Hong Kong’s role in global trade is evolving rapidly. Amid myriad developments, from shifting supply chains as a result of the US-China trade war to initiatives such as the Belt and Road (BRI) and the Greater Bay Area plan, as well as the ever-present digitisation topic, Standard Chartered and GTR gathered a group of local experts to discuss the benefits and challenges for supply chains.
Ahead of the conversation, participants were polled on their experiences around supply chain digitisation, the responses to which can be seen on these pages.
Roundtable participants:
- Nelson Chow, chief fintech officer, HKMA
- Belinda Han, regional head of trade, Hong Kong, Standard Chartered
- Alan Kwan, fund manager, Suning
- Denis Savastano, group treasurer, Li & Fung
- Tiffany Wong, CFO, YTO Express Group
- Eleanor Wragg, senior reporter, GTR (chair)
- Jessica Yeung, manager, fintech facilitation office, HKMA
- Ethel Yu, regional treasurer, Lyondellbasell
GTR: Much has been said in the media of late about the realignment of global supply chains around the trade war. To what extent has this heightened the need for Hong Kong to maintain its links to the world, and are you considering making changes to supply chains as a result?
Wong: We are quite affected by the trade war. Looking at our interim results for 2019 compared to 2018, there is a big difference. In 2018 we had very good results, while in 2019, for the income we saw, we dropped a lot in revenue and profits, because the trade war affected forwarding, which is our core business. Our main offices are in Hong Kong and China, and a lot of our customers and agents moved the manufacture of goods to Vietnam, Thailand and Cambodia instead of China. We can sustain this, because we are present in 17 countries, but the China and Hong Kong offices saw a lower performance compared to last year.
Kwan: In Hong Kong we have a high level of concentration on local retail, so the trade war has not been much of a factor except in terms of sentiment. We have however been hit by the current turmoil in Hong Kong as a result of lower tourist numbers. In fact, in terms of local business, our purchases come from local vendors. That said, a small amount of our business is from the internet sales to our PRC local offices and that has been somewhat affected. However, we have enlarged our source of purchases to not only concentrate on China or the US.
Yu: We are no different. We are facing the same problem as everyone else here. For many industries including ours, China and India are always the two dominant countries that we have to focus on, because a lot of our sales are made there. If our customers are not buying from us in China because of a manufacturing shift out of China to Southeast Asia, the number one issue for our company is how to change the supply chain. You might think that it is just an easy shift but looking for the right FX orders, the right shipping company, and so on, is a challenge in itself.
In addition, there is the challenge of maintaining the same level of sales we had in the past in China when we shift to Southeast Asian countries or to Bangladesh. And then, how can we do these sales without a certain amount of protection around our collections? These are the major challenges. If you look at Bangladesh, it’s not only the lengthy processing time for us to do the collection but also the additional cost that we need for every single sale into Bangladesh.
For example, if our customer is issuing an LC, and we do not feel comfortable with that Asian bank, it would immediately increase the cost for us to do the collection. It would also take more time, and not all the banks that our customer has a banking relationship with in order to issue LCs have a relationship with our bank. So basically without that kind of collecting bridge, the sales cannot happen.
If we are building a relationship with another advising bank, it means more fees, more transactions, more processes, and it is more cumbersome. This is the biggest hurdle that I have in my mind: how to help our business from a banking perspective to conduct the sales in the countries that we are not familiar with, and also that our banks are not familiar with.
GTR: From a banking perspective, how much pressure are you under to find solutions to these issues, and what more can banks do to support their clients?
Han: There are indeed a lot of challenges in terms of the shifting of supply chains. It is not a case of just moving the production base to another country; it’s far from that, and financing support is an important element. Let me use the example Ethel mentioned to demonstrate how we as a bank can support our clients in this journey. Ethel talked about shifting to new sales markets like Southeast Asia and Bangladesh. Standard Chartered can provide Ethel with LC confirmation and discounting services for their sales on LCs issued by various local banks in these markets, not to mention LCs issued by our own branch network there.
It is not only about financing, but more importantly providing risk protection when our clients enter into new markets to expand their sales. With our extensive network in these countries, we support our clients in terms of their collection process. On the other hand, we also provide our importer clients with assistance in supporting their suppliers to get finance. Normally these suppliers are SMEs and they need easy access to financing in order to provide the steady supply in a timely manner to our importer clients, and our comprehensive supply chain finance programmes will allow easy access to financing by these suppliers, for example, in Bangladesh. The most important thing is for banks to work together with their clients to understand their needs and tailor-make their products in order to address the pain points.
