By Ziad Kabbara, Global Sector Head, Transportation, Aviation and Logistics, Global Liquidity and Cash Management, HSBC
The Transportation, Aviation and Logistic (TAL) sector is currently undergoing various substantive changes. Collectively, these changes are providing opportunities for TAL company boardrooms and their corporate treasuries alike. Ziad Kabbara, Global Sector Head, Transportation, Aviation and Logistics, Global Liquidity and Cash Management at HSBC, outlines some of the ways of seizing and capitalising on these opportunities.
M&A activity, cost base reduction, unfamiliar markets and new technology are just a few of hurdles facing TAL sector treasuries today. Nevertheless, any treasury that surmounts them is also opening the door to multiple opportunities and benefits. Collectively, these hurdles require considerable focus in terms of both cost and available resources, so many TAL treasuries make use of some external assistance to meet their operational workload. This makes a TAL treasury’s choice of partner bank critical to its success in supporting the business with efficient financial processes and adequate working capital, as well as seizing the associated opportunities.
M&A activity: implications
M&A activity in the TAL sector has been increasing recently and very substantially in some TAL sub-sectors. For instance, global transportation and logistics saw 284 deals in 2017, representing an increase in volume over 2016 of 18%1. Excess capacity in the transportation (shipping) sub-sector coupled with weak demand and the resulting consolidation were important drivers of this increased M&A activity, with the largest deal during Q2 2017 being for USD6.3bn. The aviation sub-sector (including aerospace and defence) had a record USD72 billion year for M&A deal value in 2017, surpassing the previous record of USD67 billion established in 20152.
M&A activity represents opportunity for the business as a whole, as well as treasury. In the short term it causes an increase in workload for corporate treasury. In some cases, literally hundreds of bank accounts have to be opened and closed, data from ERP and treasury systems have to be consolidated/normalised, numerous authorised signatories have to be changed, liquidity structures need to be revised, all in a short time scale. However, a successfully managed integration process can also deliver numerous longer term benefits, such as streamlined processes and an enhanced working capital position.
In common with treasuries in many other sectors, TAL treasuries are typically small teams, yet handle a myriad of tasks. Treasury may have been allocated some extra budget to handle M&A integration, but treasury personnel usually have to on board/dispose of an acquisition/disposal in addition to their existing day to day workload.
M&A activity: reducing the workload
This is a scenario where the right bank can have a large beneficial impact by assuming some of the workload. A suitable bank for this situation will have dedicated teams capable of working up and implementing detailed project plans, while being able to minimise any business disruption during the transition. They should also be able to accommodate the globally diverse nature of the TAL sector in the context of technology migration. This involves providing in-country local language specialists who are formally qualified in major ERP and treasury systems and SWIFT, as well as having experience in migrating legacy technology.
The wide geographical footprint of many TAL M&A deals today also makes the breadth and depth of a bank’s network a key success factor. An appreciable proportion of TAL M&A activity is taking place in jurisdictions that may be unfamiliar to the acquirer and this trend is likely to continue given current macroeconomic factors (see “The economic and political environment: new opportunities” below). Therefore, TAL treasuries may find that they need to integrate assets in unfamiliar locations in remote time zones. This is considerably easier to do if supported by a bank with the necessary network footprint and global co-ordination skills to support this type of remote integration. Better still, if the bank can focus all this expertise down to a single point of contact in the same location as the treasury, then the treasury team will not have to waste valuable time calling bank offices in remote locations to check/chase progress.
A final important element in the M&A puzzle for treasury is time, or rather the lack of it. Acquisitions are often funded by capital markets or bridging finance, which makes it imperative to release as much internal liquidity as possible as quickly as possible from a new acquisition in order to minimise funding costs. A bank with a strong intercompany loan management solution can materially assist here, because this will streamline the incorporation of new entities and save time, as well as reducing the risk of accidentally falling foul of thin capitalisation rules.
Another area where a bank can help in meeting tight timelines is with the quality of its internal co-ordination. This especially pertinent if the same bank is providing funding and/or advisory for an M&A deal3. If this is the case, much time can be saved by a well organised internal handover, since a faster start can be made on integration planning, thereby also reducing the time required to access internal liquidity from the acquired entity.
Costs, cash and liquidity
While the impact of increasing M&A activity affects all three TAL sub-sectors to a similar extent, there are other issues that affect some more than others. Costs and cash availability are generic themes for treasurers in all business sectors, but at present they are particularly germane for the transport sector. Despite lower oil prices, industry overcapacity is still squeezing profitability, so the pressure is on to cut costs across the board, including with financial processes. The good news is that with the right banking partner, this is relatively easy to achieve.
For example, the transport sector has historically tended to make extensive use of international (and costly) wire payments. A growing number of transport treasuries are looking to reduce this cost and increase efficiency by asking their banks for better alternatives. A bank with a sufficiently extensive network and local clearing memberships can deliver this by receiving a single payment file from the client which is then automatically split by country. Then each set of payments for each country is routed internally within the bank to the appropriate local in-country office, where they are executed as low cost local payments. The irony here is that a growing number of countries are implementing low cost immediate payment systems, so the speed of payment may actually be as fast as a conventional wire payment, while costing perhaps only a sixth of the price or less.
The TAL sector – but especially the transport sub-sector – has become increasingly focused on cash. Many transport companies previously took a fairly relaxed view of cash positioning, with reporting conducted perhaps monthly. As cash has become tighter, this has changed, so that it is commonplace for these companies to report cash weekly or even daily. This has in turn driven increasing focus on real-time treasury and the technology required delivering that.
