Published: September 01, 2012
Anyone hoping that 2012 would herald brighter economic horizons will so far have been disappointed. Economic stagnation is affecting both sides of the Atlantic, with extreme volatility in Europe. The effects of globalisation mean that no region is immune, but although growth in Asia, for example, has cooled, it has the policy tools available to rebound.
Despite anticipated growth of only 2.6% this year, which masks considerable differences globally, there is light ahead, particularly in emerging economies such as China that are likely to see some growth acceleration in 2013, supported by government policy stimulus. The dark clouds still sit over the west, however, as many economies are running out of policy tools with which to respond in the event of another shock. A potential rise in energy prices if, for example, relations between the United States and Iran worsen, ongoing challenges in Europe, lack of growth and huge government debt owed by the developed economies, equalling an average 105% of their total GDP, combine to form a ‘perfect storm’ of risk facing the global economy in 2013.
In this environment of ongoing uncertainty, OECD and emerging market multinational corporations (MNCs) alike are focusing on developing markets in pursuit of growth and potentially greater resilience. The working capital and risk implications of their changing footprints differ however, as do the bank solutions they require to address them.
Supply chain financing and receivables services
OECD corporates continue in their quest to remove working capital from their balance sheets to improve their key performance indicators. At the same time, they are looking to reduce costs and enhance the working capital cycle, including working with vendors and clients in emerging markets to move away from traditional trade methods such as letters of credit (LCs) to open account. This has an obvious knock-on effect for these counterparties. For example, smaller or lower-rated suppliers will have difficulty obtaining credit without an LC. Treasurers of large MNCs are sensitive to the need to meet their own working capital objectives but also to maintain the resilience of their supply chain by enhancing working capital across their entire ecosystem. Consequently, supply chain financing and receivables financing programmes are gaining traction, leveraging higher-rated companies’ credit standing to support the wider supply chain.
Liquidity tools
As OECD MNCs increase their business in regions such as Asia, a greater proportion of liquidity is accumulated in heavily regulated markets. These companies are therefore seeking solutions to enhance visibility over cash globally, accompanied with interest optimisation and/ or notional pooling solutions (depending on the country) that maximises the value of liquidity to the group.
Processing costs
When expanding globally, companies are seeking to avoid fragmentation of their operations and escalating costs. The need to maintain efficiency and control is driving the extension of financial shared services, as well as regional and global treasury operations, not only in Europe and North America but also into Asia and other emerging regions.
Local access
Finally, companies need appropriate access to markets in which they operate and have plans to grow. In many countries, comprehensive payment and collection services need to be underpinned with an extensive bank branch network, as opposed to relying on a few branches located in major cities. This is particularly important for new ventures involving smaller distributors in remote locations who prefer to be paid in cash and/or over a bank counter. Similarly, companies need timely access and full granularity of receivables information, requiring a banking partner with the necessary technology solutions and integration capabilities to facilitate automated account reconciliation and posting.[[[PAGE]]]
Strategic flexibility
MNCs headquartered in emerging markets have somewhat different working capital needs. While these companies are rapidly embracing the sophisticated treasury and finance technology and organisational structures such as regional and global treasury centres that their OECD peers have had in place for some time, the home country is often far more significant. For example, those based in heavily regulated markets such as China need to open treasury centres outside their home country, often in Singapore, Hong Kong or Europe, in order to deploy capital and liquidity efficiently across their international business units and access the wider financial markets.
Bundled finance
To increase their competitiveness, particularly in new markets where OECD companies have not yet established a strong presence, such as Africa, Latin America and parts of Asia, emerging market MNCs are seeking to boost competitiveness by bundling financing solutions with their products and services. For example, an Asian company attempting to sell a large mobile network to an African customer may compete equally on quality and price with its OECD peer, but will use bundled financing to gain competitive edge. This is particularly the case where the buyer is unrated or would otherwise have difficulty in obtaining financing. This requires a bank with sufficient strength of balance sheet but also the local presence and depth of business knowledge to understand and quantify the customer risk.
In a global business environment, risks are not restricted to a single region and it is likely to be some time before the crisis afflicting most of Europe and North America eases. The emerging regions of Asia, Latin America and Africa are not immune from economic ricochets, but the impact is gentler and the longer-term outlook remains very positive. In this environment, companies headquartered in all parts of the world need to direct their business strategy, and the treasury and finance strategy that underpins it, towards reduction of volatility, growth and sustainability.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
