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					Global CommerceZone
     Case Study
            Internet Entrepreneurship Course
                 for the Next Generation
              Hebrew University, Jerusalem




Authors:
Shani Shalgi
Itai Ra’anan
Pini Reisman
Ze’ev Getner
Nocham Ohana
Ziv Yermiyahu




                    January 2002
                    Table of Contents

Preface………………………………………………………….….……..                     2
Executive summery……………………………………………..…..……                3
1. The Problem….………………………………………….…….………                  4
2. The Solution
       a. Synopsis…………………………………………….…………...              6
       b. The Initial Stage – Bubble Era………………………………….   7
       c. Post-Bubble Stage……………………………………………….           8
3. Company History & Structure……………………………….………...        10
4. The Product…………………………………………….…….………...                12
5. Business Model…………………………………………….…………..                14
6. The Market & Marketing...………………………….…………………           16
7. Sales…………………………………………….……………………...                    19
8. Competition…………………………………………….……………...                 21
9. The VC’s Point of View……………………………………………….             25
10. Future & Risks………….…………..………………………………..              26
11. Summary & Conclusions.…..…………..………………….………...        28
Bibliography…………………...………………………………….….….. 31
Appendix A: Customs………………………………………….………... 33
Appendix B: The Classification Process……………………….………... 37




                                                              1
Preface
  In the beginning, we went into the company’s internet site. The six of us were extremely
disappointed to find out we had been given a B2B company which was dealing with such a
boring issue – customs. We wanted to see some hi-tech, some amazing new technology that
would inspire and excite us. But as we dug deeper into our study, we realized two things: the
first, that the customs issue is surprisingly interesting. Different laws, different approaches,
very complex. The second was that the lessons to be learnt were not supposed to be lessons
about technology and hi-tech, but lessons on how a startup company is established and the
changes it goes through. Starting from our first meeting with Johnny Klair from BRM, we
realized that this company’s history was the most interesting part of the case study. A lot
could be learnt both from the choices the company made and those made by the Venture
Capital firm. In fact, this case study turned out to be so interesting, we feel we practically
‘know’ the company, and are very excited to see whether it succeeds in the future. We have
become almost emotionally involved, and we’ve even formed our own opinion on what the
company should do. However, we did not let our affection for the company affect our
objective study, as you will see in our criticism of the company.
  So in fact, apart from learning about how a startup is formed and run, we also learnt to be
more open minded about ideas and not to jump to conclusions, especially that we now know
exactly why the internet site we first saw was uninspiring. Aren’t you already curious to find
out what we did…?




                                                                                               2
Executive summery
  This case study on Global CommerceZone (GCZ), is focused on GCZ’s solution to an
international problem and the company’s evolution, from the initial idea to its current status.
  As future entrepreneurs, our goal was to attain personal insights from key figures in GCZ’s
executive team and their investors, and to learn the motives and considerations behind the
decisions and actions of the company.
  GCZ was founded in July 1999 as vShip Inc. by three Jewish Americans under the slogan
“Make the World Your Marketplace”. From the beginning and until this day, its main goal
was to solve the internationalization problems of retailers – the problem of handling different
customs and duties all over the world.
  The establishment of the company created a lot of hype, especially due to the sales-oriented
CEO appointed by BRM. Throughout the year 2000, the company accomplished some
achievements that were considered significant in the ‘Bubble Period’1. It developed a beta
version by may 2000, it made connections with the big players in the market (the carriers)
and succeeded in signing 6 small customers, the first one in September 2000. All of the six
clients were e-commerce retailers, which wished to expand their sales internationally. GCZ
opened 7 offices around the world and had a total of 75 employees.
  At the end of the year 2000, the bubble popped. BRM re-assessed all her startups, and it
was discovered that GCZ would not be making any profits in the near future. The re-
evaluation of the company lead to some major changes, starting with firing the CEO and
bringing in Herb Zlotogorski as a replacement. A focus change was made, and the post-
bubble realizations required resizing the company to 14 employees and two offices.
  Today the company depends totally on BRM and is in final negotiation stages with a large
client which can save her life.
  What happened, Why did it happen, and Did it have to happen, are some of the questions
we will try to answer in our case study. We will raise further questions that came up during
our study and try our best to find the reasons for the mistakes made and solutions to the
problems. We will also attempt to assess the future of the company, and summarize what we
learnt from the study. But first we will discuss the problem GCZ was trying to solve, then
move on to the solution and afterwards we’ll review the change that was made and where the
company stands today.




1
  The ‘Bubble Period’ refers to the years 1999-2000 in which the expectations from the internet were huge, and therefore
lots of money was invested and many startups were formed.


                                                                                                                           3
    1. The Problem
                                       “There is a $50 shipping and handling charge for international
                                       deliveries. Any product that we ship internationally might be
                                       subject to local tariffs and taxes above the cost of the product.
                                       Sometimes these fees can be quite high and are charged to you
                                       directly by your local authorities (example: customs). Please note
                                       that for all international orders customers are responsible for all of
                                       the tariffs, taxes, customs, and import duties of the destination
    country. Because these duties vary by country, PenExpress cannot determine what these fees will
    be. For more information, please contact your local customs office.”
-       Excerpt from www.penexpress.com, a virtual pen store


        International Fulfillment
      Fulfilling international orders brings with it a set of obstacles for retailers: Issues such as
    tariffs and complex customs regulations all have to be overcome. As a result of these
    problems, many companies have yet to expand their sales beyond their native shores.
    According to Cambridge, Mass.-based Forrester Research, only about 15 percent of US
    companies conducting business online can fill international orders, and most of those are
    shipping to just a few countries in Europe and Asia.
      When Lands' End2 sent its first batch of catalogs to Saudi Arabia in the early 1990s, the
    company was dumbfounded to discover that none of the books ever arrived at their
    destinations. Thousands of pieces and tens of thousands of dollars had vanished into some
    sort of postal black hole. After thorough investigation, Lands' End executives discovered that
    they had overlooked a key Saudi regulation not allowing to display women in bathing suits.
      Retailers have yet to understand that customs policies are not as clear-cut overseas as they
    are in the US, and that documentation policies change from country to country.
      Welcome to the chaotic world of global fulfillment, where shipping to customers outside
    the US, even to Europe, or shipping among countries which seem to get along in every other
    way, can be as frustrating as it can be lucrative. An international retailer must be prepared to
    tangle with petty bureaucrats, red tape, and customs regulations that seem to defy
    explanation. Some restrictions may be sensible, like those that govern many food and drug
    items. Some may be cultural, like the Saudis' Muslim laws. And some may be political, and
    can change whenever a government changes or if its relations with other governments
    change. But they are all restrictions, and they are maddening, especially for an industry that
    may be worth more than $1 billion annually.
      There are almost 200 countries in the world, and each – even those that belong to trading
    blocs like NAFTA and the European Union, which are supposed to minimize the differences
    – has its own rules and regulations. All of that can make the idea of shipping overseas quite
    daunting, especially for consumer-oriented firms.
      Companies have several options. One is to set up a foreign warehouse, which can store
    merchandise for a specific region. This can be, however, an expensive option. Another option
    is to hire a third party to fill global orders. The third option, and in our impression the best
    one, is to work with a company like GCZ. Their Solution and its advantages will be
    discussed in chapter 2.




    2
     A large catalog company.


                                                                                                           4
        The Reality
         250 thousand small parcels are shipped internationally every single night. The average
       value of a package is 250$, and if you include the shipping costs (average for a 250$ package
       is 50$) the amount paid is 300$.
         The package is delivered to it’s destination, where it needs to be cleared through customs.
       In the best case scenario, the carrier fronts the customs at the port (for example 75$ for the
       250$ package) and then needs to collect the money from the consumer on delivery or by
       billing him later. But the problem is they don’t often get their money back. DHL say they
       need to collect 150M$ import duties in the UK only per year, and have 3M$ of uncollected
       duties. Collecting the cash requires a large accounting division for this purpose only – a
       distraction from the core purpose of the carriers.
         In the worst case scenario, a customs clerk decides the package needs to be cleared by the
       consumer himself, who then needs to go to the customs branch and waste a considerable
       amount of time on clearing his package. Customs agencies today collect 5% of the taxes
       they should be collecting because of manpower problems. On the other hand, there are
       consumers that pay more customs than they should because of classification problems.
         So in reality, the problem is actually a chain of pain.
          The Chain of Pain



                               Dissatisfied
          Retailer          customers
                                                                          Consumer
                               Customer service
                            costs                                                Unknown import charges
                               Cost of exceptions                               Multiple payment points
                               Lost revenues                                    Products get held up in
                                                                        customs
                                Inefficient
                              process
                          


                              Merchant complaints                                            Unreliability /
              
         Carrier               Import charges collection                  Customs
                                                                                Inconsistency
                              Reconciliation                                                 Inaccurate Import Charges
                              Uncollected fronted cash                                       Uncollected Duties
                              Inefficient process
1.         Customer:
One.            Doesn’t know the true price of the goods. (To the question we raised – won’t it scare customers off to know the
     customs beforehand? The answer we received was that companies prefer to lose these customers then get unsatisfied ones
     or lose their goods.)
Two.            Two different payment points.
2.         Merchant (Retailer)
One.            Dissatisfied customers.
Two.            Increased customer service – more people serving same number of goods. (Example: Lands’ End pay 120$ per
     hour for customer service, that’s 2$ per minute. Change the length of the call of dissatisfied customers or service
     explaining the customs that will need to be paid from 10 minutes to 5 – save thousands!)
Three.          Packages refused are either abandoned or reclaimed (sent back on supplier’s expense.) If they were customized
     for the client – it’s a total loss.
Four.           Lost revenues – people wont buy presents internationally because they know the recipient will get a bill for
     customs!
3.         Carrier – (FedEx: “Get us out of the collection business”)
One.            money lost
Two.            increased cost for accounting organization
Three.          dealing with uninformed consumers
4.         Customs agencies
One.            Spends time, manpower and money on classifications.
Two.            Unable to collect all customs
Three.          Classification is difficult, many times inaccurate and inconsistent.
                                                                                                                                  5
 2. The Solution
  "Most retailers want access to large and rapidly expanding international markets. With our
 service, they can open up those markets without having to substantially change their existing
 infrastructure for online sales in the United States." – James Treleaven, former president and
 CEO of GCZ, in an interview to InfoWorld.com.

 a. Synopsis
   GCZ offers a single solution for the multiple pain points. Its solution is to provide a
  technical infrastructure to:
        Provide automated, guaranteed landed cost quotes and documentation for
  international parcel shipments.
        Enable single payment point for all charges.
        Seamless transfer of customs funds from the merchant to the carrier clearing the
  products through customs.

