Published: November 01, 2010
Indeed, the experience of the financial crisis and tighter liquidity means that this back to basics approach on cash and how it is managed is now a board level concern: not only CFOs and treasurers, but also CEOs, want to know where their company’s cash is at any given time, who the company’s counterparties are, how their cash is collected, and the risks inherent in the company’s processes. There is a huge appetite for information and knowledge that can be used to improve liquidity.
Clear, accessible information — delivered in a timely way using a consistent format — is essential to be able to make informed decisions. As the world moves out of recession and into a new global growth environment dominated by emerging markets such as India, China, Brazil and the Middle East, information has become ever more important. These markets are often highly regulated and it is crucial to understand the implications of that in terms of moving cash.
Notwithstanding regulatory barriers and exchange controls, developments in technology mean there is now the potential to deliver control and visibility of cash positions located almost anywhere in the world. However, surprisingly many large multinationals still do not have structures in place — outside the developed banking markets of North America and Western Europe — to enable them to oversee and manage their cash globally.
Necessarily the challenges associated with gaining control and visibility of cash in rapidly growing markets such as Asia, Latin America, the Middle East and Africa are greater than in developed markets with mature banking sectors. Moreover, it is important to understand that these markets are very different — not only from more developed markets where companies have operated centralised cash management structures for decades — but from one another.
Working out what treasury model is most advantageous for a company can be a significant challenge. Often industrial companies are decentralised and have complex corporate structures. For example, in the auto sector, there may be multiple entities in a single country that are involved in manufacturing, sales, re-selling, franchising and finance. In addition, there may also be scores of companies operating as part of the manufacturing supply chain.[[[PAGE]]]
With companies now more global than at any time in the past, many are asking whether they still need people on the ground to manage local regulatory and compliance issues. In emerging markets the answer is invariably yes. Local treasury hubs are essential for many large industrials companies because of time zone concerns and issues associated with trapped cash and the regulatory environment.
Corporates in all industrial sectors need to assess the extent of their business in these new markets in order to understand the scale and growth potential of their operations. They then need to consider whether it is worth investing to gain control of their cash and liquidity in these countries and regions. This process must take into account the potential regulatory and tax issues, but ultimately must be driven by the potential economic benefits to the company.
Companies in the industrials sectors are increasingly finding that the scale of their operations in China, for example, warrant the creation of a treasury hub in-country separate from the rest of Asia. Similarly, depending on the scale of their operations in Brazil, some companies are realising that it makes sense to separate it from the rest of Latin America or that it is appropriate to set up a hub in Dubai covering the Middle East rather than trying to manage it from Europe. Essentially, the decision comes down to the importance of visibility in that particular market to the overall group.
This new thinking does not affect existing treasury hub structures in Western Europe and North America, which have developed over many years and are effectively set in stone. However, it does run contrary to common practice over the past decade, which has relentlessly emphasised the importance of centralisation through shared service centres and common ERP systems, for example.
What has changed is the focus of many businesses. Strategies focused on centralisation were developed to address developed markets in North America and Western Europe. Both of these regions are essentially homogenous in terms of rules, requirements and operating conditions (in Europe, this process has been driven by integration of the EU economy). In contrast, Asia is far from homogenous.
While it is important to consider the diversity of countries in which a company operates and develop treasury structures accordingly, that should not be at the expense of visibility and control. While day-to-day treasury management might be conducted in China, for example, because it is becoming a core part of the company’s global revenues, it is essential to be able to aggregate the information from China with operations elsewhere in the world.
The transportation sector, which includes passenger travel, freight and logistics by air, sea or land, is central to the globalised economy. Indeed, its importance was highlighted by the volcanic ash cloud over much of Europe, which grounded flights for weeks. Many technology and automotive companies struggled to find alternative ways to get components to their factories in order to meet just-in-time manufacturing schedules.
Trade routes have been opened that only a decade ago would have seemed unlikely, if not impossible.
The transportation sector inevitably goes where its customers need it to operate. Consequently, in recent years, customers’ supply chains have become ever more complex and disparate, so the operations of transport companies have had to expand to cover ever larger swathes of the world on a more routine basis. Trade routes have been opened that only a decade ago would have seemed unlikely, if not impossible.
The challenges faced by transport companies are therefore the same as those faced by their clients. As global trade expands, new facilities (such as ports) will be required and they will need capital expenditure. Raising finance for such expansion can be complex and challenging and may involve credit export agencies, which have become increasingly important in the wake of the financial crisis, debt finance from banks or capital markets, or use of internally generated cash.
