Nordic corporates have been moving their production hubs closer to their main markets in Asia. Their traditional banks are hot on their heels, writes John Ollett.
The Nordic region is home to a range of significant global companies such as Carlsberg, Ericsson, Konecranes, Nokia, Sandvik, Telenor and Volvo, which trade and invest around the world.
But Nordic exports have been weak in 2013. A recent research paper by Swedish bank SEB showed that Norwegian exports are expected to drop by 1.5% in 2013, with exports from Sweden falling by 1.4%, and Finland’s exports by 1.7%.
The sole positive note this year is Denmark, which is to see an export rise of 1.2%. Much of this is caused by the eurozone crisis, but as companies continue to invest in other markets around the world and Europe slowly drags itself out of recession, more positive figures in 2014 are expected for exports from the Nordic countries.
Still in crisis
Matti Malminen, director of trade and export finance at Konecranes tells GTR: “[Europe] is a very important area for Konecranes and accounts for a large part of our turnover, but unfortunately we have seen this downturn bring the volumes down and it has really created some challenges for us.”
This can also be seen in other major companies such as Volvo, whose construction equipment business has reported that the European market will be down 5% to 15% for 2013 and that market conditions show few signs of revival in the short-term.
It is not just larger companies that have experienced this decline. The Nordic region is also home to a number of specialised high-tech companies exporting products such as IT infrastructure and medical equipment.
Companies like these, a source tells GTR, are being severely affected by the crisis because of heavier dependence on western markets.
While many companies can shift away from the European and US markets, emerging markets do not have a sufficient scale of demand for high-tech products to compensate for the fall of demand in Europe.
Made in Asia
As an economist at the London Metal Exchange meeting last year pointed out: “The words that defined the last decade were ‘Made in China’, the words that will define the next are ‘Bought by China’.” This is a sentiment that is being seen across Asia, one delegate at the recent GTR Nordic conference said, particularly in countries like Vietnam, which was previously a supplier of materials for the Nordics but is now becoming a market for finished products.
Klaus Ekland, an economist at SEB, told the conference: “The emerging markets will be the locomotive over the next five years and the eurozone will continue to grow slowly for some time to come. I am quite sure that the growth of trade will pick up but it will look different to how it used to.”
Countries will become less important, he outlined, and it will be cities that compete with each other for business, meaning the Swedish cities of Gothenburg and Stockholm might be in competition for trade with each other as well as with London and Singapore.
Winfried Blasius, a director at Surecomp, agrees that the future for Nordic trade is in Asia, and tells GTR: “We see in the Nordic countries the same [as what]we see in the German markets. We observe that exports to the other European countries are on the way down year by year; exports to the emerging markets are on the way up so the growth in exports is expected to be much more in the emerging markets than in the traditional markets.”
These new demand sources have encouraged an unbundling of Nordic production chains, which are moving hubs closer to the customer. Konecranes is seeing significant demand from Indonesia, to which it supplies cranes for new port developments and other infrastructure projects, but its products are often produced in hubs near Indonesia rather than in Sweden.
This is also true for Volvo. The parts for a car may be produced in several different countries around the world, then assembled in Vietnam and sold to China without ever passing through Sweden.
“The world is changing, it’s the same with us – a lot of our products are manufactured closer to our customers,” says Malminen.
Trade finance follows
The increased Asian focus of Nordic corporates is changing the way the Nordic-centric banks must operate to provide trade finance to their customers. Patrik Zekkar, head of trade finance at SEB, tells GTR: “We need to develop more because along this supply chain and this process you suddenly have more open account and trade financing instruments involved.
“The unbundling of production will not only demand an understanding of an increased complexity in the value chain, it will also demand higher flexibility in bundling banking products and processes as well as more tailored offerings suited for specific value chains.”
But letters of credit (LCs) will continue to be a key trade finance instrument when dealing with Asia.
“LCs have the potential to play an even larger role in risk management, for example replacing down-payment requirements and breach of contract insurances,” says Zekkar.
Masood Arai, head of trade finance global development at Nordea, agrees that LCs will remain popular. He adds: “I think what makes it more challenging from our perspective is perhaps being available for our customers who are also in Asia, should they pursue trade finance.”
Nordic trade financiers have principally operated in and around Europe and many do not have a full trade finance-specific presence in Asia. As such, a number of banks are looking at expanding this presence in 2014 through partnerships with local institutions and through expanding their own offices in the region.
“Our main agenda is to be where our customers in the Nordics need us to be in the best possible way. Whether we do it ourselves or with a partner, that’s the way to go,” says Arai.
Malminen of Konecranes notes the importance of this to Nordic companies, saying: “Banks are giving very good service to our smallest subsidiaries over in Indonesia, we really appreciate this.”
This funding through wide-ranging subsidiaries means that in the future, the majority of revenues made by Nordic banks will be through their offices and external branches abroad rather than at home.
Which companies banks will turn to in the Nordic regions remains to be seen. Zekkar of SEB says that there are still businesses that will remain locally-based and will require trade finance.
There is room in this new supply chain for a niche company that covers one specific area of the supply chain and does it very well. These companies, which aim to add value to a product before moving it on along the chain, could be a strong growth area for trade finance.
An example of this would be the pulp traders in Sweden, whose sole function is to source the pulp from paper mills, then package, market and export it. Zekkar says: “I think that this type of player will have a huge opportunity to climb the value chain because they will become more and more important… [because they are specialised in one area] they can really show that they have a competitive advantage and then they can charge for that.”
Many of these companies will continue to be based in the Nordics as the region affords good opportunities for shipping and access to the CIS and European markets.