Given the export-driven and fragmented nature of the Asian economies, corporates in these regions have the most to gain by adopting the latest trends in financial supply chain management techniques.
Interest in financial supply chain management (FSCM) was certainly growing before the onset of the financial crisis and global downturn, however we have seen this trend accelerate as corporates seek to enhance working capital arrangements and make the best of the latest technologies in order to assist them through this stormy period.
Indeed the current climate represents the ideal time to implement schemes that take a holistic view of supply chain processes, and we have certainly seen a surge in enquiries from corporates regarding these solutions.
One of the key effects of the financial crisis was the strain placed upon the working capital arrangements of many corporates. With increased difficulty in accessing traditional sources of credit in late-2008 and beyond, these corporates found day-to-day liquidity coming under extreme pressure – with the situation amplified on the supply side of the financial supply chain.
Concerns surrounding securing supply of components and raw materials forced many corporates to rethink their relationships with their suppliers and the way they approached supplier financing. In this respect, financial supply chain management provides corporates a powerful set of tools to maximise not only their own liquidity, but also that of their key trading partners in order to secure supply.
Globalisation and the growth of global sourcing among corporates from all regions – something that is increasingly placing Asia at the heart of the world economy – are factors driving the development of FSCM.
With sourcing and distribution becoming more sophisticated, corporates have to deal with managing additional layers of complexity and risk in both their physical and financial supply chains. These are issues that the latest technologies and techniques from the leading transaction banks are able to address.
Physical supply chains
Another key driver behind the development of FSCM has been the adoption of ‘just-in-time’ inventory models and similar production strategies in many industries. Such initiatives depend on close links between trading partners, where even the smallest disruption could prove damaging further up the chain. In this respect, financial flows and processes have not always kept pace with developments in the physical supply chain, and many corporates will find that there are significant benefits to be accrued though addressing issues in the financial supply chain and by making use of the latest technologies and techniques. Indeed, many corporates are now turning their attention to this area after feeling that they may have exhausted the current potential for making improvements to the physical side of their procurement and distribution arrangements.
A number of factors are currently placing Asia at the centre of the latest developments in financial supply chain management. Most of the key markets in the region base their strong growth on export-driven economies, and trade between Asian economies – as well as with the rest of the world – must clearly play a key role in sustaining this growth. Due to the wide geographies of the Asian economies and different currencies, languages and legal or regulatory frameworks, the supply chains of both local corporates and the multinationals tend also to be highly fragmented. In this respect, these Asian corporates may well have the most to gain by applying the latest FSCM techniques that can help overcome such disparities.
Aside from the issue of fragmentation, corporates and transaction banking practitioners doing business in Asia also face several other key challenges. Global trade flows have suffered since the financial crisis. And the way this trade is being conducted has also changed – the ongoing trend away from documentary credits towards trading on open account terms has, in some quarters, slowed in favour of a return to trusted risk-mitigation techniques such as letters of credit. This is certainly a reflection of the current increased sensitivity towards counterparty risks and the trend towards open account is a medium to long-term trend.
Exporting outside Asian borders
While there is certainly a place for the application of FSCM in intra-Asian trade, it is in trade between Asia and the EU or the US where the greatest potential benefits can be found.
For example, a common technique, known as supplier finance, works best when applied between large, well-rated buyers and smaller suppliers. Supplier finance leverages the buyer’s superior credit rating in order to provide the supplier with cheaper working capital funding, while the buyer can often benefit from improved payment terms. Such techniques rely on a good historical trading relationship between the buyer and supplier and make use of the latest web-based systems to maximise the visibility of – and hence control over – financial supply chain processes.
In Asia, the two key markets that are currently attracting the most attention from a FSCM point of view are China and India. Corporates in these markets, which were once considered less sophisticated in applying such techniques, have made a big leap forward. Many are increasingly making use of the latest technologies as well as improving process sophistication to levels that the EU and the US have been using for some time.
As corporates in China and India align their business practices with international norms, their demand for more complex FSCM solutions and related cash management tools are also increasing. A key area of activity for FSCM practitioners in these markets, especially in India, is to enable local corporates to move away from paper-based processes towards electronic systems which allows for further financial supply chain enhancements in their solutions.
While the challenges of doing business in Asia are considerable with issues of fragmentation and unpredictable trade flows, the key issue for corporates lies in selecting transaction banks armed with the ability to invest in technology and the local expertise through on-the-ground presence as well as a global reach and access to capital.