Published: September 01, 2014
This is the second of three articles in TMI published by ING that provide in-depth insights into the challenges, opportunities and solutions for corporations expanding from their home market in Europe or Asia into new territories. You can find the first article in this series here.
With many of the world’s fastest growing companies headquartered in Asia, across a wide variety of industries, we are seeing substantial growth in the number of Asian multinationals expanding their business into Europe. Given the geographical and time zone differences between their home markets and Europe, a large proportion of these corporations are establishing regional manufacturing, distribution and sales operations. For European treasurers of these companies, the challenge is how best to support the cash, risk and working capital requirements of these business operations, whilst also satisfying the needs of the business at a group level. Implementing, or expanding a shared services model can be a valuable means of achieving these often conflicting objectives.
While many Asian multinationals, such as Japanese automotive and hi-tech firms, have had a presence in Europe for many years, with mature cash and treasury management infrastructure, others are at an earlier stage in their European expansion. The first issue for corporations to consider is where best to locate their treasury centres. With many companies siting their manufacturing hubs in Central & Eastern Europe (CEE), countries such as Poland are also growing rapidly as shared service centre (SSC) locations, with Czech Republic, Romania, Slovakia, Hungary and to some extent Ukraine also becoming more popular. For example, around five years ago, there were fewer than 50 SSCs in Poland; today, this figure is more than 500.
There are a variety of reasons why CEE is often considered as a SSC location over western countries. In many cases, it makes sense to maintain proximity to manufacturing or distribution hubs in CEE. Companies are already familiar with the business environment, and there may already be suitable facilities available. Furthermore, many of these countries, boast a competitive cost base and educated workforce, as well as a strategic location and time zone that straddles Western Europe and Asia.
For Asian multinationals that have had a long-standing presence in Europe, the concept of European treasury shared services is not new.
For Asian multinationals that have had a long-standing presence in Europe, the concept of European treasury shared services is not new. Early SSCs were set up to centralise core competencies and re-engineer processes to reduce costs, improve efficiency and enhance risk management. In many cases, the scope of these treasury SSCs was relatively limited, such as accounting, often for a limited number of group entities. Although some SSCs have increased the range and geographic reach of the services they offer, the wide diversity of business practices and cultures in Europe has proved an obstacle in many cases, whether in technical, cultural or cash and liquidity terms. These obstacles, whether perceived or actual, have prevented companies from leveraging economies of scale and optimising pan-European cash and liquidity management.
The European treasury landscape has evolved considerably in recent years to the extent that many of the former obstacles to pan-European treasury centralisation no longer apply. With the introduction of SEPA (Single Euro Payments Area) it is now easier to centralise payments and collections with the help of an expert pan-European bank. Corporates can leverage the SSC more effectively, now that instruments and formats have been harmonised.
Asian multinationals have expanded significantly in Europe and therefore have to deal with a challenging macroeconomic and regulatory environment in the same way as other multinationals. These changing demands have resulted in more complex cash and treasury requirements, with working capital and financial supply chain optimisation now primary considerations. The challenge for existing treasury SSCs is therefore to review the scope of their SSCs and identify, implement and deliver new means of offering value to the business in Europe.[[[PAGE]]]
For Asian multinationals opening a treasury centre in Europe for the first time, these considerations are equally significant. In practice, however, it may be easier to introduce a shared service model upfront rather than migrating activities from a decentralised business organisation, which can be challenging. For example, treasury SSCs located in CEE may experience resistance or reluctance from entities in Western Europe to further centralisation of treasury activities, such as liquidity management and collections. In particular, they may be concerned that locating treasury activities outside SEPA might result in sub-optimal liquidity structures or lack of support for domestic payments and collections.
In reality, locating an SSC outside SEPA does not limit its ability to leverage the full advantages of SEPA
In reality, locating an SSC outside SEPA does not limit its ability to leverage the full advantages of SEPA, or to achieve the same degree of sophistication in either liquidity or working capital management. SSCs located in CEE can achieve the same degree of sophistication and geographic reach in supply chain finance programmes, cash pooling and payments and collections centralisation as those in Western Europe. This includes leveraging techniques such as payments on behalf of (POBO) and collections on behalf of (COBO) that enable companies to minimise the number of euro accounts they operate.
Demonstrating this potential to business units may take time, and it is important to build trust and encourage buy-in, particularly where the SSC does not have a definitive head office mandate. This involves clearly communicating the advantages that a treasury SSC can offer, both at a group level and for individual entities, such as enhanced processes, reduced costs through economies of scale and improved controls. This is not a ‘one off’ process, but a constant process of dialogue and communication to ensure that treasury understands the evolving needs of the business, and business units continue to recognise the ways in which treasury adds value. Some SSCs adopt a phased approach when implementing or expanding the functionality or geographic coverage of an SSC to demonstrate to business units at first hand the services it can deliver.
At ING, we are experienced in supporting the European cash and treasury management needs of Asian multinationals throughout our network. This extends throughout Western Europe, CEE and beyond, offering customers a cohesive experience across all markets in which we operate. We provide our Asian multinational clients with a single point of contact for their pan-European business, irrespective of where their treasury centre or SSC is located. The front-office team is supported by product and country specialists who provide expert knowledge in each market to design and deliver customised solutions. Together, they offer a cohesive advisory function enabling companies doing business in Europe to select an optimal treasury location, structure an appropriate liquidity management infrastructure and implement a robust payments and collections framework.
When introducing or expanding an SSC, Asian multinationals inevitably have different business priorities according to their business maturity in Europe, organisational model, cash flow profile and business culture. We work with Asian multinationals, both in their European SSC and with their head office team, to identify where the greatest value can be gained, and identify potential challenges and how they can be overcome. For example, a business that has expanded through acquisition may have a large number of ERPs and legacy bank relationships, which can make it difficult to achieve the transparency, reporting and process consistency which is required. We therefore suggest techniques such as multi-bank connectivity and pan-European cash pooling to help neutralise these challenges.
Having defined the project scope together, we provide detailed implementation support, both when setting up a new treasury centre or SSC, or enhancing the activities of an existing treasury function. In many cases, these treasury SSCs are managed by senior managers from the head office location. As they may only remain in-country for two to four years, they may not have access to an extensive local network of local experts, so we help to put them in touch with the right people to support their business objectives. In addition, as these SSCs typically employ local staff as well as expats, we provide local language support across Western Europe and CEE.
Asian multinationals’ expectation of their banks can be quite different from that of their Western peers, so banks need to demonstrate a flexible approach to managing customer relationships. For example, we find that treasuries of Asian multinationals are keen to receive information, guidance and support, but are less inclined than Western companies to engage in a proactive dialogue, particularly early in the business relationship. We therefore prioritise long-term customer engagements which focus on transparency, trust and advisory, to ensure that Asian clients receive service in a manner that they expect, both in their home markets and overseas.
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