GTR: According to a recent Standard Chartered survey, 64% of businesses see new opportunities and new business coming out of the Greater Bay Area. What are you doing to capitalise on that, and what support do you need in order to fully take advantage of what’s out there?
Kwan: Our parent company is in the PRC, so our HQ staff will research and explore the opportunities, we don’t necessarily do the research.
Yu: In our business we split our strategy into north China and east China, so the GBA is not really something we’re looking into. We are looking at a bigger perspective.
GTR: Moving on to access to finance, what are you seeing in the market around knowledge of trade or supply chain finance? What are your experiences around getting the right products that you need to bridge working capital gaps, both for you and your suppliers?
Yu: We have a group of customers in an ongoing supply chain finance programme. They are familiar with what it is, they’re familiar with how to deal with it, and this is part of our business negotiation already.
Han: As per the statistics from the Asian Development Bank and the World Trade Organization, 74% of trade finance requests made by SMEs are rejected, while in contrast for MNCs the rejection rate is around 7%. It is a huge difference. At the same time, the contribution of SMEs to global GDP is 50% as per WTO.
SMEs need financing and funding support. Supply chain finance enables you, corporate clients, to support your direct suppliers accessing financing from banks, and the financing rates can be more competitive. We also see the situation where your suppliers get financing, but your suppliers’ suppliers probably also need financing. This is where we leverage technology and blockchain platforms to support your entire supply chain, not only your direct suppliers, but suppliers’ suppliers, even your suppliers’ suppliers’ suppliers – what we call deep-tier financing. In this way, your SME suppliers can have easier access to financing and enjoy cheaper financing rates.
GTR: Digitisation remains a hot topic in the supply chain space, but trade digitisation is only as strong as the weakest link in the chain. How optimistic are you about the possibility of getting that end-to-end digitisation both on the physical and the financial supply chains?
Yu: I’m not that optimistic. So far we have seen so many pilots and proofs of concept from banks, and while all of them promote what a good job they are doing, I don’t see any true success stories there. By that, I mean that everything we have seen thus far has simply been that bank A partnered with bank B in this very well-defined test case. It is not a real-life environment, and I don’t think that corporates are as involved as they should be.
If banks bring everybody to the table to do digitisation as a project, I believe that would work, but that is the only way that we can make it happen. If any parties are not at the table it won’t work. That’s why I’m a little bit sceptical about the progress. If you asked me if I’m interested in digitisation initiatives, I would say no, because I want someone to really prove to me that it is something workable before we spend our resources and time on it.
We all realise that digitisation is necessary, but what is the point for us to step in to play the game at this stage? This is always a question mark in my mind, because it is not easy. If we suddenly build a success case, how likely are we to be able to replicate this to any other business process?
Chow: The digitalisation of trade finance can reduce related manual work and help lower risks of fraud. This is why HKMA facilitated the launch of eTradeConnect to digitise paper-based documents, automate the trade finance process and help with duplicate finance checking.
As a leading international trading hub, Hong Kong facilitates a substantial number of cross-border trades. It is therefore useful if eTradeConnect can be put to even greater use if other jurisdictions can connect to it. That was why we conducted a proof-of-concept trial to connect eTradeConnect with we.trade, a similar platform in Europe. Next year, another proof-of-concept trial will be carried out to connect eTradeConnect with the People’s Bank of China Trade Finance Platform. We look forward to hearing good news about the outcome.
The digitalisation of trade finance has the potential to solve age-old problems that have plagued the industry for decades, benefiting both corporates and banks. We hope that HKMA’s facilitation of eTradeConnect could support the digitalisation of trade finance and may incentivise more industry players to join and build a more vibrant ecosystem.
GTR: It has been just over a year since HKMA launched eTradeConnect. How can initiatives like this help change the way you do business and make life easier for you, or conversely what the barriers are to change?
Kwan: We are trying to change the behaviour of our counterparties from companies to their executives. For example, for payments, they want to see and still prefer to sign something to make them feel more comfortable that money is going out. If you ask them to press a button, to them it feels different. We need to work harder to change behaviour.
Wong: Our experience was that we went through a very difficult journey to encourage our customers to pay us by wire transfer instead of cheque. One of the very common resistances was that they don’t need to pay to write a cheque. It’s zero cost for them to make the payment to a company like us, by just simply cutting a cheque. This also causes a working capital issue, as the minute they give us the cheque, they will expect the goods, even though it has not cleared yet. The journey as to how we go forward is that we explain to our customers that if you are holding a payment for us, that means we are also having an internal system to hold our leverage here until we see the money coming in, then we can unblock the order in our system and then we will be able to start shipping the goods to your destination. I won’t say that we are able to get rid of the cheque but we are pretty much over 95%.
