Published: August 01, 2013
Companies across a wide range of industries are increasingly recognising Latin America as a growth region with extraordinary potential and upside. Across the region, a burgeoning middle class, a growing consumer economy and an urgent need for basic infrastructure are creating many business opportunities. In addition, the rising demand for commodities and other exports worldwide, and increasing foreign direct investment, are boosting growth.
Latin America brings some unique challenges, however. Companies who are investing and expanding into the region are facing ever-changing regulatory, tax and political conditions, coupled with rising costs.
For these reasons, the opportunities, as well as the risks and costs of doing business in Latin America are often greater than those in other regions, including other Emerging Markets. To support this, treasurers are adapting their treasury models to drive growth, minimise costs and manage risks across the region.
One such company which has successfully managed these risks and costs, while also meeting aggressive growth prospects, is Syngenta. A major player in the agri-business, Syngenta has goals to almost double its business to $25bn by 2020. In fact, the agri-business in Latin America is one example of an industry that has been and is set to double on average every seven years. In this article, Wagner Birochi, Regional Treasury Manager for Latin America, discusses how he is successfully overcoming challenges, supporting strategic growth, and leveraging the synergies to be gained from using an integrated, regional treasury approach.
Syngenta has traditionally adopted in Latin America a largely decentralised approach to treasury management with each commercial unit managing its own transactional activities, while some basic rules are always followed by local treasuries. While this brought some advantages in that on-the-ground teams brought insights into the local market and could be responsive to fast-growing businesses, there were also some challenges with fragmented, inconsistent information and process flows. Consequently, we made the decision to restructure our cash and treasury activities into a regional model to be more consistent with other parts of the world. This included standardising processes, sharing expertise and experience across countries to facilitate best practices and streamlining information flows.
We have a regional treasury manager in each core region, including Latin America, who represents Group Treasury to ensure that global standards and best practices are adopted wherever possible, and to provide information back to Group Treasury on the needs, constraints and opportunities in the region. For example, Latin America brings particular complexities both in terms of the seasonality of our business, the detail of which can be difficult to appreciate without detailed local knowledge, and the diverse, often challenging regulatory environment.[[[PAGE]]]
Given the diverse market and regulatory conditions that exist in Latin America, Syngenta’s pace of growth and our strategic business focus in the region, we are faced with a number of cash and treasury management challenges. We see treasury’s fundamental role as a partner to our subsidiaries and business units in the region, so we aim to reduce risk and facilitate both day-to-day activities and strategic growth. For example, managing business and market volatility is of particular concern, so we need to provide solutions that support sustainable delivery during ups and downs in the market, and mitigate the effects of currency and commodity volatility on our costs and revenues. In addition, we need to be flexible by supporting new business models, such as barter models, with innovative financing solutions and supply chain tools in order to maintain our competitive lead and ensure that our solutions are as attractive to our customers as possible. Barter trade, for example, enables us to sell our products to farmers without taking on the full credit risk. By engaging a banking partner in the process, we can convert invoiced amounts to cash sales. Techniques such as prepayment of exports are also valuable in facilitating trade, optimising cash flow and reducing risk.
Although we have local production and both buy and sell goods and services within the region, aggregating cash is challenging. Cash pooling is only permitted in three countries in the region (Mexico, Panama and Uruguay), so while we have implemented cash pools where we can, this only covers the minority of flows. Consequently, managing liquidity at an individual currency and country level is very important. To achieve this, we appointed Citi as one of our main regional banking partners, partly as a result of the bank’s presence in each country in which we operate. By working with Citi across the region, we have been able to rationalise our account structure, standardise payment processes and information flows and reduce the number of electronic banking systems that we maintain. We are now in the process of implementing a single gateway to our core banks through SWIFTNet, which is expected to be complete by Q1 of 2014. A streamlined banking and technology framework has enabled significantly enhanced visibility of cash across the region, so we can now monitor our liquidity and market risk effectively. We transfer surplus cash to fund deficits wherever possible, which for Syngenta has been a little easier than for companies in some other industries, even in more challenging countries. Agribusiness is a key economic driver in the region and we are making substantial investments that impact directly on food, animal feed and fuel production and generate employment. Consequently, Syngenta has close relationships with regulators and our opportunities for transferring cash may be greater than some companies in other industries.
Centralising cash remains extremely challenging however, so finding ways to finance local business operations is vital to drive and sustain growth. While we do not issue bonds locally, we are instrumental in identifying investors who can facilitate our growth. In addition, we regularly review opportunities and conditions for local financing in addition to borrowing at a group level, particularly to manage the seasonality of our cash flow profile.
Managing risk is equally complex. Our aim was to reduce unexplained FX losses and optimise our hedging so that our FX position was negligible at the end of each month. We also sought to implement a hedging strategy for soft commodities to protect Fields Production. This has been challenging to achieve, not least due to the variety of currencies involved, and the lack of liquidity and market depth for hedging commodities such as soy beans and corn. A key criterion in achieving our risk management objectives was to improve exposure reporting, with greater regional oversight. By establishing better visibility over our FX and commodity risks, we are in a better position to hedge them effectively, which with hedging undertaken through a central team wherever possible.
A frequent misconception is that Latin America is a low-cost region, but in fact the costs of doing business can be very high. Having adopted a business services model, one of the ways in which we aim to reduce our costs is by outsourcing non-core functions wherever possible. This typically needs to be done locally as some activities need to be conducted in Spanish or Portuguese. We do, however, use outsourcing services from lower-cost countries, and leverage global models where it is feasible to do so. For example, we have centralised accounts payable globally in India.
Based on our experiences of operating in Latin America, and developing a substantial treasury presence, we would emphasise the importance of investing in people who bring a clear and detailed understanding of the regulatory framework and market practices in each country. Banks also have an important role to play in this respect, but ultimately a company is responsible for its own activities and should therefore ensure sufficient internal expertise. Cash and treasury management processes should be clear and well-documented, with the overall intention of standardising processes at a regional and global level. In some cases, these may need to be modified to meet local needs in particular countries or regions, but the starting point should be a global standard.
Technology plays an important role in achieving the required level of standardisation, efficiency and control, and is important to invest in secure, automated and integrated technology to control processes and provide access to information for managing liquidity and risk effectively. Finally, sourcing people with the right skills and experience in Latin America is often challenging, particularly as Spanish and Portuguese language skills are typically also required, and it can be expensive to recruit and retain suitably qualified personnel.[[[PAGE]]]
Our shift from a decentralised to a regional treasury operation is not simply an organisational, technology and process shift. Instead, it has facilitated a transformation in the way that we support the business. As a first step, we have achieved greater operational efficiency, with better information flows and decision-making. These measures have increased automation, enhanced the quality of information, improved compliance and had a positive impact on both the balance sheet and profit & loss. Once we had developed robust and trustworthy information flows, we could then build new methods and tools to refine our hedging approach, improve business intelligence and manage costs more systematically. Finally, we are now able to be proactive in recommending and delivering solutions that address unrealised customer needs, reduce our working capital needs and create business models that enhance our competitive position.
Treasury cannot support business growth simply by delivering credit solutions. Instead, it needs to be proactive and innovative in directly enabling and in some cases driving the business strategy. The right banking relationships are key to success in achieving this. The bank’s ability to support the business across the region, and therefore bring insight into cash and risk positions is invaluable; furthermore, a bank’s commitment to innovation is essential in enabling us to deliver solutions to the business that facilitate growth. In a market where managing risk is complex and challenging, a banking partner should be willing to find risk-sharing solutions and support alternative financing to facilitate trade whilst mitigating risk.
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