   When GCZ starts working with a customer, it classifies each product on the client’s catalog
 for every destination country in terms of HTS classification3, including NTBs3 and all other
 taxes. (Classification is done once on signing a contract, and updated each time the catalog
 changes).
   Then, when an end consumer wants to make an order from the retailer, a query is sent to
 GCZ’s server. The server returns a quote of the full product price which includes customs
 duties and NTBs for the product, plus a commission it takes for its service. This is done on-
 line. GCZ guarantees the given quote.
   If the consumer decides to by the product, he pre-pays the whole landed cost.
   GCZ receives the custom costs plus the commission from the retailer.
   The HTS code supplied by GCZ is attached to the invoice of the packages and shipped to
 the consumer.
   The carrier still fronts the customs for the consumer, but he then collects the money from
 GCZ.

  Win-win solution:
  Consumer’s problem solved: one payment point, full price known in advance, packages are
 delivered more quickly because of smooth custom clearance.
  Retailer’s problem solved: satisfied customers, no lost revenues. Meeting post-transactional
 fulfillment needs of the customer is a crucial factor in customer loyalty and satisfaction.
 GCZ’s quoting system is transparent to both the consumer and the retailer, meaning the
 retailer is not distracted from its core business, and of course the consumer does not need to
 go through any extra hassle. GCZ is a service bureau (comparison – payroll processing).
  Carrier’s problem solved: instead of collecting from thousands of end consumers, he needs
 to collect the customs and duties from one reliable organization. All customs fronted are
 customs collected. Reduce the carriers work and costs.
  Customs’ problem solved: packages arrive with a trustworthy HTS classification, making
 the clearance process more efficient. 100% percent of the customs can be collected. GCZ
 has no interest in the receiving end and so impartially and objectively classifies the products.



 3
     See Appendix 1: Customs.



                                                                                                6
     The cash flow change demonstrates the solution for the chain of pain:
            Cash flow today                                                                     Cash flow with GCZ



Retailer                                                                            Retailer
                                       Consumer                                                                  Consumer




Carrier                       Customs                                               Carrier                 Customs

  A huge added value is the guarantee on the customs and duties quotes. If the amount quoted
 and collected is different than the amount assessed by customs when the parcel arrives at the
 destination country, GCZ makes up the difference, thereby ensuring that the parcel clears
 customs and continues on it's way to the customer's doorstep or dock. Additional funds do
 not need to be collected from the seller or the end recipient. What enables GCZ to guarantee
 the landed cost is the insurance it buys for covering the taxes the carrier fronted after the
 package arrives. The insurance is often needed because of problems such as changing
 customs laws, problems with classification, currency fluctuation.

     b. The Initial Stage
  GCZ was founded in the bubble era. The whole motivation behind solving the international
 deliveries problem lay in the anticipation that a new market was emerging in need of the
 solution – globalized e-commerce. Experts and analysts believed there would be lots of
 ‘Amazons’4, everybody was going to shop through the internet (See chapter 6). So in the
 initial stages of the company, the target clients were e-retailers. The whole product was based
 on consumers making orders and receiving quotes through the internet. 40K$ products were
 given out for free in anticipation of making a return on investment very quickly.

   The former CEO, James Treleaven, who was caught up in the internet excitement, wanted
 to ride the wave and so spent a lot of money on leading the company to become the front end
 for the consumers. He shifted away from the initial business model (where GCZ was in the
 background, meaning that the consumers bought from the retailer and the retailer got the
 services from GCZ) to a business model where the consumers would get to GCZ’s homepage
 first, and through it reach the retailer of their choice. He wanted GCZ to be a portal between
 the e-retailers and their customers. It wasn’t clear how GCZ was going to get paid in this
 business model.

      Here are two charts that demonstrate the difference between the original strategy, for
     which the company got the investment, and the strategy that the first CEO applied:




 4
     Amazon is the largest e-store in the world, originally a book store, today expanding to other areas.



                                                                                                                      7
          First CEO Approach                                                                Original Business Model
          GCZ as middleman                                                                  GCZ in the background



Retailer                                                                         Retailer
                                      Consumer                                                               Consumer




Carrier                    Customs                                               Carrier                Customs


    A Summery of the main focuses in the first CEO’s approach:
       Focusing on e-retailers, electronic B2C market.
       Creating awareness and “hype” regarding the company.
       Business model that pushes GCZ into the front line, not in the background.
       Grow as quickly as possible, no matter the expense – created a large distributed
   company.

   The initial idea of the founders also included handling consolidating shipments to drive
  down shipping costs, but this was much to big of an undertaking and meant a diversion from
  a software only solution. Very quickly they realized that the less you touch the physical
  package the better off you are. Their focus is on the sale side, not the supply chain side. Our
  assumption is that this is why the company’s name was changed from vShip – to a name with
  a non shipping connotation.

   When asked what should have been done differently in the initial stages, Haim Chasman,
  one of the founders, replied “Conserved our cash much better. We started GCZ in the bubble
  era, and we were influenced by concepts that were common at that time – we grew to quickly
  without real results.”

       c. Post Bubble Stage
    In the beginning of 2000, the bubble popped5. The post-bubble evaluation revealed there
  were no revenues, and that the 6 small e-retailer clients will return on their investment only
  after 4 years. In general, the e-commerce market not as successful as hoped. Why didn’t e-
  commerce succeed? Amazon was anticipated to be an example, but all other businesses on-
  line stayed small. They are still busy establishing local market, and most don’t anticipate
  profits in the near future. Even if they e-retailers sell abroad, it’s not in large volume.
  BRM together with GCZ realized that the whole business model was built on hype. The
  examination of the company also revealed the deviation from the original business model
  that the CEO was making, and that lots of money was being spent on his vision for the
  company.


   5
    The end of the bubble era, when it was realized the expectations from the internet were too high.



                                                                                                                  8
  Re-organization was required – a new CEO was brought in and the company was
downsized (see chapter 3). The company shifted back to its original business model, and a
change of strategy was made: instead of creating a new market (globalized e-commerce), go
to where the problem is. The problem exists in the whole international delivery market, and
the big money is in the large catalog companies (150B$ in international sales) and B2B
businesses that ship small parts internationally (250K parcels delivered per night. For
example, jet plane companies that ship special screws and spare parts to airline companies
regularly). With the arrival of the new financially-oriented CEO, a shift of focus was made
from classifying the catalogs to allowing prepayment and guaranteeing costs. GCZ was to
become a financial service, not a classification service – the classification would be
outsourced to companies that specialize in the classification, and GCZ will handle the money
issues. (It is important to note that up until today GCZ did its own HTS classification because
the catalogs it worked with so far were small and not worth the expense).
  In terms of software, a new abstract layer was added to the program which is able to handle
any request, not only requests from internet shopping carts. (See chapter 4).

 We asked Haim Chasman if he thought his idea would be accepted in the post bubble era.
His answer was: “Hard to say, there are still several competitors and none have claimed
victory. The business makes sense especially now as everyone is trying to cut their
operational costs. However, this is a business that will take a long time to grow.”




                                                                                             9
    3. Company History & Structure
     GCZ was founded in 1999 as ‘vShip Inc’ by 3 Jewish Americans from ‘Galtech Soft Ltd’:
    Haim Chasman, Richard Demb and Boaz Fletcher. The founders, who were all experienced
    entrepreneurs, had no background in the customs area, but they experienced the problem of
    purchasing goods through the internet first hand. The connection with BRM was made via
    Jerusalem Global/Yazam a virtual investment bank, with which the founders had personal
    connections. The idea was accepted during a relatively short period of time – 2-3 months. In
    the first investment round the company raised $2.4 million. BRM brought in a hotshot sales-
    oriented CEO, James Treleaven, from the US who created a lot of hype and interest in the
    company. In the first stages the focus was small electronic retailers, and after signing a
    cooperation agreement with the USPS (see chapter 6) 6 small e-retailers were signed. But
    there were no revenues and nor would there be in the near future. The CEO strayed from the
    original business model and spent a lot of money on expanding the company – 7 offices were
    opened in locations around the world: Chicago, New Jersey, Washington DC, San Francisco,
    Seattle, London and Jerusalem. 75 employees were hired.
    At the end of the year 2000, like for many other companies, problems begun, and the
    investors started to ask questions about the management of the company and about the
    company’s right to exist. The company was burning money at a high burn rate, it had almost
    no revenues and the hope of getting the investment back, at the strategy that was used
    seemed impossible. BRM also understood that they would not be able to raise any more
    funds with GCZ’s current clients. So in fact, GCZ had accomplished very little, and the
    detour the CEO had taken made BRM very displeased. They decided to let him go and
    brought in Herb Zlotogorski. With Herb’s help, a change of concept was made, which was
    accompanied by a major downsizing of the company – most of the employees were fired (14
    employees left from 75) and 5 offices were closed, leaving only the ones in NJ and
    Jerusalem. Herb hired a VP of sales with 16 years of experience in FedEx sales. After the
    change GCZ succeeded only in making connections with some large clients and carriers, but
    no new contracts were signed. At the moment, GCZ is in advanced negotiation stages with a
    major catalog company. The future is unclear, yet hold promise.

    Company milestones:
      July 1999 - company founded
      November 1999 - first investment round $2.4 million led by Yazam.
      February 2000 - GCZ was one of 82 companies selected from more than 1,000
    applicants to participate in Demo 2000, the premier new product event in the hi-tech
    industry.
      April 2000 - Signed a services agreement with the US Postal Service
      May 2000 - First Beta customer (Version 1.0) and first commercial parcel to be
    processed by the US Postal Service's new International/Military Service Center at O'Hare
    Airport.
      June 2000 - Concluded agreement with British Customs for deferment account to pay
    Customs directly.
      June-July 2000 - Signed agreements with six customers.
      September 2000 - First live customer, GolfCarCatalog.com.
      October 2000 - Released Version 1.5.
      December 2000 - Evaluation by BRM results in a strategic shift. Herb Zlotogorski
    brought in to replace the CEO. Company downsized.




