The Next Generation of Asian Treasuries?

by Helen Sanders, Editor, TMI

One of the most significant outcomes of globalisation and the development of markets in Asia is the emergence of Asian multinationals as companies with a strong domestic presence pursue growth opportunities both across other parts of the region, and beyond. While many North American and European corporations measure their international growth journey in decades, many of their Asian counterparts can use the fingers of one or both hands to demonstrate comparable expansion. Not only are companies experiencing organic growth, but M&A in Asia is rapidly approaching levels more familiar in the west: in 2015, M&A by Asian corporations across a range of industries grew by 60% compared with 2014.

Key to the longer-term success of an international strategy is effective cash and treasury management to manage liquidity and risk across markets. Consequently, given the pace of change, treasurers of Asian multinationals need to focus on how they create treasury functions that will support their international growth strategy today, and in the future. These treasurers do not have the comparative luxury of years of incremental change, but need to react quickly to maintain visibility and control over cash, avoid exposure to liquidity and market risk across the countries in which they operate, optimise working capital and preserve operating margins.

Building efficient treasury functions has been a lower priority for many Asian multinationals in the past compared with pursuing growth. Today, this has changed. Unprecedented volatility in both financial and commodity markets, regulatory change, and the emergence of new business models in which the ability to harness innovation quickly creates competitive advantage are converging at the same time, with the result that treasury has never been more important. So what should treasurers of Asian multinationals be doing to position their business for further international growth, whilst also preparing for the inevitable challenges that doing business internationally brings?

Changing priorities

Inevitably, there is as much diversity amongst Asian corporations as there is amongst North American and European businesses. Consequently, every treasurer will find her or himself with a somewhat different ‘to do’ list depending on factors such as treasury’s maturity, organisational structure, cash flow dynamics and corporate strategy, amongst others. As Kee Joo Wong, Regional Head of Global Payments and Cash Management, HSBC warns,

“The term ‘Asian’ multinational is somewhat of a misnomer, as not all corporations are at the same stage in their international growth strategy. Some corporations headquartered in Japan and Korea, for example, expanded offshore many years ago in some cases, whereas today, corporations in China and parts of ASEAN have only recently embarked on this process.”

As Andrew Bateman, Head of Treasury Software Solutions, FIS continues,

“It is important not to generalise too far when identifying treasury and technology trends amongst Asian multinationals, as these inevitably differ by industry, geography and the maturity of a company’s international growth strategy, amongst others. However, cash and liquidity management is usually top of mind for Asian and western multinationals alike, closely followed by risk management, particularly FX risk management. Beyond this, various nuances exist. In North Asia, for example, such as China, managing the impact of regulatory change is typically a key priority, as is managing interest rate exposure. In Australasia, which has a longer heritage in treasury technology, interacting with core banks and managing commodity exposures is often more important.”

A key characteristic of many Asian corporations, however, is their international ambition. Bruno François, Head of Transaction Banking, BNP Paribas China emphasises,

“Trends and priorities amongst Asian multinationals will inevitably differ, not least due to the country of incorporation. For Chinese companies, for example, state-owned enterprises (SOEs) are actively pursuing the ‘go global’ strategy promoted by the government in response to slowing growth in China and the need for diversification. This applies not only to the largest, well-known names, such as Huawei, but smaller, less well-known enterprises too.”

With internationalisation a widespread objective, and despite inevitable differences across organisations, the core treasury tenets of liquidity and risk are universal, irrespective of the maturity, reach and background of a company. Treasurers’ specific priorities and the way in which these are manifested may differ, as Kee Joo Wong, HSBC says,

“Multinational corporations globally, wherever they are headquartered, typically share similar treasury priorities, namely visibility and control over liquidity and risk. A key difference however, which often characterises multinationals headquartered in parts of Asia, is where they are in their international expansion journey and therefore the degree of treasury sophistication that they have in-house to facilitate this international strategy.”

