Published: November 01, 2014
China International Marine Containers (Group) Ltd (CIMC) has experienced considerable overseas business expansion in recent years, with 65% of revenues now generated from outside China. In 2013, the company was one of the first Chinese corporations to implement a multi-currency, multi-entity, notional cash pool with Bank Mendes Gans (BMG) offering considerable value in cash visibility, liquidity and FX risk management. In this article, Raymond Zhang, Head of Group Financing at CIMC outlines the background to this decision and some of their experiences so far, with comment from Norbert Braspenning, Managing Director Asia Pacific, Bank Mendes Gans (a subsidiary of ING).
CIMC covers a wide spectrum of activities from containers and vehicles through to energy, chemical and food equipment, offshore oil and gas and airport facilities. Over the past five years, we have structured our business into eight business segments, the cash and treasury management activities of which are managed through our treasury holding company. This comprises two divisions: cash management (which takes care of cash management, financing and bank relationships) and our financial service operation that is involved with group financing and leasing.
CIMC has been the world’s no. 1 container business since 1996, and this remains a core activity for the business. However, other parts of the business, such as specialist vehicles, are also growing considerably, both in China and overseas, such as in Europe. The business is also actively engaged in mergers and acquisitions (M&A). For example, CIMC is the no. 3 company globally in offshore (oil and gas) equipment manufacturing having acquired a Norwegian business in 2008. As a result of both organic growth and M&A, CIMC has become a global business, with 65% of our income now derived from international activities, with significant balances in EUR, USD and other currencies.
Given the growth of the organisation, and exposure to an expanding range of foreign currencies, we needed to create a new model for handling foreign currency balances across markets and manage our FX risk more effectively. Although we had had a cash pool in place for the previous two years, we needed a more effective way of managing our currency risk as well as cash. We therefore decided to implement two cash pools: a domestic cash pool in China, and an international cash pool, which is operated by Bank Mendes Gans (BMG), owned by ING.
There were a variety of reasons for selecting BMG to manage the international cash pool. We reviewed various options, and recognised that BMG’s multi-currency, notional cash pooling solution offered unique advantages in both currency and liquidity management, without impacting on our existing account structure.
CIMC was a pioneer amongst Chinese corporations as one of the first to adopt BMG’s solution. Although BMG is well-known internationally, particularly amongst multinational corporations headquartered in North America or Europe, the bank is currently less familiar to Asian, and particularly Chinese companies. However, we recognised that ING, with its subsidiary BMG offered the combination of innovative solutions, experience and expertise, commitment to our business and international reach that we required.[[[PAGE]]]
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The international cash pool is highly innovative in nature, and is structured as a multi-currency, multi-entity, cross-border notional cash pool. This means that we can link accounts globally into the cash pool and offset surplus cash balances to offset deficits, and net off foreign currency exposures. As physical balances remain in country, however, we do not incur withholding tax issues.
Since we started to implement the cash pool in 2013, we have taken a step-by-step approach. So far, we have connected around twenty of our Asian and North American entities, and expect to add entities in Australia, South America and Europe in due course. One of the most significant benefits of BMG’s cash pooling solutions is the ability to gain far better visibility over cash flows and positions across the business, so we are looking at how best we can leverage this opportunity to inform our cash and liquidity strategy and decision-making.
Although we have not yet implemented the cash pool across all of the regions in which we operate, we are already realising the benefits. In particular, we have achieved visibility over flows and balances across all of the entities that are connected so far. We are able to achieve our intercompany funding and FX risk management requirements whilst reducing our withholding tax liability, leading to a highly efficient solution that meets our current and future objectives.
There are a number of factors that have contributed to the project so far, and continue to do so as we expand the project scope further. While both CIMC and BMG bring different skills and experiences, we have worked closely together throughout the process, with common objectives. Both organisations have taken a flexible, pragmatic approach to implementation, and shared experiences and mutual respect.
Looking ahead, we look forward to expanding the reach of our multi-currency, multi-entity notional cash pool further, particularly into Europe where we have substantial activities, in order to leverage the benefits at a global level. In addition we are looking to integrate our group financing more closely into the cash pool, such as linking to our credit facilities.
Chinese multinational corporations that have grown their international business rapidly have less experience of global liquidity and FX risk management than their North American and European peers that have often grown over a longer period. Consequently, it is important to explore the opportunities to optimise liquidity and risk management with a partner bank that has the global solutions and specific expertise to support the business effectively. This may involve looking beyond traditional, familiar bank relationships to forge new relationships with banks such as BMG that are not headquartered in China, but understand in detail the issues of global liquidity and risk management.
Finally, it is important to be patient. New solutions, particularly those that are less familiar and/ or that have multiple stakeholders located in different parts of the world, take time to implement, so it is important to take a step-by-step approach and manage expectations accordingly. CIMC is proud to be an early adopter in China of BMG’s proven, well-established cash pooling solution and we look forward to extending the benefits further as we expand the geographic reach and depth of the solution in the future.
This is the third of three articles in TMI published by ING that provide in-depth insights into the challenges, opportunities and solutions for corporations expanding from their home market in Europe or Asia into new territories. You can find the previous articles in this series by clicking here and here.
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