                                                                                               10
       September 2001 – Negotiation with The Gap fall due to Sept 11th terror attack and
    the resulting market lows.
       December 2001- Advance negotiations with a Major potential client.
    Company Structure & Key Figures

                                                CEO
                                                 14
                                                                                   ISRAEL
                                             Zlotogorski                           USA

              Sales            Client Services              R&D     Finance
                4                     2                      6         1
              Wilson                                       Kadosh


                  Tech Implementation        CIT Expert
                           1                      1
                                               Frimer


     Herb Zlotogorski: President and CEO of GCZ. He has more than 26 years of senior
    management and IT experience in the software industry, with special expertise in
    internationalization, global funds transfer technologies, encryption and authentication. Works
    both in Israel and the US offices. He was introduced to BRM through the founders and was
    nominated CEO by BRM after the change. Prior to that, he served as an advisor and a private
    investor of GCZ, and as such gained trust from both parties.

     Arie Kadosh: Vice President, R&D and General Manager of the Israeli office. He has more
    than eight years of management, applications and engineering experience in the software
    industry. Joined GCZ on February 2000

     Ze’ev Frimer: Customs and Trade (CIT) Expert. Joined GCZ in February 2000. Knew the
    founders personally. Prior to actually working for the company he helped consolidate the
    idea and find funding. He is the only CIT expert left in the company after the change.
    Worked in FedEx, as manager of import in Israel, and holds a customs agent licence. Knows
    the market up close and personal.

     Haim Chasman: Vice President, Corporate Development, and a founder of GCZ. All of his
    work experience has been with startups. This is the second company he started. Prior to GCZ
    he was at Director and Founder of Galtech Soft Ltd.

      Richard Demb: Director, Business Development and a founder of GCZ. He has spent the
    last three years working with early stage internet startups and was instrumental in developing
    GCZ’s business strategy. Prior to GCZ, Demb worked in business development at Jerusalem
    Global.

     Wade Wilson: Vice President, Sales. Has over 16 years of sales experience, 12 of which in
    FedEx – where he was managing director of sales and business development in Beijing. This
    work makes him experienced in the market and its problems.

      James Treleaven: the former CEO. He is a technology and software industry veteran who
    is marketing and sales oriented.




                                                                                               11
    4. The Product
                                                                                                                  Overview
     The product is an automated online service of guaranteed customs and duties quotation for
    international retailers, and a payment-processing system for streamline movement of goods
    through customs. GCZ’s product is not a stand alone software solution, but a complete
    service. The system is designed to offer a robust, scalable and flexible solution.

     How it works
     Stage 1: Classification:
     When a client starts working with GCZ , his catalog is classified to the countries he wishes
    to sell to. The product of this process is added to the product classification database:
     When a classification is made – The SKU# (client’s product serial catalog number) is
    mapped to HTS, and per HTS for each country the duties and taxes are calculated. NTBs are
    also kept in the database.

                     HTS           Country                    Duties and Taxes          NTB’s and rules

                                                SKU#            HTS

     Stage 2: Transaction:
     The GCZ server receives online quotation requests for products regarding a destination
    country, and returns a guaranteed quote for the customs and duties.
     When a transaction is actually made between a GCZ customer and its consumer, GCZ is
    sent the details of the order and the relevant documentation information from the client and
    then uses the carrier’s information-system interface to forward the documentation for the
    parcel to be shipped including also the customs classification of the contents.

                                       Client
     Consumer                                                                 GCZ server                           Carrier
                              Sale-Center Warehouse
A consumer fills a           The sale
shopping cart and
                        1    center          XML message of shopping
checks out.                  handles the     cart contents + destination
                             transaction                       2
                             interface
                             with the             Quote   3
                     Quote                                                   DB is queried
                             Consumer.
                                                                                                 (FTP)
  Decision
                                               order-info (commit)                               parcels
  whether to            4                                                                        barcode and
  purchase                                                                   GCZ is
                                                 5                           updated about       it’s contents.
                                                                             the order and
                                                The order      Parcel        parcel                  7
                                                is             barcode       information.
                                                processed,     and
                                                the parcel     contents                                           The Carrier
                                                is                                                                produces the
                                                packaged                                                          documents for
                                                and a                                                             the shipment.
                                                barcode is     6     The parcel is delivered to the carrier
                                                attached.




                                                                                                                             12
After the parcel clears customs the carrier bills GCZ for the customs if fronted.
GCZ’s system is able to learn from deviations from the quoted figures and update the DB for
the next quote.
 With FedEx the process is somewhat different: when the packing info arrives to GCZ, they
use FedEx’s API to generate shipping certificate and other documents needed for shipping by
the law and GCZ receives a tracking number, which is then returned to the client’s
warehouse. There is an intention to extend the interface with FedEx beyond the existing API
since it is limited and does not fulfill the potential of benefit from the process.
 The system configuration: Servers are connected to the client’s sale center and warehouse
and to the carriers server. They can also be connected to other GCZ servers. This open
configuration can be set in the LAN of the client, or over the internet. An XML module is
installed on the client’s system that generates and interprets the messages that are sent and
received by GCZ’s sever. A GCZ server can serve multiple clients, and several different
GCZ servers can serve a single client, thus backing each other up.
  The two possible configurations

                    Retailer’s system
                    (call center system
                    or website)
  1                                              XML message
                                                 (Order information)    GCZ
                                     GCZ
                                     module                            Server
                                                      Quote
                                                                                     GCZ
                    Quote                                                 Queries
                                                               FT                    DB
                             Buyer                             P       Tracking
                                                                       info.
                                                     Carrier

                                                     GPL, UPS
                                                     FedEx, DHL




                                                                                    GCZ
  2               Retailer                                             GCZ Server Serv
                                              GCZ                                  er
                                              Serv
                                               er
                                                                                    Retailer
                                Retailer
                                                               GCZ
                                             mess Serv
                                             age       er
  GCZ bills its customers using a small billing system called ‘Peachtree’. When more clients
                                             (Ord
are signed this small system will probably be replaced with a larger more complex system,
                                             er
                                              can
like ‘Oracle-finance’ or ‘People-Soft’ which inforalso work with different currencies.
                                             mati
                                             on)

                                                                                               13
    5. Business Model
     GCZ’s business model has gone through a few changes, but after the bubble burst and the
    re-evaluation of the company, it returned back to its original business model, changing its
    focus to fit the new market situation. In this chapter we will discuss the company’s current
    business model, as the direction the company went in the beginning was effected by the
    excitement of the bubble era and the former CEO’s approach was only a diversion from the
    original business model and was discussed in chapter 2.

         GCZ in the background: GCZ provides a service for large enterprises, which
  serve many end-users around the world. GCZ approach is to work in the background of
  the her clients. When an end consumer contacts a retailer, he has no need to know about
  neither GCZ nor its activity. The consumer uses GCZ’s services without knowing that the
  information received about taxes and duties comes from GCZ, who also enables the
  prepayment and guarantees the landed costs.
         GCZ outsources the classification process: GCZ does not specialize in giving a
  product classification service, the service which most of its competitors provide. After
  the reorganization and cutbacks it was decided to outsource the classification and focus
  on the financial transaction service. Once GCZ signs a client, a third party is hired to
  classify the catalog, and is contacted again once updates need to be made. The
  classification is done ahead of time, and during a sale the information is given on-line (it
  is not possible to classify online because it’s a time consuming process, see appendix B).
  Today only one employee specializes in the field of customs duties and trade, while
  before the change of focus there were more CIT experts in the company. The
  classification is not part of GCZ’s revenue model – the cost of the classification is
  charged to the clients at costs.
         Financial transaction service: Motivated by the background of the new CEO (in
  the field of financial transactions and insurance), GCZ believes its main added value is
  the financial service it provides its customers, and the guarantee given for the landed cost
  quotes. GCZ offers its customers the ability to enable prepayment of a product’s full
  landed cost, by handling the money paid for customs and taxes and delivering it to the
  carriers or whoever fronts the customs for the end consumer. This service makes GCZ an
  integral part of the transaction itself, and ensures GCZ is indispensable to its clients.
         GCZ guarantees the quotes: GCZ makes a commitment that the quotes it gives
  for the landed costs is the final true cost for its clients and their customers. If the amount
  quoted and collected is different than the amount assessed by customs when the parcel
  arrives in the destination country, GCZ makes up the difference, thereby ensuring that the
  parcel clears customs and continues on it's way to the consumer's doorstep or dock.
  Additional funds do not need to be collected from the seller or the end recipient.
         Insurance for the guaranteeing service: In order for GCZ to be able to guarantee
  the landed cost, it buys insurance for the quotes. The insurance is needed because
  customs regulations might change in the time gap between the purchase and the delivery,
  currency issues, wrong or problematic classification and so on.
         GCZ’s revenue model: There is an initial charge for the installation and
  classification of the client’s catalog, but the revenue model is based on the commission
  GCZ charges for every transaction. GCZ estimate the commission will be between 3 and
  10 dollars (depends on the price of the product), but as there is no real paying customer,
  the actual fee is not yet known. The commission covers the quote, the insurance and the
  money handling. Note: there is no charge for simply quoting the price. The commission


                                                                                                   14
  is only taken when a consumer actually orders a product. This charging system is
  advantageous to the client because GCZ only makes money if the client makes money, so
  the client can decide to charge the commission to its consumers instead of paying it itself,
  as opposed to pay-per-quote. It is also important to note that because GCZ has no real
  large customers, the revenue model is subject to change on a client’s demand – for
  example the client might ask to pay a fixed monthly sum. As Herb said, all is subject to
  negotiation.
        Another method of the revenue model is making profits on the money during the
      time gap between collection from the retailer and payment of the carrier. Large
      amounts of money are going to go through GCZ’s hands. The average customs duties
      and taxes for an average package worth 250$ is around 70$. Dealing with tens of
      thousands of packages a month, it can be estimated that GCZ will be handling
      hundreds of thousands of dollars that need to be delivered to custom authorities. GCZ
      expects to get these amounts from its customers within a short time after the actual
      purchase is made, but transferring the money to the customs authorities (through the
      carriers) will always be in a few weeks delay because of the time it takes for the
      packages to be delivered. Holding these amounts, even only for few weeks has a great
      economic value, for example from interest on the waiting money.
         GCZ’s marketing model: Go after big clients only, not small retailers. There are
  two ways into the market - using the carriers as a channel to the market, and the direct
  approach to other big clients (see chapter 6).
         No more freebees: In the initial stages the product was given out to potential
  customers free of charge. On Herb’s arrival, it was decided no more products were going
  to be given out for free.
         Agreements with the carriers: GCZ pays the carrier per package, not once a
  month for total jobs. GCZ’s strong point is that it has connections with USPS, FedEx and
  UPS which will benefit if their clients work with GCZ. One of GCZ’s goals is to reach
  agreements with all the major carriers, similar to the agreement with USPS.
         Company structure model: Keep the company size to the smallest size it can
  manage with. Conserve cash and spend wisely.