Centralise to globalise

International expansion can result in fragmentation of processes and controls, replication of technology and operational capacity, and loss of visibility and control over liquidity and risk, particularly when growing through M&A. Consequently, establishing visibility and control over cash and risk is typically a first priority for treasurers. There are different approaches to achieving this, such as rationalising bank relationships and accounts, implementing liquidity structures such as cash pooling to bring cash into a single location wherever possible, and putting in place bank communications technology to bring this information together. Achieving these objectives is often easier in a centralised cash and treasury management environment, whether regionally or globally, as treasurers have a greater ability to influence transaction and information flows, manage bank relationships and accounts, and improve efficiency and control over processes and decision-making. Furthermore, it is easier to integrate new business units that result from M&A without loss of operational or financial control.[[[PAGE]]]

Despite the potential advantages of cash and treasury management centralisation, the business culture and organisational structure of many Asian multinationals can make it difficult for treasurers to convince senior management of the business case. Kee Joo Wong, HSBC illustrates,

“An obstacle to centralisation is that the organisational culture in the past may have allowed considerable local autonomy both in operational and decision-making terms. Companies at an earlier stage in their centralisation process, particularly the larger conglomerates with diverse business activities, often find it more difficult to enforce a centralised approach to cash and treasury management, particularly if there is a lack of proactive senior management support.” 

As many Asian multinationals are now experienced in M&A, there is likely to be a stronger trend towards treasury centralisation

As Bruno François, BNP Paribas notes, however, centralisation is often a medium- or longer-term goal, and as many Asian multinationals are now experienced in M&A, there is likely to be a stronger trend towards treasury centralisation,

“M&A is a significant means by which Asian corporations are expanding their international footprint, but for the first two or three years, these companies typically allow the acquired business to continue as they had done previously. After this time, senior executives start to look at potential synergies and influence the management and strategy more, which has an impact on cash and treasury management. This tends to result in corporations operating along more similar lines to foreign multinationals, including centralisation into SSCs, payment and collection factories, and RTCs, and rationalisation of bank relationships.”

Internal barriers to centralisation are also compounded by external, regulatory challenges, and potentially the lack of solutions from core banking partners. However, the regulatory environment is becoming more favourable to centralised treasury centres and/ or shared service centres, as Kee Joo Wong, HSBC discusses,

“One of the most significant challenges, but also opportunities, that treasurers of Asian multinationals face is keeping up to to date with, and complying with, changing regulations, both in their home country and those in which they do business. While this can create complexity and therefore uncertainty, there are emerging opportunities to establish regional or global treasury centres in locations that may not have been feasible before, not only Singapore and Hong Kong, but also Thailand and Malaysia amongst others.”

However, as Bruno François, BNP Paribas adds,

“These companies are learning quickly as they pursue their international strategy. Typically, they start by trying to continue with cash and treasury management approaches that they have used domestically, but they are quick to change when they realise that a different approach is required. Consequently, some of the largest and best-established Chinese multinationals (and those headquartered in other parts of Asia) have achieved comparable treasury sophistication to their western peers.”

Extending bank connections

While centralisation is a valuable step for many Asian multinationals in establishing visibility and control over liquidity and risk, the right banking relationships, with the resulting account and liquidity structures is another. This applies irrespective of the degree of centralisation. As companies expand internationally, they need access to cross-border solutions, expert advisory services and cash management solutions in new markets, that existing local banks with which they have built relationships historically may not be equipped to provide. Kee Joo Wong, HSBC outlines,

“Corporations in Asia have often adopted a different approach to bank relationships from their western peers in the past. For example, while many companies in the United States and Europe have taken a more transactional approach, treasurers in Asia typically take a primarily relationship-driven approach, focusing for example on a strong requirement to balance local banking relationships rather than a primarily capability-based evaluation approach. They often have more appetite for bilateral financing relationships, and a banking panel comprising a number of legacy banks as well as increasingly some global banks. While this brings some advantages, it can compromise attempts to centralise cash, control and achieve operational efficiencies.”

This is not to say that the local bank relationships are no longer valuable; rather, treasurers may need to supplement these long-standing, trusted relationships with international banks that offer cross-border liquidity and risk solutions, and domestic solutions in other markets. Bruno François, BNP Paribas comments,

“Asian multinationals’ appetite for working with global banks rather than domestic or regional players depends largely on the maturity of their treasury activities and their geographic reach. Japan – China flows are managed almost entirely by Japanese banks. There is a similar situation between Korea and China from a cash management perspective, but there is more scope for other banks in supporting supply-chain financing solutions and balance sheet optimisation. Thailand is a difficult market for foreign banks as there are a large number of local banks, but there is strong demand for global banks’ services amongst Thai conglomerates as they build their business in China, such as cross-border cash pooling solutions. Territories such as Singapore, Taiwan and others are open to both foreign and Chinese banks, so long as there are good relationships in place between the bank and the company’s head office. In this respect, the quality of a bank’s advisory services, as well as banking solutions, is essential.”

He continues,

“In general terms, international cash management, supply-chain solutions and balance sheet optimisation are the areas most in demand from foreign banks, as these are less widely available from local banks. As corporations expand internationally, they are keen to leverage foreign banks’ network and solutions in regions such as Europe, and use these banks’ Asian centres as a springboard into these regions.”