On the other side, some of the service providers will not deliver services until we issue a cheque. They see having us give them a cheque as a guarantee for us to make a payment to them. It’s painful, it’s lengthy, especially for those smaller companies who if they can save a single penny in an operation by using cheques, they will do that.
Savastano: It has been a great start, definitely. The cheque is just the payment instrument, but ideally, if we can get rid of all this manual processing that would really drive the efficiency, and then bring a lot of cost savings for the whole supply chain.
Kwan: Our host company acquired the Hong Kong business in 2010, and at that time they pushed for us to use bank transfers, and it turned out that this is because in PRC bank transfers only cost Rmb1-2 or less per transaction. That is not the case here. What we do now is hundreds of transactions, and hundreds of transfers are made in a cheap and efficient way because all our transactions are authorised through our SAP systems. At that time it took more than three years to convince our vendors to accept bank transfers because they like to see the cheque. Even now we still have a few who request us to pay by cheque.
With regard to the Fast Payment System (FPS), I appreciate that HKMA has launched these systems, because it means a lower cost of transferring funds around. The problem our banking system has is that we use different online banking systems, unlike in the PRC where they have one single system for all cities and all banks. In the PRC, everything is highly integrated and harmonised, while in Hong Kong, if you are managing funds in each and every bank, you have to log in to different bank systems to transfer funds around. In Hong Kong our staff have to enter into three to four banking systems to manage our funds every day. I wonder if HKMA can lead a project of integrating the banking systems in Hong Kong in such a way that if I launch one single portal I can manage all my bank accounts?
Savastano: How does the system work in China? Is it a portal system?
Kwan: They have managed to create a host-to-host system with a third-party software house in such a way that whenever our SAP system initiates a payment, those instructions channel through this third-party software house and they can direct it to different banks’ systems.
Han: We offer a multi-bank solution to establish connectivity with different banks. You can send a single payment file to Standard Chartered that consists of payment instructions debiting your account with us, as well as with third-party bank accounts across markets, in Hong Kong, China, and so on.
Alan raised the challenge of connecting to the e-banking system of different banks. The Hong Kong eTradeConnect Platform is one of the examples of how these types of concerns can be addressed. Getting buyers, suppliers, banks and logistics companies onto a single platform is exactly the mission statement of Hong Kong eTradeConnect for open account trade. It’s an end-to-end automated process with one single gateway to different banks.
Another example is where we have a strategic collaboration with SAP Ariba. We understand that our clients would like to manage their procurement, payment, financing and FX transactions via a single platform. By early 2020, buyers using Ariba Network will be able to seamlessly manage their payments and supply chain finance needs with the SAP Ariba digital platform, while suppliers will get quicker access to financing and foreign exchange via Standard Chartered’s global network.
GTR: On the topic of bringing people together, as corporates around the table, do you feel like you’re getting enough of a voice in the digitisation journey that perhaps banks and regulators are leading?
Wong: We have 70 countries in our group. I have seen elsewhere in the world a lot of progress being made in terms of linking banks into corporate accounting systems, and this interface is already complete. But in Asia, or for us in Hong Kong, this interface between our bank and our system is still a work in progress.
Han: If we want to establish the ecosystem, we need as many participants as possible on the platform, otherwise it won’t work. Denis, let me take your company’s example. If you want to make a trade via Hong Kong eTradeConnect, you want to make sure that your counterparties are also on the platform. So basically your conversation is: if my counterparties are not on this platform why should I join? But on the flipside, if everyone thinks in this way, there won’t be any players on the platform.
From Standard Chartered’s perspective, we have been actively promoting the eTradeConnect platform. We talk about the benefits of digitalisation and encourage as many corporate clients to participate as possible. At the same time, we also work together with HKMA to see how we can bring more players onto the platform.
From a corporate’s perspective you not only want to see buyers, sellers, and banks on the platform. You also want to see other players in the ecosystem, for example, logistics companies on the same platform. This is why we are participating in a proof of concept to see how to bring logistics information to eTradeConnect. The seamless exchange of digital trade and shipment information will move clients away from paper-intensive processes, and more importantly will connect the various counterparties within the ecosystem. It offers end-to-end visibility while bringing about supply chain efficiency.