From a treasury perspective, transport companies also face similar challenges as their clients. As they expand into new markets, they need to consider how they will manage new cash flows from operations. Will a team be required to manage them in-country? If so, will they be local hires or will international expertise be necessary? To what extent will it be possible to take cash out of the country, and if it can be taken out, how will it benefit the group?
One logistics company that effectively addressed the challenges it faced in its invoicing and billing process in order to improve efficiency is Cargo Network Services, a subsidiary of the International Air Transportation Association. It introduced an electronic billing and payments solution that transformed the company’s air-freight bill-payment process. The solution shortened days sales outstanding by at least 10 days and reduced air carriers’ invoice presentment and collection costs by 18%.[[[PAGE]]]
The complex nature of automotive construction makes it the archetypal industrials sector in terms of highlighting broader trends. For example, a leading global automotive manufacturer has announced plans to open a new plant in China in response to a phenomenal growth in sales: the company expects sales to quadruple over a one-year period. Facilitating that growth — and the construction of a new plant — is inevitably a major challenge.
Automotive companies expanding their manufacturing capabilities into China in order to significantly increase capacity, are likely to require funding for capital expenditure and careful consideration of treasury requirements as their businesses grow. Given strict regulations on cash management in China, corporations will need to assess how cash can best be used in-country, and how they can continue to benefit their groups should the funds be required to remain there.
Automotive companies expanding on such a scale should also effectively manage their supply chains. For example, they must be flexible in their approach to sourcing materials. Initially, sourcing components for production may be done both locally (for instance, in China) and from Europe, but as the scale of production in China increases, it may become financially efficient to source a greater proportion of parts domestically. However, an expanding company needs to be aware of the potential implications of such a decision in terms of quality control and consistency.
Similarly, companies will need to consider the credit risks associated with new suppliers: an assessment of the robustness and quality of suppliers must extend beyond the parts they will produce for their cars. Auto manufacturers must also make decisions about costs. Will it aim to source parts at a lower cost to those sourced in other regions? What payment terms will it set for suppliers in China and how do they differ from common market practice?
More generally, automotive manufacturers are under pressure as they expand overseas to continually innovate, especially in relation to environmental performance. Given the financial constraints that many companies in the sector face, such a responsibility can be onerous. Freeing up cash for new investment in plant and model design through more efficient management — and ensuring a cost effective supply chain — is therefore crucial.
Many of the world’s largest engineering firms are already among the most global of all companies — often operating in more than 100 markets. Nevertheless, the pace of their expansion internationally continues to accelerate. In particular, infrastructure spending in the Middle East — not least associated with the reconstruction of Iraq — and Asia is booming as countries struggle to keep pace with rapid economic growth.
Similarly, in the US, infrastructure spending is a core element of the economic stimulation package designed to re-start the economy following the financial crisis. The American Recovery and Reinvestment Act is thought to be worth $787bn and covers roads, bridges, public transport and dams, as well as the electricity grid and investment in alternative power generation: the package is the largest since the 1950s when the inter-state highway system was created.
What is dramatic about this wave of infrastructure spending is the nature of the companies that will be involved in it: six out of the world’s top 10 infrastructure companies are now Spanish. Consequentially, some of those companies currently bidding for toll road contracts in Texas will be operating in the US for the first time, and should they be successful in their bid, could see familiar issues of how capital will be raised and how they will manage cash.
In such circumstances, it can be essential to work with a bank that not only understands the home market of the company expanding but is an integral part of the market it is expanding into. Similarly, expansion overseas — especially in the areas of engineering, manufacturing and construction — may require a joint venture. Understanding and managing the counterparty risk of joint ventures — and ensuring confidence in the associated cash flows — often require the involvement of a trusted third party, such as a bank.[[[PAGE]]]
The financial and economic crisis has undoubtedly opened a new chapter in the world’s economic growth. The relatively strong growth of major emerging markets such as India, China and Brazil compared to weak growth in the US, and especially in Europe, is rapidly changing the dynamics of world trade. There is a realisation among companies in the industrials sector that emerging markets are going to drive global growth for the foreseeable future.
This new era of globalisation has resulted in a reassessment of how companies need to operate and manage their cash. Globalisation was once perceived to mean that operating conditions would eventually be effectively the same in all countries. In a world where China has overtaken the US as the world’s largest automotive market, that is clearly no longer the case. Instead, globalisation is about accessing markets and making decisions based on local circumstances.
The only constant across all markets in which a company operates must be information. While cash may not be easily transferable from some emerging markets, timely and accurate data is. Consolidation of that data is the key to success in the new global economy. Without that aggregated information, companies cannot make effective and informed decisions and therefore cannot continue to prosper in what is an ever-more competitive environment.
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