Loic Senechal, Head of Cash Management China, BNP Paribas adds,

“The role of international banks as advisors, rather than simply providers of infrastructure and banking services, will come to the fore. Most of the solutions themselves are likely to be the same as today, but banks need to relate these more specifically to the needs of each client, and the countries in which they operate. Specific regulatory conditions will also have an impact on the banking landscape. In Indonesia, for example, banks are obliged to onshore some of their transaction banking activities, which could lead to fewer international players due to the level of investment required.”

Western banks cannot be complacent, however, and assume that an influx of Asian corporate business will come their way. Inevitably, Asian banks are not standing still and watching while other banks take on their clients’ international business. As Bruno François, BNP Paribas says,

“It is not only Asian treasury functions that are at a different stage in their evolution, but also Asian banks. While many Chinese SOEs expect to work with the banks that have supported them domestically, these banks lack the network and solutions to support them internationally. The leading Chinese banks are now setting out to build an international network to accompany their clients’ international expansion, but they are experiencing many of the same challenges that foreign banks have encountered when expanding overseas, such as the investment required to establish the necessary infrastructure, and compliance with local regulations. As a result, many banks are seeking to establish partnerships with leading banks in other regions, such as BNP Paribas in Europe, to share infrastructure in each other’s regions.” [[[PAGE]]]

The technology edge

While the right treasury organisation and bank relationships are key elements in building an effective treasury function, the role of technology has never been as important as it is today. Kee Joo Wong, HSBC says,

“One of the drivers of this leap in treasury and technology sophistication is M&A, which often forces treasurers to deal with more complex requirements in new or less familiar markets. There is also an increasing need for treasurers to build up a ‘war chest’ and quickly mobilise corporate cash to support these activities. Treasurers recognise that existing manual processes do not allow the appropriate level of scalability and sophistication that this involves, and are therefore seeking to invest in more advanced treasury structures and technology. However, as these organisations may have little prior experience of treasury centralisation and treasury technology adoption, it can be difficult to educate senior management and create a convincing business case to apply for the necessary budget.”

Creating a credible and robust business case requires experience and insights into industry best practices which, bearing in mind that many Asian treasury functions have been established relatively recently, may be less readily available internally. As a result, international banks, consultants and vendors are playing an increasingly important role. Kee Joo Wong continues,

“Treasurers recognise the opportunity that technology offers, and are turning to their banks for advice on how best to leverage these opportunities and supplement their in-house expertise.” 

Similarly, Andrew Bateman, FIS notes,

“We are seeing significant demand not only for our solutions and technical expertise, but also our advisory services, drawing on many years working with clients to shape and implement industry best practices.”

Not only are companies seeking advice on the business case for technology solutions, but bearing in mind that technology itself will not result in efficient treasury processes and policies, they are using the opportunity to review and revise policies and processes so that they can harness the value of technology as effectively as possible.

At the first, and most basic level, treasurers need a core treasury management system (TMS) to manage cash, liquidity and risk, with robust, secure bank connectivity. Kee Joo Wong, HSBC suggests,

“Many of these treasurers will be adopting specialist cash and treasury management technology, including bank connectivity and liquidity management techniques, for the first time, having relied on spreadsheets, in-house tools and personal judgement in the past.”

Andrew Bateman, FIS agrees, noting however that just as business cultures, treasury maturity and organisational structures and bank relationships differ, there are also considerable differences in the existing level of treasury technology sophistication across companies headquartered in Asia,

“Companies headquartered in Japan and Australasia, for example, often have a long history of international expansion and therefore have comparable levels of treasury technology sophistication to their western peers. Corporations headquartered in other parts of Asia are often at an earlier stage in their international growth strategy, so in many cases, they are implementing treasury management systems and electronic bank connectivity for the first time.”

There are a series of changes taking place, however, that are resulting in treasury technology adoption becoming more important. Firstly, as a younger generation of tech-savvy executives becomes more influential corporate attitudes towards technology investment in Asia are also shifting, as Bruno François, BNP Paribas describes,

“While treasury priorities globally are broadly similar in terms of liquidity and risk, Asian corporations’ use of technology is a differentiating feature. While many, such as those headquartered in Taiwan, are extremely sophisticated in terms of product design and development, they have been far slower to embrace treasury and banking technology. It can be a major cultural shift to move away from hard copy payment instructions and manual finance processes, but increasingly they recognise this is essential to create economies of scale, improve the security by using dematerialised means of payment, and facilitate international expansion. In countries such as India, the use of mobile payment technology, for example, is growing quickly, so corporations increasingly expect the same degree of automation and convenience in their business operations as they enjoy as consumers.”

