Published: September 06, 2013
One of the many consequences of the global financial crisis was the realisation by many Western corporations that the stagnation of their domestic markets made emerging markets their most likely growth engine for the foreseeable future. As Jiten Arora, Global Head of Sales, Transaction Banking at Standard Chartered explains, the resulting shift is still ongoing - as are the associated challenges and opportunities for working capital management.
While the global financial crisis itself may be a receding memory, we still live with many of its consequences. For many corporations, a shift in emphasis from West to East has been a prominent example. While some may originally have seen this shift as an urgent response measure, there has since been a growing acceptance that this is a fundamental and long-term change that the crisis has served to accelerate and accentuate. Today, it is not uncommon to hear multinationals talking of targeting emerging markets for a significant contribution to their global bottom line. These intentions are already becoming a reality, as OECD corporates increasingly choose to locate their supplier, client and procurement/manufacturing bases in regions such as Asia.
Although corporations may now see this transition as more opportunity than crisis driven, the crisis taught/reinforced a number of key lessons. The importance of managing concentration and counterparty risk was probably one of the most important, which is clearly reflected in the way corporations are managing their expansion into new regions. The days of one global bank servicing all corporate needs are probably gone forever, as most corporations now prefer to work with banks regionally in Asia, in order to distribute the counterparty risks and achieve a measure of contingency.
This new approach has a direct link with another important corporate realisation: that given the right treasury framework, emerging markets such as Asia are no longer as challenging from a working capital management perspective as has traditionally been assumed. Historically, the prevalent concern that caused corporate hesitation was that markets in the region were perceived as both risky and fragmented. The application of regional risk management and liquidity structures were assumed to be unachievable because of issues around currency controls, diverse regulatory models, lack of SWIFT connectivity etc.
A number of factors have combined to drive the realisation that this is no longer the case. On the one hand, certain markets in Asia have realised the implicit opportunity for themselves of the financial crisis and so have started revising their regulatory stance to become more ‘multinational friendly’. On the other, multinationals have understood that there are a few banks that can provide a highly efficient regional alternative to the single global bank model. These banks obviously provide a risk diversification opportunity, but also offer niche expertise in regions such as Africa, Asia and the Middle East that facilitates the extension of a global treasury framework.
A major irony associated with the financial crisis is that as certain emerging markets have started to liberalise their regulatory position, the reverse is true in developed markets. One of the most obvious manifestations of this is Basel III. Previously many corporates assumed that this was an issue purely for banks, but now there is a rapidly growing appreciation of the knock on effects that will directly impact them.
From a corporate perspective, the main concerns regarding Basel III will be the reduced availability and higher cost of credit. This is likely to be particularly evident with longer term credit and variable facilities such as overdrafts. The severity of this will vary significantly from bank to bank, with more conservatively capitalised banks being less affected. In particular, those banks with a high proportion of trade assets on their balance sheets will be well positioned, due to the self liquidating nature of those assets and their direct link to client economic activity, which results in more favourable regulatory capital treatment. Nevertheless, the overall message remains that corporations looking to expand into new markets in pursuit of growth will be well advised to minimise their dependence upon bank funding by maximising their working capital efficiency to free up internal liquidity sources.
This point has already been taken on board by some corporations expanding into Africa, Asia and the Middle East, which is reflected in the changing way in which they are using treasury centres. OECD multinationals active in these regions have historically regarded treasury as primarily a utility service function. This is no longer the case, as these corporations begin to appreciate the potential benefits of treasury centres in areas such as cash management efficiency and the management of supply chain, country, currency and counterparty risks.
These activities are now being rolled into the remit of the treasury function and managed treasury centres that are becoming tightly integrated into the organisation’s strategy and thinking. As this happens - in addition to being concerned with efficiency, cost and economies of scale - treasurers are also participating in growth, risk and finance planning for new ventures and opportunities. Their working capital expertise is increasingly being tapped to help identify the most efficient way to fund these new business units in new markets.
Rather conveniently, this change in role for treasurers and treasury centres has been accompanied by growing opportunities for more efficient liquidity management. Traditionally, a major issue for Western corporations regarding emerging markets has been the concept of trapped liquidity. However, this is becoming less and less of an issue for some emerging markets - with China being an obvious case in point. The various pilot schemes for permitting cross-border cash concentration currently being deployed by the People’s Bank of China and the State Administration for Foreign Exchange represent a major step change in this respect.
At present it seems likely that these pilots will ultimately evolve into more general measures that will potentially liberate substantial additional corporate liquidity to transform working capital efficiency and mobility. Furthermore, the Chinese authorities are keen to attract domestic and regional treasury centres to cities such as Shanghai. More specifically, if a corporation has (or is considering) the placement of a treasury centre in China, then this is regarded favourably in the light of any pilot scheme application they may make. Therefore, although Singapore and Hong Kong have for some time been popular locations for Asian treasury centres, they are now facing competition from both China as well as (on a smaller scale) from countries such as Thailand.[[[PAGE]]]
Regional treasury centres are also becoming increasingly involved in managing and advising on sovereign risks, especially in the context of expansion into emerging market regions. Countries in these regions typically have highly diverse business, regulatory and political environments, which obviously affect the optimal way of deploying capital and building up operations in each location.