  As we can see, the GCZ’s business model is based not on the information and the price
 quotes, but on the risk it takes – the guaranteeing of the landed cost is unique to GCZ. GCZ
 in fact unifies three services: classification, collection and guaranteeing. Herb Glotogorski
 calls it a high-tech service business, and using the current business model wishes to lead the
 company into a bright successful future.




                                                                                                 15
6. The Market & Marketing
  a. The market
 As stated in chapter 2, GCZ’s target market is B2C and B2B businesses which ship large
amounts of small parcels internationally, and hence experience the pain described in the first
chapter.
 The table below describes the amount of small packages delivered each day only from the US
abroad. As we can see, GCZ’s solution suits a huge market with great revenue possibilities:
 U.S. Outbound Market & Revenue
             DAILY PACKAGE ANNUAL PACKAGE                                        REVENUE
             VOLUME            VOLUME (254 DAYS)                                 OPPORTUNITY (10$)
  B2B        98334             25 million                                        $250 million
  B2C        139763            35.5 million                                      $355 million
  TOTAL      238097            60.5 million                                      $605 million
  Sources: Maxwell Sroge, Forrester Research, FedEx, UPS, DHL, excluding USPS and smaller carriers.
  Average Carrier Revenue: $44 per parcel. Revenue opportunity is based on GCZ’s 10$ commission per transaction.

 In order to succeed gaining a share of this market, GCZ needed to find an entry point, that is to
focus on a specific niche of the market. The primary niche that was chosen was the e-commerce
market. This choice was effected by the period in which GCZ was founded – the ‘bubble era’.
The focus was on a market which didn’t fully exist yet, but had the potential of growing and
becoming the substitute for all traditional ways of trade:




  GCZ tried to capture this share of the market using more than 40 sales and marketing people
sitting in 6 different locations and a huge budget, but when the bubble popped it was understood
that the forecasts wouldn’t come true. The e-retailers stayed small and tried to survive first by
establishing a local market. Even those who were selling abroad were selling in a very small
scale. GCZ had to make a switch of its target niche in order to survive.
  The new focus was to be an existing living and breathing niche that would be based both on
traditional and on electronic trade. And the niche that was identified as the one with the biggest
need for GCZ’s solution and the biggest potential for high revenues was the large catalog
companies.

 The catalog market
 The catalog market is made up of companies whose goal is selling products through catalogs by
phone or through the internet. The catalog companies do not usually have physical stores but


                                                                                                                   16
  huge warehouses, although some companies use both. All types of products are sold using
  catalogs – clothing, music, furniture, electronic supplies, etc. These companies need to operate
  huge customer services in order to take orders and sell their products. The biggest catalog firms
  are situated in the US and in Europe.
   Here are a few examples of the amounts of sales of these companies:
         Crate & Barrel (home furnishings): sales reached $125 million in 2000.
         Talbots (women's and children's clothing): sales climbed more than 40% since 1999, and
  have reached $269 million.
         The San Francisco Music Box: sales estimated at 279$ million.
         Coldwater Creek (clothing and gifts): sales rose 24%, from $323.2 million in 1999 to
  $400 million in 2000.
   The size of the catalog industry is estimated at approximately 120 billion dollars, and it is a
  growing market – at 11% growth each year for the last 5 years. Approximately 20% of the
  catalog companies sales are international sales, which leaves GCZ with a target market of 24
  billion dollars in sales.
   The amount of international sales through the internet is approximately 3-4% of the catalog
  companies’ international sales. There is a huge unfulfilled potential in this area, but it is expected
  to minimize in time.
   Catalog companies today don’t deal with customs and drop the responsibility on the consumer.
  They are not developing in-house solutions to the customs and NTBs problems because it’s not
  their area of expertise.
   GCZ’s solution suits this market perfectly, especially due to its huge customer service costs
  which GCZ’s solution is supposed to decrease sharply.

  A few words about the future market
  Today GCZ’s focus is the catalog company market, though an analysis of the whole market
 shows that more than 66% of the parcels delivered worldwide are actually in the B2B market.

  Worldwide Market & Revenue:
             DAILY PACKAGE                       ANNUAL PACKAGE                   REVENUE
             VOLUME                              VOLUME (254 DAYS)                OPPORTUNITY (10$)
   B2B       287,333                             73 million                       $730 million
   B2C       574,666                             146 million                      $1.46 billion
   TOTAL     862,000                             219 million                      $2.19 billion
    Sources: Maxwell Sroge, Forrester Research, FedEx, UPS, DHL, TNT excludes Airborne and national carriers.

  The B2B market looks like the one with the highest potential for high revenues, not only due
 to it’s size, but also based on its structure which includes many huge enterprises – some
 larger than any company in the B2C trade market. This is the reason there is a very high
 entry barrier for gaining first customers (although there is place for lots of competition), and
 why GCZ sees this market as the future potential market after it succeeds in the catalog
 companies area.
   For the players in the B2B market it is very important that packages reach their destinations
 quickly. Companies don’t want to keep inventories abroad because it is costly. Landed cost
 calculation is very important – today retailers that order from B2B suppliers must take an
 “hysteric factor” and overprice their customers because they do not know the landed cost.




                                                                                                                17
 b. Marketing
 GCZ uses two approaches to reach its potential clients:
 1. Using carriers as a Channel into the Market: The idea behind this approach is using the
carrier’s connections in return for solving the carrier’s problems (see chapter 1&2).
Carriers are companies whom are in charge of delivering packages locally and internationally.
They are either private or public companies such as DHL, FedEx and UPS and can also be
governmental companies such as the US Postal Service (USPS).
 Today the carriers are part of the chain of pain described in chapter 1, but the assumption is that
due to the size and focus of these companies, they won’t be able to or won’t want to supply this
service themselves in the near future. Instead, they would prefer promoting their customers to
work with a company who has already come up with the solutions, especially since the cost of
the service falls on their clients and not on them (GCZ does not ask for anything in return for the
pain it solves for the carriers). Under these assumptions, once GCZ’s product proves its value to
the carriers, it would serve as a motive to promote it and connect GCZ to their clients.
 Another reason for connecting to the major carriers is GCZ’s future vision. If a possible exit is
to be acquired by a large carrier as part of an in-house solution it wants to supply (see chapter
10), then it is best to make the connections at this stage and gain a lot of clients that use the
carriers in order to establish themselves as a vital part of the market.
 Today GCZ invests a lot of efforts in connecting to the major carriers. It already has an
agreement of cooperation with the USPS, in which GCZ agrees to supply its solutions to the
companies who use USPS’s services. In addition, GCZ has already reached all the major carriers
(DHL, FedEx, UPS) in the highest levels, but the problem is that these companies are massive
and have trouble making and adjusting to changes, even for their own good.
 2. The Direct Approach: GCZ collects all the information needed about the potential customer
and applies all available marketing tools, especially personal or business connections (either
connections that the employees create or BRM’s business connections. For example, GCZ
started negotiating with the Gap due to personal connections) in order to reach the client and
make it interested in their solution. This approach also includes also participating in tenders that
a potential client advertises, trying to compete with other companies that offer solutions in the
same area.
 Using the direct approach, GCZ doesn’t depend on anyone, but due to her current status in the
market as a very small company with little references and no big customers it’s the hardest way
into the market. The direct approach serves mainly as a backup to the channel approach.

 The marketing focus nowadays
  Today the company doesn’t have even one big client in the new target market. Finding that first
customer is the crucial issue which will determine whether the company will survive or not.
Once an anchor customer is signed, many others will follow, because signing such a customer
will mean that GCZ’s solution is valid, and will provide proof that it works.
  There are a few problems with landing the anchor customer: no experience with large
customers, competition, future of the company is undetermined. A different kind of problem
is that this is a time of market lows, recently caused by the September 11th terrorist attacks
(The negotiation with the Gap was cut off due to lay-offs). But let’s not rule out the
possibility that the terrorist attacks might also be a leverage because more people will shop
from home through catalogs, therefore strengthening that market and the intensifying the
need for solving its problems.




                                                                                             18
7. Sales
      In April 2000, GCZ signed a services agreement with the USPS to help online retailers
     quickly capitalize on opportunities in the fast-growing global marketplace. As part of the
      agreement, USPS offered GCZ the use of Global Package Links (GPL), a high volume,
trackable package delivery service which provides total landed costs and helps mailers fulfill
   merchandise orders to customers around the world. GCZ, in turn, would add its integration
and payment services – collect prepaid customs duties and value-added taxes (VAT) in order
  to speed up the delivery process to countries outside of the United States, initially covering
       shipment to Canada, France, Germany, Japan and the United Kingdom. Following this
   agreement GCZ succeeded in signing agreements with 6 private and public e-retailers who
deliver through USPS. Landing these clients was not a big challenge because the product was
  offered to them for free, and because they were almost reputationless and not large volume
                             sales sites, so the connection to GCZ was not a big risk for them.