At first glance this doesn’t appear easy, because with margins tight, obtaining investment for new treasury technology isn’t straightforward. However, with ERP and treasury management systems now available on software as a service basis, major capital investment is no longer necessary. Some treasuries are leveraging this new form of software delivery, but there still remains the task of implementing the new technology so that corporate cash globally is immediately visible centrally. The good news is that this is an area where a bank with the right network and technical expertise can make a considerable difference by helping to pull together all the necessary connectivity and information.
Transport companies tend to have a different approach to liquidity management from aviation and logistics companies. While the latter two sub-sectors are inclined to have relatively tight centralised control of corporate liquidity, transport companies have often been content to grant their local operations considerable autonomy with their liquidity. It
may be that this variation is due to differences in ownership structure: while major logistics and aviation companies are usually publicly listed and so subject to extensive scrutiny, this is less true of even large transport companies, which are often privately owned.
1 https://www.pwc.com/us/en/industry/transportation-logistics/publications/quarterly-deals-insights.html
2 https://www.pwc.com/us/en/industrial-products/publications/aerospace-defense-quarterly-deals-insights.html
3 Subject to appropriate observance of Chinese walls and related governance procedures
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Payables and receivables
Transport also differs from aviation and logistics in that many companies still make extensive use of paper processes for payables and receivables, rather than the electronic processes now commonplace in aviation and logistics. Nevertheless, aviation and logistics are by no means entirely electronic. Some aviation companies still use cheques for paying for certain items such as uniforms or catering, and they also use commercial cards for tasks such as emergency payments (e.g. accommodating passengers on flights that have been diverted). While major logistics companies are now mostly electronic, their US operations typically still have to process a large number of cheques from customers, using a combination of lockboxes and remote deposit capture.
The growth of new instant payment systems can be of substantial assistance here. At present, 43 countries have live instant payment systems, with a further 13 reported to be planning them4. Apart from their speed, many of these new systems also offer much larger capacity for free form text that can be sent along with payments, so it is now possible for remitters to add a comprehensive list of invoices covered by the payment.
This fits particularly well with a further potential opportunity on the receivables side that has much to offer the aviation and logistics sub-sectors: the Next Generation Virtual Account (ngVA). By giving customers their own unique account number to pay to, treasuries can be sure of reconciling accurately to the customer level. However, when coupled with the additional information that can be sent by instant payment systems, automated reconciliation down to the invoice level is also possible. Furthermore, ngVAs now also provide a degree of self-service. Clients can potentially open and close ngVAs as needed themselves, which can be extremely useful for creating liquidity management structures on the fly, as well being a good way of centralising control and visibility of payables and receivables.
The economic and political environment: new opportunities
Current economic and political factors have a strong bearing on the TAL sector. New or wider trade corridors within Asia, as well as at a regional level such as between Asia and MENA, are likely to present considerable business opportunities for the sector. This is partly because these corridors are becoming far more diverse and multilateral than in the past, so for business to flow efficiently along them, the TAL sector will be a key enabler.
While this is obviously good news at a corporate level, if a TAL sector company is moving into new countries to facilitate servicing these corridors, treasuries may find themselves operating in unfamiliar jurisdictions. New local regulation, business practices, payment systems and so on will have to be mastered. A bank with a comprehensive network can help flatten the learning curve by sharing its local in-country expertise in these areas, thereby increasing the probability that any new international expansion will be successful.
Technology
Technological innovation looks set to have a major impact on the TAL sector in the near future, especially for logistics. New players are moving in and leveraging new technology to improve delivery performance. Two prominent areas where this is happening are robotics, such as where robots are being used to load/unload (and even potentially drive) trucks, and the use of drones for deliveries.
This combination of new technology and the different mindset of the new players leveraging it are also changing consumers’ and businesses’ expectations. The concept of waiting two days for a delivery is not acceptable, especially for younger consumers who expect intra-day or perhaps even intra-hour delivery timelines – and not necessarily even to a fixed address, such as a home or office.
As a result, not only do businesses in the TAL sector have to adapt their business models to accommodate this shift, they also have to adapt their financial processes. An increasing percentage of their payment traffic (especially from consumers) is likely to come from newer payment channels such as mobile and wallets.
This is an opportunity for TAL treasuries to reduce costs, as well as to increase straight through processing and auto-reconciliation rates. An indication of the possibilities can be seen in India’s Unified Payments Interface (UPI). The Reserve Bank of India has stipulated that banks wishing to use UPI may only do so if they act as both originator and collector of payments. Therefore, retail customers will have the option of being able to embed their bank accounts in third party providers’ applications, as well as their own banks’ applications.
Conclusion
The TAL sector clearly faces significant changes on various fronts, many of which also throw up important opportunities for their treasuries. The tools and solutions treasuries need to manage these changes successfully are readily available. In some cases, treasuries will be able to implement these in-house themselves. However, where this isn’t possible, the right banking partner can help significantly by sharing the burden.
This support is particularly valuable given the upbeat business outlook for the TAL sector. As outlined above, the economic and political environment is likely to throw up new opportunities as trade corridors expand and develop. In addition, the more general macroeconomic prospects for 2018 look promising, with both developing and established economies already showing signs of solid GDP growth5. The net result is that TAL treasuries will have plenty of opportunities to deliver value by increasing automation and streamlining processes.
4 https://www.instapay.today/tracker/ (as of February 2018)
5 https://www.bloomberg.com/news/articles/2017-08-18/malaysia-s-gdp-growth-beats-forecasts-as-economy-expands-5-8
https://www.ft.com/content/ab8f0035-6ed9-3fce-9781-f6d6fe52fd5d
https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
https://tradingeconomics.com/china/gdp-growth-annual
