Published: June 06, 2014
Before 2013, Future Electronics’ Corporate Treasury department managed highly fragmented pools of liquidity in Asia-Pacific through a decentralised model, which caused significant cash management challenges for the company. Mario Pizzolongo, Vice President - Finance and Treasurer, explains how the introduction of a new centralised notional pooling liquidity management structure optimised efficiencies throughout the region.
Future Electronics was founded in Montreal, Canada in 1968. Since then, the company has grown into a global leader in the distribution of electronic components, earning an impressive reputation for providing outstanding service and developing efficient, comprehensive global supply chain solutions. Today, it operates in 43 countries around the world. In Asia-Pacific, Future Electronics has a geographical footprint that spans across the entire region, operating through entities in 13 key markets, including a regional head office in Singapore. Given that a significant percentage of the company’s global revenue comes from within the region, Asia-Pacific is a very important market for the company.
Future Electronics’ success has largely been built on its commitment to maintaining close business partnerships with suppliers and customers, coupled with the strength of its commercial and technical competencies through all stages of the design-production cycle. However, the industry features a highly diversified product base, cyclical business patterns and higher-than-average volatility in terms of business flows, all of which can create challenges in terms of liquidity management. Further complicating the situation, Corporate Treasury oversaw cash that was extremely fragmented in Asia-Pacific due to the fact the organisation has legal entities operating in several countries throughout the region.
Historically, Future Electronics did not benefit from a centralised structure of funds in Asia-Pacific. There were isolated pockets of cash held across different banks and the domestic funding process was not optimal. The lack of visibility over cash positions was so acute that Corporate Treasury was not able to prepare the global cash position without the assistance of the regional office in Singapore. Reporting cash positions and the funding of domestic businesses was managed through manual processes.
In 2012, Future Electronics decided to completely revamp its treasury processes, including its financing strategy. Once the external sources of funding were reorganised and centralised under a structured arrangement, the focus shifted towards optimising the company’s internal liquidity. Future Electronics invited various banks to become a strong cash management partner after the company reviewed its key objectives for the project. In particular, Corporate Treasury wanted to:
• Centralise funds
• Reduce excess cash in the region
• Improve visibility over the cash position
• Reduce the cost of float
• Facilitate the repatriation of excess funds to North America
• Minimise external borrowing
• Reduce the number of banking partners
• Automate critical processes
• Centralise foreign exchange trading
• Reduce transactional costs
In order to achieve all of these objectives, it was essential that Future Electronics choose the right banking partner, capable of delivering a streamlined solution that was sufficiently flexible to adapt to the changing landscape in Asia-Pacific.
Future Electronics decided to issue a request for proposals (RFP) to a limited number of potential bank candidates. The company invested almost two months of work analysing the replies, evaluating the tax implications and ensuring that the replies were being compared objectively. The company chose HSBC not only because the bank could deliver an effective liquidity centralisation solution, but also because of the bank’s extensive footprint within the region. This enabled Future Electronics to maintain the same banking relationship centrally and locally as much as possible and paved the way for potential future expansion into new markets in Asia-Pacific.
Together, HSBC and Future Electronics developed a regional liquidity structure involving several participants from many countries in the region, as well as several different currencies. The liquidity structure facilitates the consolidation of surplus funds across multiple currencies and markets into a multi-currency, multi-national notional pool domiciled in Singapore. Funds are consolidated into the regional pool through automated cash sweeping arrangements that accelerate the centralisation of funds collected in various countries on the same value date without leaving behind any residual cash balances. Through this structure, Future Electronics is able to consolidate its liquidity in Asia-Pacific in its preferred currency (USD) and to repatriate these excess funds to North America within one business day, which allows the organisation to improve visibility over its cash balances and enhances access to internal funding.
On the disbursement side, funds are transferred directly from the regional pool of funds to the local disbursement accounts based on the daily funding requirements of the domestic markets. The funding requirements are approved by the regional office in Singapore on a regular basis. Funds are available to the local team in a timely manner to meet the local commercial obligations. This flexible solution allows the company to keep a minimum level of funds in its banking network.
There were several key challenges Corporate Treasury needed to overcome before the new liquidity structure was put into place, the first of which was developing the RFP itself. In order to mitigate the risk of unexpected surprises further down the line, it was essential that the company produce a highly detailed RFP that clearly outlined its main challenges, concerns and objectives. This required a clear understanding of the banking requirements of the local legal entities, not only in terms of Corporate Treasury needs but also operational needs.
The project also required extensive buy-in from internal partners. While many activities such as negotiating banking partners or evaluating tax implications can be completed at the treasury level, banking services must be implemented locally and it was important that company representatives recognise the efficiencies of the new structure. Therefore, the involvement of these representatives was critical and a key success factor.
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Geographically, the liquidity management overhaul was always going to be challenging because of the wide range of time zones spanned by the project. This was overcome with the efficient participation of the local teams. The extensive reach of the project also created challenges from legal and tax perspectives. The company needed to comply with a host of standard requirements associated with a basic notional pool of funds domiciled in Singapore. This had to be done without creating a potential tax issue for any of the pooling participants and had to be in line with the existing structured financing arrangements already in place. The implementation plan had to take into account the fact that banks are required to comply with a wide range of legislation such as “Know Your Client” and money laundering regulations around the world. These requirements are quite time demanding to meet.
Several individual markets in Asia-Pacific posed specific challenges, most notably India, which could not be added to the new structure due to current domestic legislation. Liquidity from markets such as Korea and China could not be added to the notional pool initially, but are now being included in the second phase after working closely with the respective national regulators to obtain the necessary approval and also due to recent relaxation in domestic legislation.
Finally, the sheer size of the project posed a challenge. The restructuring came from a single idea at the start. However, the number of people involved grew exponentially over time, which meant project management was complex.
Despite these key challenges, a suitable structure was designed by Mr Pizzolongo, who has orchestrated several similar projects in his career, and the implementation was run smoothly and efficiently without any impact on operations due to the new partnerships between the highly- dedicated teams at Future Electronics in Canada and Asia-Pacific and HSBC’s highly-experienced global team, who worked around the clock on several continents in order to ensure the structure was implemented on time. Having been in place for several months now, Future Electronics is starting to see some very real benefits from the new structure.
Thanks to the ongoing efforts of both the teams at Future Electronics and at HSBC, Future Electronics has now achieved all of, if not more than, the initial objectives identified at the start of the project.
Visibility has been improved considerably, which has enabled Corporate Treasury to monitor and control the company’s cash position.
Because Future Electronics now supports a range of currencies through the notional pool, it has provided flexibility to meet the funding requirements of the business across different currencies, which has resulted in fewer foreign exchange transactions and the costs associated with these transactions have been reduced.
The new structure has also helped to substantially minimise external borrowing. With full visibility of the banking network, Future Electronics can clearly see what funds have been collected on a daily basis in Asia-Pacific. This helps Future Electronics to better manage credit arrangements and to reduce the need for external funding, which saves extensive financing charges.
Future Electronics also saved money by reducing the number of banking partners within the region. Working with a smaller number of banks means that Future Electronics can seamlessly integrate its domestic operating accounts with its centralisation structure, and automated processes related to controls and risk management within the treasury function are now harmonised across the region.
Future Electronics’ centralised notional pool liquidity structure is more flexible and more appropriate to support the evolution of the company in introducing new markets, adding other currencies and adapting to the changing landscape in one of the world’s most diverse regions.
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