    GCZ’s first customers


 AbleCommerce is an electronic commerce solution provider offering online merchandising
systems for a small storefront, a large catalog web site or even a complete working mall. Its
principal customer, TopSites.com’s customer directory features such names as Casio,
Bushnell, Cummins Engine and Victorinox Swiss Army Knives.



 The iGo Corporation (NASDAQ: IGOC) is an online provider of model-specific accessories
such as batteries, adapters and chargers for mobile products including laptops and cellular
phones. It offers delivers in the US and abroad for its more than 7,900 products to individual
consumers and businesses, including more than 50% of Fortune 500 companies. Company
sales reached over $40M, but in the last years it showed losses and no revenues. iGo does not
utilize GCZ’s solution (as advertised in their website, ‘Customs, taxes, and duties are the
consumers responsibility’).



I
 The Golf Car Catalog offers hundreds of golf car accessories as well as parts for
maintenance and repair. It was GCZ’s first live customer.



 Online Metals is a Seattle-based company whose clients include NASA and Kodad. In the
year 2000 Online Metals was named as one of the top 200 B2B sites on the web by Forbes
magazine.



    Junonia is catalog company offering apparel and accessories for women size 14 and up .


                                                                                             19
 BandMerchandise
 An online retailer of musical artists t-shirts, collectibles and accessories. Today we couldn’t
even find this company’s web site.

 The total sales GCZ has generated from these companies were approximately 1M$, but this
did not cover the investment. All the agreements with the companies were made during the
hype period of GCZ. The only ones who actually use GCZ’s solution on their web sites today
are the Golf Car Catalog and Online Metals. GCZ is keeping her first customers and
supporting the product installed for them for reference reasons only.
 Till this day GCZ failed to reach an agreement with a large catalog company. It started to
negotiate with ‘The Gap’ catalog but negotiations were stopped because of market lows and
management changes.
 But there might be a light at the end of the tunnel…

 The possible anchor customer
 GCZ succeeded reaching the final stage at a tender published by a very big catalog
company (due to the confidentiality issues we will refer to it as company L). At the moment
out of 15 competitors, company L has narrowed the candidates to 2 – GCZ one of them.
 A few details about company L: It is one of the most prominent and successful catalog
companies in the United States. Their catalog offers clothing, gifts, accessories and more.
Last year the company mailed more than 269 million catalogs all over the world, from the
US to Saudi Arabia. It delivers more than a thousand packages a day. Company L has more
than 11 million customers who made at least one purchase in the last year and generated
sales over 1.4B$. Only 260M$ of the sales were made through its web site (a growth of 60%
compared to last year). All of their products are available on the web and these days the
company’s goal is to reduce its physical catalog sales and expand its web sales, because
selling through the internet requires significantly smaller financial investment (no need for
customer service to take down orders).

 As we understand it, company L is the ultimate anchor customer GCZ needs in order to
survive and conquer a major piece of the fulfillment market. An agreement with this
customer will bring the company to it’s break-even point and further. It will generate the
needed reputation for teaming up with other customers and will promise the beginning of
GCZ’s success. Of course, as was said before, failing to land the client will demand harsh
decisions about the company’s future.




                                                                                              20
8. Competition
Direct competitors
  Direct competitors are landed cost calculators – companies which also offer to classify and
quote the price of customs and duties. As we will see, these companies offer more than just
landed cost calculations, and none propose the special solution GCZ supports.
  The main competitors are ClearCross, Open Harbor, Exporta, NextLinx, and Vastera, which
offer software and services that combine human knowledge and expert systems to help
companies comply with customs laws and tax duties.


  Supply chain management and trade strategy consulting.
  Vastera was established in 1992. It is the only public company (NASDAQ: VAST)
competing with GCZ. Vastera is the biggest competitor in the fulfillment market, with more
than 300 employees and sales which crossed 33M$ in the year 2000.
 Vastera focuses on providing global trade solutions that manage the flow of information
throughout the global trade community in order to improve visibility of international product
movement and move goods more quickly internationally. Vastera’s goal is to automate its
client’s global transactions and ensure compliance with international trade laws through a
range of solutions, from solely quoting tariffs and NTBs to managing the entire supply chain
for a company – information, analysis and logistics. Vastera also provides a collaborative
platform necessary to collect and share data among the global trade community, including
carriers, forwarders, brokers, suppliers and customers, as well as trade management
consultants. In addition, Vastera offers trade management consulting to expedite the flow of
international shipments and improve profitability, as well as help in implementing the
recommended trade strategies.
 Vastera performs its own customs classifications, and has a custom broker’s license. It
employs trade experts in countries around the world and constantly updates a knowledge
base called TradeSphere that flags products that might be noncompliant. It automates the
process so that any customer company entering changes necessary to make a product
compliant can enter them directly into the system.
 Its customers: More than 200 clients, including Ford Motor Co., Lucent Technologies,
Marubeni Corporation (the world's fifth largest trading company), Matsushita Avionics
Systems Corporation, Air Products and others.
 Our impression: Vastera is a suitable company for B2B clients whose main pain is in the
supply chain process.



  Provides information necessary to evaluate the most cost effective fulfillment strategy.
  ClearCross was established in 1984, and it is the second largest company in this market.
With more than 150 employees, their sales crossed 20M$ in the year 2000.
  ClearCross provides a single knowledge base for the planning, compliance, and
documentation content needed to effectively execute, and consequently accelerate,
international trade. Their goal is to enable an evaluation of processes to reveal opportunities
for savings throughout the entire supply chain. ClearCross’s solutions include classifications,
trade planning considering landed cost and import constraints, generating the needed
information about restrictions, licenses needed and other required documentation, and
increased visibility for shipments.



                                                                                             21
  ClearCross offers the unique ability to help a customer during the design and sales stages of
his products. Aid in design: advising what ingredients violate local country rules and require
lengthy registration processes, how to reduce time-to-market of new products by considering
restricted materials and problematic compliance issues during the design phase. Aid in sales:
Advising how a customer can further his commitment to environmental, health, and safety
issues while strengthening his global brand, how regulatory information can enhance his
sales process and so on.
  Its customers: Motorola, Oracle, Heinz, Merc, CDWorld and others.




  Automated global trade management.
  Open Harbor was established in November 1999 as myCustoms. Today employs around
100 employees. The total investment in Open Harbor was more than 29M$ up to the year
2000. We were unable to obtain any information about their amount of sales.
  Open Harbor’s goal is to automate the entire trade process, from order-receipt to delivery. It
has developed a global trade management solution that delivers the information infrastructure
to improve efficiencies and reduce global trade operating expenses for multinational
companies and their supply chain partners.
  Open Harbor’s solutions include: Supplying information about compliance (such as NTBs,
product issues), landed cost calculation, preparing the documentation needed in the supply
chain process, recording all transactions both for the clients and their fulfillment partners for
future analysis. As part of Open Harbor’s service, its trade and technology experts conduct
an analysis of its clients current international operations and process flow, and provide an
assessment of their annual expenditures and anticipated cost.
  Open Harbor also partners with leading logistics and fulfillment companies, carriers and
freight forwarders by embedding its system into theirs, which in turn enhances their product
suite and the value they bring to their customers.
  This company focuses on providing its clients with the information and technical help
needed to go through the supply chain, and on helping their clients make the right decisions
for current and future trade transactions.
  Its customers: Compaq (Via Allogis Partnership).



 Product classification and landed cost calculation.
 Nextlinx was founded in 1994. Its headquarters are located in Washington, with a few
developing offices in India and the UK.
 Nextlinx solutions include determining required licenses, producing product documentation
and overseeing their electronic distribution, calculating landed costs, assigning classification
codes quickly and easily for both the HTS and non-HTS export control classifications, and
saving customer and product information to facilitating repeat shipments.
 Nextlinx focuses on calculating landed costs and finding the product classification as fast
and as accuratly as possible. Offers no consulting services.
 NextLinx's customers include: Boeing, FedEx, UPS, Proctor and Gamble, ABN, Cisco
Systems, 3Com, Rockwell Automation, Sotheby's and others.
 FedEx sits on Nextlinx’s board, meaning FedEx plans to one day offer its own service (See
chapter 10)




                                                                                              22
  Providing the information required for optimization of the supply chain process and
minimize its cost.
  Xporta was founded in 1999 in Santa Clara, CA. With its 40 or so employees, its sales were
about 4M$ in the year 2000.
  Xporta’s deals with computing full landed costs of goods sold overseas - calculating duties,
taxes, insurance and shipping, Their specialty is an application that identifies trade
compliance regulations and helps determine the best location to source an order when an
inventory is held in multiple countries.
  Exporta’s clients include MeetChina.com, FreeBorders and vLinx.

            Company                                                                Open
 Feature                           Vastera                      ClearCross                        Nextlinx           Exporta   GCZ
                                                                                  Harbor
       Supplying
     Classification
                                                           +         +               +                +                +        +
  Calculating Tariffs,
 NTB and Landed costs
                                                           +         +               +                +                +        +
      Guarantying
         Quotes
                                                                                                                                +
       Generating
    Documentation
                                                           +         +               +                +                +        +
  On-line Information
   Status of Delivery
                                                           +
  Keeping Records of
       Deliveries
                                                           +                         +                +                         +
    Trade Strategies
       Consulting
                                                           +         +                                                 +
 Enables Prepayment of
        customs
                                                                                                                                +

The following quality graph shows how we see the different companies:
                           Focus on Trade Strategy Consulting
                                   and Management




                                                                 Focus on classification and accurate landed costs




            The new niche : focusing on
            prepaying customs financial
            transactions




                                                                                                                                23
      As we can see, the direct competitors of GCZ all have something to do with supply chain
     management (visibility, trade decisions, dealing with freight). Supply chain management is
     suitable for companies who buy and sell raw materials and parts B2B, and not so much for
     catalog companies, which are currently the main focus of GCZ.
      All the competitors provide the classifications of products, find out about NTBs and other
     constraints and calculate landed costs, but their main focus is to improve supply chain and
     fulfillment strategies, while allowing their customers to focus on their core competencies.
      GCZ entered the existing fulfillment market. All the major competitors already have big
     valuable customers, some have powerful agreements (like Nextlinx with FedEx), and all of
     them make millions of dollars in sales. Each competitor has its own uniqueness and each
     offers its own solution, but what stands out is that no competitor guarantees the landed
     cost nor deals with money transactions for the client. It seems GCZ has found a new
     untouched niche in the fulfillment market in which it has the opportunity to grow. From our
     point of view, this gives GCZ a huge competitive advantage. We will discuss the extent of
     this advantage in chapter 11.
      There are a few possible answers to the question why would a company choose a
     competitor over GCZ:
1.        GCZ has no big clients. All other direct competitors have large clients. Therefore
     GCZ has no experience working with large clients. This is a huge disadvantage.
2.        The competitors are all economically stable, while GCZ has no revenues. GCZ might
     fall/close any day.
3.        Not all companies want to start collecting customs.
4.        At the moment, GCZ’s solution focuses on large retailers selling B2C and not on
     B2B, while the competitors offer solutions advantageous for B2B businesses.
5.        Most importantly: It depends on what the company wants – what its main pain is.
     The company might need a supply chain consultant, or to manage their order database
     more efficiently, and the main pain is not the lack of ability to guaranty the landed costs.