Secondly, selecting and implementing treasury technology is quite a different proposition even compared with five years ago. For example, new ways of deploying technology create opportunities for companies of all sizes, IT appetites and degree of treasury centralisation, as Andrew Bateman, FIS outlines,

“There is often mention of how Asian corporations have the opportunity to ‘leapfrog’ the technology evolution that western companies have been through over the past decade or more. This is true to some extent as treasurers of Asian companies can cut out many of the steps in their technology journey. However, this does not mean that all treasurers end up at the same destination, whether in terms of their functional requirement or technology deployment. For example, while some companies opt for SaaS (software as a service), others prefer a private cloud-based or installed solution. While companies’ IT policy is one of the factors which will influence this, there are also regulatory conditions that may make one of these options more attractive.”

These developments are critical for many Asian corporations adopting treasury technology for the first time. In markets where it is feasible to implement or access cloud- and SaaS-based technology, it may be easier to create a business case, given that less IT resource is required, maintenance and upgrades are outsourced (in the case of SaaS solutions and with vendors that provide managed services) and it is often easier to be more selective in the functionality that is accessed initially, and developed later on, making the return on investment easier to calculate.

The common characteristic amongst Asian multinationals as they define their cash, treasury and risk management strategy is ambition. 

Thirdly, market opportunities for efficient payments and cash management are continuing to develop across Asia, such as CIPS (China Cross-border Inter-Bank Payments System) in China, and emerging instant payment solutions in Singapore and Australia. As Andrew Bateman, FIS comments,

“Opportunities for cash management innovation and automation are burgeoning in Asia, such as the development of real-time payments. These innovations are moving more quickly in some markets, such as Australia, than others, but these will increasingly drive corporate behaviour.”

Most importantly of all, treasury’s importance in the organisation is becoming more apparent, which is driving interest in solutions such as bank-agnostic bank connectivity, standardised ISO 20022 formats, and innovative payments and cash management solutions offered by banks and independent vendors. Senior management is increasingly recognising not only the ‘traditional’ treasury roles of liquidity and risk, but equally, the vital role that treasury plays in supporting innovative business models that drive competitive advantage. No longer is treasury technology simply a tool to automate processes and reporting within the department. Instead, as efficient digital payments and collections are a pivotal element of emerging business models, treasury can contribute to emerging business models such as e-commerce and m-commerce in a wide variety of ways, including efficient payment and collection models, automatic reconciliation and account posting. Without a high level of sophistication in treasury, businesses lack the necessary intelligence on customers and suppliers to drive an efficient supply chain, optimise working capital and monetise financial assets.[[[PAGE]]]

Making the change

With senior management support, a compelling business case, and a willingness to seek external advice, opportunities and motivation amongst Asian corporations to build best-in-class treasury functions have never been higher. Andrew Bateman, FIS summarises,

“The common characteristic amongst Asian multinationals as they define their cash, treasury and risk management strategy is ambition. Companies are seeking to be the market leader in their respective field, and demonstrate best-in-class processes to support this. Technology has a key role to play in achieving this ambition. For example, with particular complexities in parts of Asia, such as restrictions on cross-border flows and disparate regulations on one hand, and the need to optimise liquidity on the other, maximising visibility of cash is a priority. Efficient bank connectivity is a key element of this, with seamless integration into treasury’s internal systems. Increasingly, companies are choosing to take advantage of FIS’ managed connectivity services to optimise bank communication without the need to dedicate resources to the process or develop expertise in available communication methods. This is particularly attractive to many of the Asian multinationals that have multiple bank relationships, including local, regional and global banks, and may not have fully automated or integrated bank connectivity in the past, but who can now fast-track their implementation.”

As innovative technology drives new and potentially disruptive business models across many industries, volatility and uncertainty continue to affect world markets, and Asian corporations pursue international growth strategies, treasurers of these companies need to be investing now in efficient treasury policies, processes and technology to compete effectively with their western counterparts on the world stage. As this trend continues, Loic Senechal, BNP Paribas concludes,

“Although Asian corporations have lagged a little in their adoption of treasury technology, this is changing quickly, particularly as markets open up and the need for specific local solutions reduces. As a result, we expect to see Asia taking a leading, rather than following role in treasury technology over the next few years, with new innovations in international cash and treasury technology originating here as well as in Europe and North America.”