This growing responsibility for regional treasury centres is also reflected in other areas such as foreign exchange. This applies both in terms of optimising cross border liquidity (where possible) as well as managing FX risk. Both American and European corporations are now empowering their regional treasury centres to handle FX risk in more exotic currencies because of the time zone mismatch implicit in trying to manage it from head office.
Technology in general benefits working capital efficiency. However, in certain geographically demanding markets mobile technology is doing this and more. Historically, multinationals operating in these markets were dependent upon bricks and mortar bank branches. However, this meant that they did not have direct access to consumers in remote locations because these consumers lacked an easy means of making payments, such as a local bank branch.
Mobile technology has completely transformed this situation by enabling consumers in remote locations to make payments by using a mobile wallet, typically provided by a bank in partnership with a suitable local mobile phone company. A multinational partnering with the right bank in these locations therefore gains immediate access to a massive new customer base for its services or products.
Given the right bank/phone company partnership, another major benefit is the ability to identify each individual customer and their payments. This means corporations no longer have the aggravation of little/no remittance information on customer cash/cheque payments and the consequent expensive manual rectification.
Instead, when customers pay by mobile phone the phone is directly associated with a known subscriber and can be directly linked with a specific invoice and auto-reconciled. Therefore, the mobile payment channel is not only facilitating more efficient working capital management and removing the security risks associated with physical cash, it is also opening the door to a major new business opportunity in terms of sales growth.
One of the many advantages of mobile technology in markets such as Africa, Asia and the Middle East is its ubiquity. Both business and consumers are already comfortable using it and in some cases can only use it, because they do not have access to a computer and/or a wired telecoms infrastructure. This can deliver efficiencies when handling business to business transactions, such as removing the risks associated with physical cash when selling to small retail outlets.
In many emerging markets, these small business customers are serviced by a travelling salesperson who also makes deliveries and collects payments - often in cash. Apart from security/fraud risks, this also reduces productivity. The sales person loses time counting cash and will probably have to make at least one trip to a bank during the day to deposit the cash, plus spend time allocating remittances to customers. This loses time that could otherwise be spent on prospecting new customers or increasing sales to existing ones.
But if these customers use mobile payments instead of cash (or cheques) to settle their accounts, everything changes. The sales person can be more productive, risks are reduced and a clean stream of remittance data becomes available to improve the reconciliation process.
Mobile technology also delivers workflow benefits directly to treasurers. As mentioned above, corporate expansion into new markets is already driving further changes to the role of treasury, such as far greater involvement in business planning and decision making. One consequence of this is that treasurers now spend far more time on the road meeting business units.
This more itinerant working life has implications for tasks such as authorising large payments that were traditionally conducted by senior treasury personnel at a treasury workstation in their office. Treasurers on the road are obviously not available to do this in the office, but appropriate mobile technology usually means that they still can whilst travelling. Assuming adequate mobile network connectivity (commonly available in many emerging markets) they can still connect to electronic banking services securely to perform this sort of activity.
However, current smart phone and tablet banking technology can not only provide a large and intuitive GUI that minimises the risk of keying errors, it also opens the door to a broad range of other mobile treasury activities. The larger screen real estate available on modern mobile devices means that cash forecasting, FX hedging and myriad other activities can be performed while on the move. Mobile news and data feeds are also now commonly available, so that treasurers can also keep abreast of major events such as price shocks or regulatory changes and respond accordingly in a timely manner. The increasing power of processors in mobile devices also means that treasurers can now perform increasingly sophisticated calculations (such as modelling hedging scenarios) ‘on device’ rather than being purely dependent upon the right pre-calculated data being fed to them over the network.[[[PAGE]]]
While factors such as Basel III and stagnant economic activity in developed markets pose major working capital challenges for today’s treasury, the good news is that the opportunities and tools to mitigate those challenges also exist. Changes in regulation and the greater involvement of treasury in business planning mean that many hitherto unexpected opportunities can be tapped to deploy working capital efficiently when making a new investment, as well as to mobilise that capital when it generates returns. In this context, the popular phrase ‘trapped cash’ is beginning to have less and less relevance in major emerging markets such as China.
At the same time, technology is also proving increasingly valuable in helping treasury deliver working capital efficiency. This applies at all stages of the transaction cycle: up front in opening up new sales opportunities, then in improving the collections and reconciliation processes, and finally in streamlining the information to facilitate critical treasury tasks and strategic decision making. Therefore while efficient working capital management will always be a work in progress, the opportunities and tools to accomplish it in emerging markets are increasingly available.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