     Indirect competitors
      Indirect competitors are Portal and B2C companies which provide service for consumers to
     shop through them locally, and they deal with the international (customs, international
     addresses, international credit card validation etc.). Their idea: ‘buy through our customers,
     we’ll pay for everything including all taxes, you pay us. (The idea might be similar to what
     the former CEO had in mind – see chapter 2) They work with end users, so in order to
     become profitable they need thousands of customers and a large customer service.
        Examples for companies that offer this service:
                              “Not only will you gain access to great prices and a fantastic selection, we take away the
                              surprises and obstacles faced by Canadian shoppers making purchases from U.S. sites,
                              including hidden costs and the hassles with deliveries and returns… Borderfree, along
     with its retail partner sites, provides a guaranteed total purchase price in Canadian dollars including currency
     conversion, duties, taxes, and shipping and handling costs; offers fast and efficient cross-border delivery
     straight to your door; and the power to make returns easily and with great assurance.”

                         “Now, international customers can enjoy the amazing US e-commerce experience in a
                         safe, reliable, and convenient way! Be Free! Shop online internationally without
                         boundaries! No hidden costs and guaranteed, all-inclusive prices! Be Safe! …only trust
                         renowned names like Mail Boxes Etc. to handle your order! Be Confident! Our return and
     warranty policies guarantee you are happy with your order! Be Informed! Know the progress of your orders
     through our tracking system!”




                                                                                                                     24
9. The VC’s Point of View
 “Nobody does it this way yet, but everybody will in 5 years.” – Nir Barkat, CEO of BRM on
GCZ’s solution.

  Our first question for Nir Barkat was ‘is GCZ a BRM portfolio company?’. Our first
impression was that it wasn’t, because we thought BRM only invested in new technologies,
and GCZ’s solution had no new hi-tech technology. We believed BRM was investing in GCZ
to use it as its ‘milking cow’ – a low cost, easy to maintain stable business which could, once
established in the market, become a money making machine. But we found out in our
interview with Nir, that BRM has experience in investing in service companies such as GCZ.
BRM’s acquaintance with the processes involved with providing services for enterprise
customers is an added value for the BRM-GCZ relationship beyond the money invested.
BRM is familiar with methods of approaching potential customers and techniques of
negotiation involved in signing contracts with them. This explains why BRM views the
investment in GCZ as a natural one, despite the fact that GCZ deals with enterprise
customers who are not necessarily from the hi-tech industry and its product is not entirely
software-based. GCZ is an extended enterprise, an enabler which extends the relationship
between enterprises and their clients. It is considered a hi-tech service, and in this regard, it
has the same problems and issues as a technological startup. BRM believes in the company’s
vision, and Nir said that they would still invest in a company like GCZ if it came to them
today.
  Today GCZ is totally dependant on BRM, its only remaining investor. BRM is not totally
comfortable with this fact because its goal is to help companies stand on their own two feet.
When asked where the company stands today in terms of funding, Nir said BRM’s position
today is that the company will be funded until it is able to raise its own funds or till it is
decided that it has no future. He did emphasize the fact that it is unusual for a VC to continue
funding such a company in these times, but that GCZ has a winning combination of a
concept BRM believes in and a respected management.
  Mutual respect and trust between the VC and the company is extremely important. BRM
lost all respect for the former CEO when they found out that there was a huge difference
between what he was saying and what he was actually doing with the company (See chapter
2). It was a problem with integrity, and so they decided to discharge him and bring someone
else in. This unpleasant situation was also product of the bubble period, because BRM was
busy giving out money and didn’t have any time to closely follow what every company was
doing.
  The solution that BRM adopted was bringing in one of the investors, Herb Glotogorski to
take over. Herb was acquainted with the entrepreneurs and had contacts with Yazam, which
had invested in GCZ in its very first steps. After a tour of all GCZ’s branches, during which
Herb interviewed dozens of GCZ employees and analyzing GCZ’s condition and embodied
potential, he agreed to become CEO.




                                                                                              25
   10. Future & Risks
     Future
    Today there are still no large customers. GCZ is still in the pre revenue stage. The current
   burning rate is $150K per month. The light at the end of the tunnel is the negotiations with
   the large catalog company. If it signs GCZ expects a radical cash flow improvement, and
   further funding rounds will be possible. The forecast expects 50M$ revenue per year in the
   next 5 years. Once GCZ will become stable they believe they will stop working with the
   existing customers because they do not generate any profits.
    Apart from the big exciting negotiation, GCZ might also be sparking up the relationship
   with The Gap again , due to personal connections.
    Possible exit points include:
1.     Merging with a competitor who does classification only.
2.     Acquisition by a carrier.

     Risks
     Business risks:
 1. Customs rates: Customs rates may change during the time period between the quote and
    when the customs are actually paid. It’s important to emphasize that this risk is relatively
    small, since statistics show that changes in customs and taxes are usually to GCZ’s
    advantage because customs and duties tend to decrease around the world., so in fact,
    GCZ might even profit from these changes.
     GCZ decreases the risk by keeping a close watch on the actual customs compared to the
    given quotes. Mistakes are quickly fixed by updating the DB.
 2. Currency exposure: Changes in exchange rates also may occur during the same time gap.
    GCZ quotes all customs and duties from around the world in US Dollars. The quoting is
    done using the currency exchange rate the local customs authorities publish every few
    days. GCZ can suffer losses if the currency exchange rate will dramatically change
    between the quote and the actual payment.
     There are some tools in the financial markets that can help GCZ hedge the risk of
    currency. Theoretically, GCZ can decrease this risk buy purchasing forward or future
    contracts that guarantee a specific exchange rate in the future. However, this kind of
    policy is expensive.
     The way GCZ deals with these two risks is by buying an insurance policy from a private
    insurance company. GCZ’s CEO has a few years of experience in this field so GCZ can get
    the right policy that fits the risk it is willing to take.
     The business risks that come from guaranteeing the quotes does cost GCZ money and
    energy, but presents a real differentiation from the other competitors in the market.

     Market risk:
     There are big players in the fulfillment market which are not a direct competition to GCZ
   but have a big influence over the market and direct control over its future trends. These
   players are the carrier companies, such as FedEx, UPS and DHL. The carriers can become
   hard competitors by providing the solution themselves (via acquiring companies that offer
   the whole service, it is not likely they will develop in-house solution). In such a case, the
   competition over that carrier’s customers will become virtually impossible. Any big client
   would prefer getting the service from its carrier, hence handle all shipment and customs
   transactions through one company. Examples of carriers advancing towards providing the
   process are the USPS, which offers its own classification services, and FedEx, which bought


                                                                                                   26
a company which provides the classification DB, ‘World Tariff’, and also sits on NextLinx’s
board.
  Today, when the demand for GCZ’s services is not yet apparent, the carrier companies
avoid spending money and energy on providing this service. They’d rather cooperate with
GCZ and help it offer its service to their own clients. GCZ is using this situation to get to big
clients with the support of the carriers. Also, this risk might change into an advantage if a
large carrier decides to acquire GCZ itself.

  Macro-economic risks:
  The trade market in has been through some systematic changes over the last years. More
free trade agreements have been and are being signed between countries. These agreements
decrease the value of GCZ’s service – as the world advances towards becoming a global
village (no customs) there will not be any need to GCZ at all.
  For one, the globalization process if slow and will not be completed in the near future.
Second, even after free trade agreements, there are still other taxes to be paid – excise tax,
VATs, etc.




                                                                                               27
11. Summary & Conclusions
 The Vision and the Doubts
  GCZ went through a big organizational change a year ago. One notices that GCZ never had
any clients which could justify GCZ’s existence, yet BRM still granted it the necessary
funds to continue. When we interviewed Nir Barkat, CEO of BRM, he told us that his
company “believes in GCZ‘s vision”. In this chapter we take a closer look at this vision and
share our doubts about it.
  The comparison model for the vision is the payroll processing model in the US. In the US,
businesses do not issue their own payroll checks to their employees, but use one of two big
companies that charge very little for each paycheck but end up earning millions.
  According to GCZ’s vision, clients in its market will want to avoid the distraction from core
business and will prefer to outsource the solution to custom clearance and uninformed
customers. Providing a service like GCZ’s takes a lot of expertise in the field of customs and
duties and in the field of finance and insurance. The development and maintenance of GCZ’s
system also requires a lot of energy and costs.
  The vision anticipates that the market has place for only one or two big ‘gorillas’, same as
in payroll processing where two main companies have captured the market. Hopefully GCZ
will be one.
  The vision also expects high loyalty of the big clients. The loyalty is explained by the big
and costly adjustments a client needs to be make when starting to work with a company like
GCZ. After spending a lot of money, a client that works with a company like GCZ will most
likely stay with it for a long time.

 Our group has some thoughts regarding this vision that we would like to present in the rest
of this chapter.

