Supply chain finance in Asia looks set to take-off as local companies move to sustain their traditional low-cost advantages and to mitigate the impact of the credit crunch.
SCF, especially cross-border programmes, have involved Asia for some time now, given it is increasingly the workshop of the world. Large western multinationals have outsourced or relocated much of their manufacturing capacity to the region, especially to China.
However, a potentially exciting development for the region is that local companies are increasingly implementing SCF programmes.
“The recent push into SCF is an extension of the cost advantage from the factory floor to the financial space,” explains Tan Kah Chye, global head of trade finance with Standard Chartered Bank. He attributed this interest to the growing size and sophistication of Asian companies. “Many now see SCF as an efficient way to manage their risks and their shareholder returns, if they are listed,” says Tan.
Indeed, the experience with Asia when it comes to adopting new technologies and practices is that once they are understood and appreciated, roll-out can follow very quickly.
Asian companies’ reasons for adopting SCF closely mirror those of their Western counterparts. “SCF is being driven by the need for better – more effective – management of working cash and liquidity on both sides of a trade transaction,” says Mark Evans, head of trade & supply chain, Asia Pacific (ex-Greater China) with HSBC. “Companies are also looking for access to more favourable financing terms by leveraging the credit lines /credit risk of their strategic partners, whether buyer or supplier.”
He explains that technology developments and increasingly common industry practices and standards are also helping to drive integration of the physical and financial supply chains. “Which is lowering the barriers to adoption for more companies as well,” he says.
According to the two bankers, there are some key differences between typical Western SCF programmes and those found in Asia.
“There is more of a balance between SCF Solutions covering supplier and dealer needs in Asia,” says Tan. “Pure SCF solutions in Europe and North America are very much more supplier/vendor-centric with a range of solutions falling under other categories addressing the needs of the dealer side.”
Evans identifies issues such as access to infrastructure, technology and the continued reliance on paper-based transactions as important differences.
“This reliance on paper is in part driven by the access to large and relatively inexpensive pools of human resources,” says Evans. “This ready availability of talent negates the need to develop technology-based solutions, which are geared to doing more with less,” says Evans.
Some of these differences throw up challenges to implementing truly cross-border SCF offerings. One of them is legislation. Unlike say the European Union, which encompasses most of Europe and attempts to harmonise regulations, Asia is very far from being homogenous. Not only are countries there at very different stages of economic development, but also possess very different regulatory frameworks and approaches.
“Countries have differing tax regimes, accounting practices, listing rules and local regulatory philosophy that can completely change the client experience of a supply chain solution,” says Tan. “This can range for example from the documentation required to implement, the technology approach itself and the resultant benefits.”
Evans basically concurs: “Regulations vary from country to country, whether this be in relation to the physical movement of goods and the continuing need for paper-based reporting in many sites or financial restrictions such as exchange controls which impact the ability of financial service providers to move funds as freely as may be desired.”
And those are not the only problems. Another issue, which is all too familiar to any trade finance banker in Europe or the US, is the lack of co-operation between the various departments of large corporates. To work affectively, SCF requires collaboration not only between different counterparties but also between departments within the organisation.
“An effective FSCM programme incorporates more than just one department,” says Evans. “Treasury, tax, risk, procurement, logistics, IT etc all need to come together to look at the supply chain holistically to gain the maximum benefits from such a programme.”
He adds that corporations in Asia are essentially no different from corporations anywhere else in the world. “Each functional group has its own priorities and performance metrics by which it is measured,” says Evans. He explains that to really work well, the SCF programme must be supported by senior management. “It will be difficult for any one area to drive a meaningful program that crosses all disciplines,” he added.
“This goes beyond the traditional banking approach where the bankers deal with the corporate treasurer/finance departments of the corporates,” says Tan.
“The treasurer, finance director and managers therefore need to play a crucial role in bridging the gap between their businesses and with the banks,” explains Tan.
Standard Chartered has been working around the problem by helping organisations improve their own internal collaboration efforts. “Generally speaking, we definitely would say that gaining broader buy-in makes SCF programmes much more successful in the long run for clients,” says Tan.
And what of the credit crunch? In the US especially it has actually been driving SCF as other credit channels have effectively seized up.
“Treasurers no longer have such ready access to funding, either cheaply or from previous funding sources,” says Evans. “Therefore, the manner in which SCF was being driven forward has had to change, it can’t simply be about offering up front discounts for early payment.”
Crunched into action
It also appears that the credit crunch is making corporates re-assess their existing relations. Evans notes that those relationships are being rationalised.
“Large importers are narrowing their focus to partner with key strategic suppliers with whom they have trusted, long-term relationships which can remain on open account terms,” says Evans. “This is also happening with banking relationships.”
“Major multinational clients are pushing their vendors and suppliers to store inventory for a longer period of time,” says Tan. “This has increased the demand for supply chain financing solutions.”
Despite not being the source or cause of the credit crunch, Asia is not escaping the general trend for the rationalisation of credit.
“OECD banks are trying to reduce the size of their own balance sheets. They are finding it easier to reduce credit exposure on working capital loans that attract significantly higher risk weighted assets under Basel II,” says Tan. “In return, all banks are promoting the use of trade finance facilities ranging from letters of credit to SCF as these are capital friendly products.”
Nonetheless, local banks are not being completely pushed aside in the rush to bring in SCF. Local banks are proving to be especially competitive when it comes to rolling out domestic SCF programmes.
Besides: “Local banks can play a role in covering the client sectors, markets or cities not serviced by the foreign banks,” says Tan. “We have seen a few local banks initiating supply chain finance businesses around the region.”
But Evans warns that local banks do face limitations in their ability to fully participate in the market for SCF products.
“Local banks are restricted when supporting cross border solutions as they do not have the coverage to support regional/global programmes,” says Evans. “By trying to do so relying on correspondent banks places them at a cost and service disadvantage. While local banks are often strong partners with local suppliers, they aren’t able to drive wholesale changes in SCF.”
He also foresees a gap opening between the solutions offered by local banks and those of the global banks, especially in terms of geographic coverage.
Indeed, the combination of the credit crunch and the desire to remain competitive in global markets seems to be driving Asian corporates to adopt SCF. One of the leading adopters is India, thanks partly to innovative banks and no doubt the strong local interest in IT type solutions. Although, China with its heavily manufacturing focussed economy is catching on quickly.
Industry-wise, the textiles industry, with its high volume output coupled with strong client supplier relationships, seems to be a major adopter. Although, SCF adoption is also spreading into areas, such as consumer electronics.
“SCF is ready for the next great leap forward,” says Evans. “Early adopters are looking to take what they’ve accomplished to the next level.”
Meanwhile, Tan sees SCF continuing to increase across Asia in the coming years driven by clients demanding such solutions.
“We expect more banks to enter this space and we will probably see them contributing their own views as to how best meet their various clients’ needs,” says Tan.
“This is part of the natural evolution as SCF becomes a mainstream banking product or offering.” A similar evolutionary spirit is also present in Western markets. With SCF now taking off in Asia, this will no doubt speed up the discovery of those ideal SCF models, which are being so keenly sort by the banks.