Supply chains in Asia are fragmented and lack homogeneity. Finbarr Bermingham reports on the challenges this presents financiers.

On the sidelines of GTR’s first Asia Supply Chain Finance conference in Hong Kong in June, it was impossible to ignore the ubiquity of furrowed brows and concerned head shakes. Practitioners were discussing the current state of Asia’s trade and commodity finance markets, where lending is down, in many cases by double digits. Compliance issues are threatening metals markets, while the slowdown in China is playing on just about everybody’s mind.
Perhaps as a means to counter this, but also due to the natural geographical tilt taken by this area of financing, banks in Asia are increasingly pouring their capital and efforts into supply chain propositions. The past few years have seen a shedload of solutions launched in the region, with banks attempting to steer products towards the world’s most populated continent, and its most active and innovative trade corridor. “We’ve seen a lot of change in how supply chains have developed around the world, and in particular in Asia,” says Simon Constantinides, who, when interviewed, was head of HSBC’s trade and receivables finance business in Asia Pacific.
But what are these trends? And as we pass the mid-point of the decade in which supply chains have become more talked about than ever, what are the major challenges facing the ones in Asia?

The regulatory jigsaw

Unlike the US and, to a lesser extent, Europe, there is no uniform regulatory framework in Asia. A report from almost a decade ago authored by consultants at Accenture said: “In Asia, diversity is the norm rather than the exception. These disparities make
the movement of goods within and across borders difficult at best.”
Speaking to those who are dealing with such issues on a daily basis, it seems that any moves to homogenise Asian supply chains have been unsuccessful. “The challenge is that a client-oriented supply chain solution should provide pan-Asia solutions,” Kai Fehr, head
of trade for Asia at Wells Fargo, tells GTR. “The various Asian markets have different regulatory and legal environments, requiring country-by-country due diligence.”
It also boils down to taxonomical issues. At most supply chain events, a knowing chuckle can be raised by talking about how every banker on a given panel will likely have a different definition for supply chain finance. (It should be noted that it’s not restricted to SCF: Frank Wu, Asian head of structured commodity trade finance, Asia at Deutsche Bank spent a few minutes attempting to decipher the definitional challenges facing that market too.) But when regulators get in on the act, it helps paint a picture of a market that is extremely fragmented, and in which it is challenging to roll things out across borders.
“When we do business with local customers, every single banking regulator will have different definitions of ‘clients’. That definition spawns different requirements for KYC and anti-money laundering that we have to comply with and, as a foreign bank, we’re under a finer microscope,” Matthew Frohling, Asia head of supply chain finance at Citi tells GTR.
This leads to difficulties in rolling out solutions, particularly ones that are scalable. In the US, banks talk about onboarding clients, small and large. They talk about integrating their supply chain financing solutions across the market and are usually willing to work with companies of all sizes to do so. However it is less common to hear this in Asia. Most banks follow their multinational clients: trying to fix them up with an SCF solution that they can use anywhere in the world.
A common statement is that it costs the same amount to roll out a solution to a client who is spending US$2mn as it does for one who is spending US$200mn, given the relatively labour-intensive nature of work in Asia. International banks, then, tend to stick to those companies who can afford to pay the big bucks.

Some are moving faster than others

It’s not surprising to hear financiers praise the likes of Australia, Japan, Taiwan, Singapore and Hong Kong as the parts of Asia which best lend themselves to SCF solutions. After all, the rules here – like them or not – are much clearer than in parts of emerging Asia.
“Those countries are transparent and have mature legal systems. And whether you like the rules or not, they’re very clear. Do we like onerous rules? No: but if they’re clearly dictated, we’re okay with that. There is a lack of clarity in some Asian countries and it can
be difficult to operate without that clarity. We will end up taking the conservative approach and doing more work than is probably required because of that. That does end up costing more and there’s an expense to that,” says Frohling.
In his four years in Asia, he claims to have seen few regulatory improvements in these markets, or few initiatives to make it easier to bring supply chain propositions to those markets. But at the same time, it is getting more costly for companies to operate
there. Much has been made of the rising production costs in China.
Certain industries are shifting from the east of the country to the west, while others are finding new homes in other East Asian neighbours.
Many claim that despite the increasing costs, facilities are not necessarily improving in line with them. So you’ve got businesses paying more for their products to be made, yet still facing the same infrastructural problems and cumbersome levels of red tape as before. It could be viewed similarly in finance: the job is arguably getting trickier, while the returns are not widening to reflect that.
For those who are taking up solutions, they remain relatively unsophisticated in comparison to those in more mature markets, but uptake is expected to grow. “Asia continues to rely on traditional working capital and term debt to fund the treasury activities,” Fehr says. “In terms of relatively inexpensive credit, the long-term benefits need to be explained to clients. Currently we see the suppliers driving a lot of the growth of supply chain programmes and we expect a substantial increase in Asia over the next few years.”

The great information deficit

Financiers talk about needing to draw on macroeconomic understanding of local markets in order to build a picture of what suppliers are doing in various Asian markets. Compared with how information gathering is done, say, in the US, this seems laborious and inefficient: the end product of which is, again, solutions for which clients end up paying a higher cost, given the expensive way in which they must be brought to the market.
Frohling says that while lack of information does not stem the flow of capital, it does hinder it, making the entire process more onerous for everybody involved. “In the US it’s easier,” he says. “It’s easier to have a pulse on what companies are borrowing at. There’s a lot more information available. The whole SEC filing system is a lot more transparent.”
He uses the example of China: contrary to media reports, many of the companies he encounters have no problem accessing liquidity at sub-PBOC rates, but he simply doesn’t know where the capital is coming from. In the US, it would be immediately apparent.
“The ability to get information for KYC or AML purposes is very simple: it is public information, in the legal system, which is mature.
I don’t think there’s anything dishonest about Asia, but it’s not set up in a way that makes it easy to see if it is regulatory compliant,” he says.
These days, it is deemed offensive to use the western-centric term “Far East”, with the connotations that the US and Europe provide the Earth with its centre of gravity. But in our considerations of Asia as a single and homogenous area, we’re also guilty of something approaching ignorance, of failing to understand the patchwork melting pot of diverse cultures, customs and laws. So while many are talking up the potential value of supply chain finance to the region, there must be a serious awareness as to its fragmentation and, thus, to the challenges facing those who hope to roll such solutions out.