  First doubt – the question of need
  Is the financial feature and the landed costs guaranty really necessary for the clients? GCZ
is unique in the way it handles the custom duties and taxes for its clients and in guaranteeing
their amount. But are these services really valuable to the clients? GCZ’s clients will have to
pay for these extra services (insurance and transaction costs), in addition to all the costs all
other GCZ competitors charge for installation, classification and quoting. Are the clients
prepare to pay the extra cost?
  In our opinion, the guaranty GCZ gives for the quote is very valuable, mainly because it
enables prepayment of all taxes by the end customer, resulting not only in informed
customers, but also satisfied ones. As for the financial transaction service, we raised the
question ‘why can’t the retailer collect the customs and transfer it to the carrier – it already
transfers the shipping costs to the carrier.’ The answer was that the guaranteeing party is
responsible for making up the cost differences if any problems arise. So actually, a client
who guarantees costs and doesn’t want to enable prepayment, will still have to deal with
GCZ in case of problems.

 Second doubt – the question of differentiation
 What will it take for the existing competitors to develop the financial services?
 Suppose the client are willing to pay for the extra services, it will be obvious to expect that
other competitors in the market will consider also adding this service. And so the question is,
whether they can and if so how fast they can.



                                                                                              28
  What enables GCZ to guarantee the landed costs in the first place is the insurance it buys
from an insurance company. We believe that any competitor can buy this kind of insurance.
The transaction handling, however, is more complicated, and will require a real strategic
change from existing competitors who wish to add this service, unless the client wants to
pass the customs on to the carrier itself (as described in the first doubt), and then if any
problems arise turn to the guaranteeing party. If this approach is used, the guaranteeing party
does not need any strategic change because it does not deal with the money.

  Third doubt – the question of capturing the market
  Lets view the gorilla market vision again. As we see it, this kind of market is formed in one
of two situations: when the market has high entry barriers, or if one or two companies
manage to gain a big piece of the market and the customers are very loyal.
 The technology needed for solving the market’s problem does not pose as a high entry
barrier to market. Specifically, the technology GCZ uses is not unique and can be imitated
relatively easily.
  The case of content is not so different. In fact, GCZ employs only one CIT expert, and
intends to outsource every classification work it gets.
  So actually, there are no significant entry barriers that will prevent imitating this small
company.
  When we examine the second gorilla market option, however, we can see that indeed there
is expected to be high loyalty of clients in this field. The problem is that reaching the clients
first is not guaranteed to GCZ. In fact, the only competitive advantage GCZ has over new
imitators is the connections it has with the carrier companies. This connection is a truly
significant competitive edge over new companies but not over all the existing competitors
and, of course, not over the carriers themselves.
  In our opinion, the market will be a gorilla market. Possible ‘gorillas’ are either the existing
companies (including GCZ) or the carriers themselves.

 Summary of Doubts
 We asked ourselves if the extra service GCZ offers is valuable, and we believe that
regarding the importance of guaranteeing the quoting, the answer is yes.
 We asked if the existing competitors can imitate this service easily, and again, regarding the
insurance feature, the answer is yes.
 Finally we asked if there are any significant entry barriers to the market, and our answer is
that there aren’t any barriers, but the is an advantage over companies without close relations
to the carrier companies.
 Our conclusion is that the market will become a ‘gorilla market’ but it will be under the
carrier companies’ control.
 The question that rises from these conclusions is – is BRM’s support of GCZ in the past
and in the future justified?
 To answer this question one must realize that when a VC invests in a firm it expects to gain
a significantly higher rate of return then the one offered by regular company. Our major
concern is that if GCZ will grow to be a big successful company like we all hope, the carrier
companies will not stand aside and let it grow.
 FedEx charges approximately 44$ dollars on a parcel, of which only a small part is actual
earnings. If GCZ will succeed in making an extra 3-10 dollars on every parcel, we believe
FedEx will not let it enjoy it by itself, and rush to compete – or – in the bast case buy GCZ.
As a result, even if GCZ succeeds and its vision will be turned into reality, the profit BRM
stands to gain from this investment is bounded and controlled by the carrier companies who
rule this market.


                                                                                                29
  And our last question is how, in fact, has GCZ managed to survive this far?
The first and main reason is the true faith BRM has in the company and the vision.
The second reason, and maybe one of our most valuable lesson from this case study, is the
close personal relations between BRM’s and GCZ’s management. We got the feeling that the
relations between these two firms are not a regular company–investor relations but a relations
of a big supporting and loving family…
  The last but not least reason is the big client standing on GCZ’s door, with which GCZ has
just ended a long negotiating stage and even a successful pilot. The clients decision about
signing with GCZ is due to arrive in a few days, maybe even before finishing writing these
lines.

 We want to wish GCZ good luck. We believe in it’s solution!
 We also wish to thank anyone who helped us in this projects, especially the people
interviewed (see Bibliography) who were the greatest help.




                                                                                           30
 Bibliography
 Interviews:

 GCZ
 Herb Glotogorski, CEO – 26/11/2001
 Ze’ev Frimer, CIT Expert – 5/12/2001
 Arie Kadosh, CTO – 16/12/2001
 Haim Chasman, Founder – written interview from the US.

 BRM
 Johnny Klahr, Advisor – 14/11/2001
 Nir Barkat, CEO – 13/12/2001

 Miscellaneous
 Rina Carasso, Customs Broker – 2/12/2001

 Web sites:
 www.gczone.com                   pressroom.ups.com                www.usps.com
 www.brm.com                      www.vastera.com                  www.hoovers.com
 www.golfcarcatalog.com           www.myCustoms.com                www.joc.com
 www.globes.com                   www.nextlinx.com                 www.prnewswire.com
 www.forrester.com                www.clearCross.com               www.mddailyrecord.com
 www.gartner.com                  www.xporta.com                   www.usatoday.com
 www.fedex.com                    www.douwantit.com                www.onesource.com
 www.landsend.com                 www.borderfree.com               www.jsonline.com
 www.penexpress.com               www.worldtariff.com              www.igo.com
 www.informationweek.com          www.gap.com                      www.ablecommerce.com
 www.techweb.com                  www.onlinemetals.com             www.junonia.com
 www-personal.umich.edu/~alandear/glossary/                        www.catalogagemag.com

  Articles:
        “BRM Invests in Israeli Start-Up vShip” by Ella Jacoby, Globes Israel's Business
  Arena, Nov 22, 1999
        “Jonathan Bulkeley to Join Global CommerceZone's Board of Directors”,
  Chicago, IL, April 17, 2000
        “Vendors are Working Toward Bringing their E-business Overseas” by Brad
  Shewmake and Geneva Sapp, InfoWorld, April 28, 2000
        “Global CommerceZone Shipment First to Facilitate E-Commerce At Chicago's
  New U.S. Postal Service International/Military Service Center” Chicago, May 15, 2000
        “Donald R. Hollis to Join Global CommerceZone's Board of Directors” Chicago,
  IL, May 31, 2000
        “Catalyst appoints new CEO” by The Business journal, June 29, 2001
        “The Bright Side of the Dot-Com Shakeout” by Mick Brady, E-Commerce Times,
  July 06, 2000
        “Reality Check: The State of E-Commerce” by Mick Brady, E-Commerce Times,
  July 11, 2000


                                                                                            31
         “Ship It!” by Jeff Sweat, Informationweek.com, January 22, 2001
         “Golf Site Turns to Third Party To Fill International Orders” by Andee Joyce,
  October 1, 2001
         “Back to the garage?” by Ella Jacoby-Bashan, Globes Israel's Business Arena,
  November 15, 2001
         “Israeli venture capital funds predict a bleak 2002” by Yanay Alfassy, Globes
  Israel's Business Arena, December 4, 2001
          “B2B's Future Goes Beyond Commerce” by By Mark W. Vigoroso, E-Commerce
  Times, December 6, 2001




                                                                                          32
     Appendix A: Customs
      In this section we will give a short overview on customs: what they are and why they are
     needed, who the key players are in the customs area and what they do, and what the problems
     are.

       Customs duties, or tariffs, are import taxes between countries. Tariffs are applied for four
     main reasons:
1.       Substantial source for the country’s economy.
2.       Protect local produce.
3.       A tool to reduce social gaps. (Imported products are usually more expensive, bought
     mostly by the upper classes, so by taking customs duties the more well-off pay more
     taxes).
4.       Protect the citizens – regulations of the ministry of health, ministry of agriculture, etc.
     (Dangerous electronic appliances, dangerous creatures or bacteria).
       The Customs Agencies in each country take other responsibilities as well because they
     stand on the border of the country. They collect other taxes such as luxury (or excise) tax and
     VATs, and are in charge of regulating NTBs.

     Custom unions and agreements
       Today, as the world advances towards becoming a global village, many unions and
     agreements in different levels are made between countries, such as EFTA, NAFTA, LAIA,
     AFTA etc. Free trade areas and agreements between countries avail the trade in the
     participating countries. However, they are only good for countries which are similar in terms
     of financial power. If there is a large economical gap between countries in the agreement,
     only the weak country will benefit from it. There are also agreements where economically
     stable countries grant facilities to produce from third world countries in order to help them
     and encourage their industry and economy.
       All the different kinds of unions and agreements do not bypass excise tax, which is
     therefore sometimes used as a method for bypassing customs agreements and regulating
     import (local produce in turn gets exempt from paying them).
      The question regarding these tariff agreements is where the product was manufactured. Even
     if an Israeli buys a product from the US, with which Israel has a free trade agreement, if the
     product ordered was made in Malaysia, the agreement does not hold.

     The Harmonized Code
       The problem with the tariffs is classifying products into categories. There are millions of
     trade transactions occurring each year, which are classified under approximately 8,000
     different categories. Every item that is exported is assigned a unique identification code,
     named the Harmonized Code. The harmonized codes used around the world are based on the
     Harmonized Tariff System (HTS). The HTS assigns 6-digit codes for general categories,
     which means that the first 6 digits are uniform for all countries. For example, HTS 2204.10
     should correspond to “sparkling wine”. The countries which use the HTS define products at a
     more detailed level than 6-digits, but within the international 6-digit framework. For
     example, in the US the harmonized code is 10 digits long, while in Israel a 9-digit code is
     used. Therefore the same 8-digit class can represent different products in different countries.
     For example, 2001.90.30 means “beans” in the US classification and “sweet corn” in the EU-
     15 classification. The classification process is consequently complex. To find a concordance
     between the HTS classification for your product in the US and its classification in the EU-15,




                                                                                                 33
start at the 6-digit level and read the descriptions to find the one which best describes your
product.
 The HTS’s 97 Chapters can be used to classify every commodity traded among countries.
Periodically, the Customs Cooperation Council recommends revisions to the HTS system to
reflect changes in technology or patterns of trade. Each country has thick books which match
classifications to customs duties. These change depending on reforms in trade laws of a
specific country, international agreements etc. There are companies whose job it is to
maintain classification and tariffs databases, which are sold to customs agents and brokers.

