follow straight line method Besides, warranty period for IT equipment is 5 years In order to save cost, the equipment is replaced after 5 years with the assumption of price increasing 10% per year

Because life cycle of IT equipment is 5 years as standard from manufacture; to ensure system work smoothly, these equipment should be replaced after 5 years, Table 3-5 states which item is replaced

Table 3-5: ICT equipment Items Quantity Unit costs (USD) Total (USD) Asset Renew

Source: Quotation from vendors

As mentioned above, 65,043USD is the amount of initial investment and 29,029USD is the amount of asset renew after life cycle finished (5 years) The calculation method for depreciation and amortization is straight line as policy of company Based on table 3-5 and policy of depreciation, depreciation and amortization plan is illustrated as table 3-6

Table 3-6: Depreciation and amortization („000USD)

Fix asset, technical

investment (initial value) 65.04

Fix asset, technical

renewal

29.03 Depreciation, amortization

Besides onetime cost, cost for hardware replacement, there are items need to

be maintained annually, that called operating cost (example: expense for maintenance, power consumption, office rental); these expenses should be considered during production which are showed in detail from table 3-7 to 3-13

 Maintenance cost:

Table 3-7: Maintenance cost Equipment Quantity Unit costs (USD) Maintain annually (USD)

Source: Quotation from vendors

Maintenance cost is keeping approximately 2,650 USD during 6 years

 Power consumption and office rental expenses:

New hiring personnel supporting for production and their computers make the increasing of power consumption and seat; besides, devices support for system also bring the amount for power consumption

In order to save energy, most of information technology devices have several modes for power usage; however in this study the power consumption is calculated based on maximum power usage of devices Besides, assuming that