Customs agent
 A customs agent is a trustee of the customs agencies, appointed by them to insure the
interests of the country in export and import. He is responsible for releasing freight in front
of the authorities.

Customs Broker
  A customs broker works for receiving end clients. Specialize in what can be brought in and
what is illegal (specifically to the country he works in), serves as a customs consultant. He is
responsible for clearing freight through customs for the client as fast as possible, and he gets
paid by a company per shipment he takes care of. Customs brokers do not deal with small
parcels (1-35kg). It is a more commercial job than a customs agent’s.
  It is not worth for customs brokers to work in the small parcel market the time and effort it
takes to classify small parcels is more or less the same as the time and effort for large freight,
but the profit from a small package is smaller. It’s therefore not worth it for a large company
to pay a broker to classify small packages.

Customs checks
 In Israel today, only 5% of the total customs are collected, simply because there is not
enough man power to open all the packages.
 Packages are supposed to arrive with a declaration of what is in them, but sometimes a
package must be opened to help its classification because the declaration is not enough
(There is no HTS classification on the package). If the package is from a private person the it
usually needs to be opened.

A Summery of the Customs Problem:
 The Classification of the goods is complex, because customs have many difficult rules
(classification depends not only on the final product but on the raw materials it is made out
of), and non barrier tariffs, (importing from certain countries to others is illegal, depending
where the product was manufactured, etc.) There are no local brokers for small packages (1-
35kg), only for freight.
 For these reasons, packages get often stuck in customs, and the process of clearance is long
and wearisome. The consumer who bought the product does not know what the customs on
his product are going to be ahead of time, which causes annoyance. If the consumer is
himself a retailer ordering packages B2B, he must take a large ‘hysterical factor’ to ensure
his profits because he does not know the actual cost of the products.

These are Incoterms 2000:
CFR - Cost and Freight
CIF - Cost, Insurance and Freight
CPT - Carriage Paid To
CIP - Carriage and Insurance Paid To


                                                                                                  34
DAF - Delivered at Frontier
DES - Delivered Ex Ship
DEQ - Delivered Ex Quay
DDU - Delivered Duty Unpaid
DDP - Delivered Duty Paid
EXW - Ex Works
FCA - Free Carrier
FAS - Free Alongside Ship
FOB - Free On Board


Terminology
Ad valorem tariff      Tariff defined as a percentage of the value of an imported good.
AFTA - ASEAN Free A free trade area among the ASEAN countries that is in the process of being implemented.
Trade Area             As of July 2000, the goal was to reduce lists of tariffs to zero among the original six
                       ASEAN members by 2002.
ASEAN                  Association of Southeast Asian Nations
CIF                    Cost, Insurance, Freight. The price of a traded good including the various costs, such as
                       transportation and insurance, needed to get a good from one country to another.
                       Contrasts with FOB.
Common market          A group of countries that eliminate all barriers to movement of goods among themselves,
                       and that agree to levy the same tariff on imports of products from outside the group.
                       Equivalent to a customs union.
Customs classification 1. The category defining the tariff to be applied to an imported good.
                       2. The act of determining this category, which may be subject to various rules.
Customs duty           An import tariff.
Customs officer        The government official who monitors goods moving across a national border and levies
                       tariffs.
Customs procedure      The practices used by customs officers to clear goods into a country and levy tariffs.
                       Includes clearance procedures such as documentation and inspection, methods of
                       determining a good's classification. Any of these can impede trade and constitute a NTB.
Customs union          A group of countries that adopt free trade (zero tariffs and no other restrictions on trade) on
                       trade among themselves, and that also, on each product, agree to levy the same tariff on
                       imports from outside the group. Equivalent to an FTA.
Customs valuation      The method by which a customs officer determines the value of an imported good for the
                       purpose of levying an ad valorem tariff. When this method is biased against importing, it
                       becomes an NTB.
European Free Trade A free trade area made up of countries in Europe that did not join the European Economic
Association (EFTA) Community. EFTA was established in 1960 among Austria, Denmark, Norway, Portugal,
                       Sweden, Switzerland, and the United Kingdom. As of 2000 it includes Iceland,
                       Liechtenstein, Norway, and Switzerland.
Exchange risk          Uncertainty about the value of an asset, liability, or commitment due to uncertainty about
                       the future value of an exchange rate. Unless they cover themselves in the forward market,
                       traders with commitments to pay or receive foreign currency in the future bear exchange
                       risk.
FAS                    Same as FOB but without the cost of loading onto a ship. Stands for "free alongside ship."
FOB                    Free On Board. The price of a traded good after loading onto a ship but before shipping,
                       thus not including transportation, insurance, and other costs needed to get a good from one
                       country to another. Contrasts with CIF and FAS.
Free trade             A situation in which there are no artificial barriers to trade, such as tariffs and NTBs.
Free Trade Area        A group of countries that adopt free trade (zero tariffs and no other restrictions on trade) on
(FTA)                  trade among themselves, while not necessarily changing the barriers that each member
                       country has on trade with the countries outside the group.
GATT                   General Agreement on Tariffs and Trade A multilateral treaty entered into in 1948 by the
                       intended members of the International Trade Organization (ITO), the purpose of which was
                       to implement many of the rules and negotiated tariff reductions that would be overseen by
                       the ITO. With the failure of the ITO to be approved, the GATT became the principal
                       institution regulating trade policy until it was subsumed within the WTO in 1995.


                                                                                                               35
Globalization             The increasing world-wide integration of markets for goods, services and capital.
Harmonized Tariff         An international classification system for goods entering an importing country through
System (HTS)              Customs. It was adopted at the beginning of 1989, replacing the previously used schedules
                          in over 50 countries.
Import Quota              A government-imposed restriction on quantity of an import per year.
Latin American            An organization of Latin American countries with the aim of encouraging free trade but
Integration               with no timetable for achieving it.
Association (LAIA)
Luxury/excise tax.        Taxes on import and on local produce.
Non Tariff Barrier        Any policy that interferes with exports or imports other than a simple tariff, prominently
(NTB)                     including quotas and VERs.
North American Free       The agreement to form a free trade area among the United States, Canada, and Mexico that
Trade Agreement           went into effect January 1, 1994.
(NAFTA)
Tariff               A tax on trade, usually an import tax but sometimes used to denote an export tax.
                     The process of one country raising its tariff to secure some advantage, to which another
Tariffs and retaliation
                     country responds by raising its tariff, the first raises its tariff still further, etc.
Technical barrier to A requirement of characteristics (such as dimensions, quality, performance, or safety) that
trade (TBT)          an imported product must meet.
VAT                  Value added tax
VER                  Voluntary export restraint, Voluntary import expansion The use of policies to encourage
                     imports, in response to pressure from trading partners.
World Trade          A global international organization that specifies and enforces rules for the conduct of
Organization (WTO) international trade policies and serves as a forum for negotiations to reduce barriers to
                     trade. Formed in 1995 as the successor to the GATT, it has 136 member countries as of
                     April 2000.




                                                                                                             36
Appendix B: The Classification Process
 This appendix is built in the form of questions and answers.

  Q. What is GCZ’s advantage over customs brokers’ classification?
  A. GCZ’s advantage is that it sits on the dispatching end while the brokers are on the
receiving end. Therefore, GCZ gets all the required information for the classification straight
from the retailer himself – information which is accurate and more available. Another
advantage is that GCZ works with fixed clients, so that the classification of a product need
only be done once, while a customs broker needs to re-classify every product. In addition,
GCZ can extend its classification of a specific product for a specific company to the same
product in other companies it works with. (It doesn’t matter if a t-shirt belongs to the Gap or
Lands’ End, the classification is the same). So in reality, GCZ only needs to classify every
type of product once while the brokers need to do it again and again because they don’t have
their own DB of products and of retailers around the world.

   Q. Why does GCZ outsource the customs classification process?
   A. 1. Distraction from core competency.
      2. Like a payroll system, should not be built without the necessary volume.
      3. System development and maintenance requires unique customs and trade expertise,
at least one expert for each destination country.
      4. Rate and classification changes requires constant external support.
      5. Many companies offer the classification service.
      6. Sometimes outsourcing is required because it is difficult to sit in one country and
classify products for another.
      7. It is not worthwhile to keep experts in the company all the time, they’re just needed
for the classification, which is done once per client (and after every catalog change).

 Q. To whom can GCZ outsource the classification?
 A. Today GCZ does the classification herself (no outsourcing yet) because it is expensive
and because there are no real clients yet. The classification is the real expense of the
company. It is not a one-time expense because the catalog keeps changing. There are many
companies who do classifications, some of them are GCZ’s competitors. The decision
whether to outsource and the time it takes to classify a catalog depend on the size of the
catalog, how many products, to how many countries, classification skills and sources of
information.

 Q. Where does the classification information come from?
 A. Customs catalogs from customs agencies are hard to get hold of, and they are thick
books that need to be collected from each country. There are companies who sell HTS
databases with information about all the countries in the world. A leading company in this
area is WorldTariff, which is owned by FedEx. The DB costs thousands of dollars for a
yearly subscription. This is considered expensive for information. It is updated yearly and
when there are new laws or economical changes in the customs area in different countries.

 Q. How long does it take to classify a catalog?
 A. One expert estimated he could classify 180 items per day, another told us he manages to
classify 4 products for each destination country in an hour . It is a very slow process.

 Q. Will there ever be a computer program that will be able to do the classifying?



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  A. The classification process will not be computerized in the near future – any classification
program would have to be a monster program, which would need many input parameters for
each product because there are thousands of sub-categories. People must sit and do it. There
is no high-tech involved. There are competitors that offer small customs calculators, but they
are for specific types of products.




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