Published: September 01, 2011
The global economy has been experiencing extraordinary economic challenges, with average GDP growth of advanced industrial countries expected to remain sluggish (at below 2%) for the next two years. The Emerging Market (EM) countries, however, are expected to remain the world’s engine for growth, even though their prospects have also been trimmed by 0.3 - 0.4 percentage points for the same period, reflecting their trade linkages with the advanced industrial countries as well as the impact of policy tightening measures to contain developing and actual inflationary pressures. Growth prospects will likely continue to be weighed down by investors’ pullback from risk, in the face of dramatically changing uncertainties associated with sovereign debt and fiscal excesses in the Eurozone as well as the United States.
Notwithstanding these macroeconomic challenges, there are three overriding trends which introduce new challenges but also represent opportunities for growth. They are: 1) Globalisation, 2) Urbanisation, and 3) Digitisation. Citi, with its long-standing reputation for innovation and focus on globality, partners with its clients in all regions to leverage its local, regional and global client and market knowledge to create solutions to leverage these important trends. Let me expand on each of these important mega trends:
Globalisation has led to acceleration and shifts in trade flows particularly from / to the EM. Since 1990, we have seen a shift in the percentage of world real GDP from the Developed Markets (DM) to the EM. As cited in our publication, Global Growth Generators (February 2011), the EM as a percentage of world real GDP has grown from 42% in 1990 to 52% in 2010 and is forecasted to grow to 70% by 2030.
Globalisation has also been characterised by recent rapid international expansion by EM headquartered clients as they seek to enter new markets through acquisitions as a means to accessing new client bases, (e.g., there has been a significant increase in mergers and acquisition [M&A] activity from Asia into Central, Eastern Europe, Middle East and Africa, over $70bn, and over $37bn dollars into Latin America. Source: Dealogic Analytics for CIRA). In Global Transaction Services (GTS) we work with our clients to deliver our globally connected network, and transaction services platform, to provide our clients the ability to gain real-time control over liquidity management and their bank account activity as they pursue global growth strategies.
Urbanisation, in particular rapid population migration to urban centres, will require significant infrastructure investment. In the EM, explosive economic growth resulting from new sources of economic productivity will see the creation of a new affluent middle class which has significant implications for population growth and spending. To illustrate this shift, as of 2011, more than half of the world’s population now live in cities (17 of the world’s 20 largest cities are in the EM). The Emerging Markets represent 87% of the world’s population with an increasing work age population. [[[PAGE]]]
Transformational change is sweeping through cities in waves and the infrastructure ecosystem is expecting over $35-40tr of investment in the next 20 years, according to a Boston Consulting Group White Paper on Global Infrastructure. New development opportunities range from transit modernisation and the ‘electronification’ of benefit distribution, to overall strategic digital city initiatives. All these activities will create new business growth opportunities for our clients who are already mobilising and re-organising to tap the new opportunities. Within GTS, we support our clients with strategic solutions, commercial partnerships and innovation to accelerate enterprise solution development in order to facilitate their working capital and supply chain requirements within these expanded ecosystems.
Companies such as Citi have adopted flexible work hours to attract and retain top talent.
Both DM and EM regions will require significant infrastructure investments for development. For example, in the DM regions they have a two-pronged need: 1) significant upgrade of existing structures; and 2) the building of new transportation facilities to move both products and information more promptly and less expensively to both existing and new markets. While the EM regions have the financial resources to commit to these new developments, the DM are burdened by severe, short-term deficits, weakening the ability to commit to such long-term planning. They are focused on medium- and long-term financing as well as new techniques to optimise working capital management to support critical development projects such as: roads, bridges, water, sanitation, ports, and electricity grids.
GTS is promoting public-private partnerships through export credit agency financings, supplier finance solutions, end-to-end cash management and trade finance solutions to support these infrastructure projects.
Digitisation is another mega trend which is re-defining business models and commercial partnerships with clients and within their industry ecosystems. The increasingly rapid pace of consumer adoption in the digital economy is evidenced by the fact that 1.7 billion mobile phone users by the end of 2012 will not possess a formal bank account, and the global market for mobile commerce is expected to reach $163bn by 2015 (source: VisionGain, Payments in Mobile 2010-2015). This trend toward digitisation has led to GTS investing in new innovative data and analytical tools, value-added payments, mobile enablement solutions and digital money.
These three trends are revolutionising how people live, work, collaborate and communicate, and they are impacting the expectations and aspirations of employees in companies across the globe. The impact is not only on what jobs people want, but it is also on how people want to work and where they choose to work: they are evaluating their options more than ever before. With technological advancement and digitisation, offices are now virtual and mobile. The ‘office’ can now be a desktop at home, with you on the road on an advanced tablet or on a smart phone. The options are wide open for people to choose work that fits with their lifestyle, as they are no longer tied to traditional desk-bound office models whereby they need to punch in by 9 a.m. Companies such as Citi have adopted flexible work hours to attract and retain top talent. The office of tomorrow has become digitised and virtual. People are choosing to live in locations that are technologically advanced, and the migration of populations to urban centres is providing new strategic business growth opportunities for many companies who will provide the infrastructure and services to attract workers to these ‘smart’ cities.
All three mega trends are inextricably linked, creating both challenges and opportunities for Citi and our clients, as we all compete for talent in a global marketplace to create sustainable growth platforms for our businesses.
The key challenges posed by the trends outlined above are as follows:
1) Increasingly complex, rigorous and ever-changing regulatory requirements across the globe.
2) International expansion through M&A can result in fragmented banking structures, which leads to liquidity management, transparency and risk management issues.
3) Cultural challenges impact globalising companies as they expand into new markets and they have to deal with new local business practices that require a new treasury operating model, one that might be quite foreign to the model the parent company is used to.
4) In some sectors, there is a need for a differentiated engagement model with customers via non-traditional sales channels such as on-line portals, and this will require additional investment and cost to deploy these new technologies, and
5) From a supplier management standpoint, as companies globalise, clients are experiencing challenges associated with managing a more diversified supplier base, and are seeking alternative financing tools to ensure stability of the supply chain.
To address and minimise the impact of these challenges, there is considerable value that companies can derive by rationalising and harmonising their global bank structure and revisiting domestic and regional cash management practices. Benefits from this approach include, but are not limited to pricing discounts as the chosen bank can achieve economies of scale, streamlined customer service and consistency, greater control over risk management and counterparty risk issues, and standardisation of end-to-end payment and receivables processes that will bring important cost savings and efficiencies while helping to optimise their working capital. [[[PAGE]]]
Given the macroeconomic challenges and strategic cost management pressures, we have seen treasurers focus on three key priorities.
First, they are seeking increased efficiency in their banking relationships and cash management structures. There has been a renewed focus on such things as in-house banks, payment on behalf of structures, establishment of regional and global treasury centres and implementation of standards (e.g., SWIFTNet for bank connectivity).
Second, for companies that have addressed rationalisation of bank accounts, they are focusing more closely on processes that contribute to working capital such as the purchase-to-pay and order-to-cash cycles. By doing so, they can manage cash more strategically, reduce short-term borrowings and make the best use of surplus cash. We are also seeing many treasurers play a lead role in enterprise wide working capital initiatives such as global supplier finance or commercial cards programmes.
Third, there is a growing focus on corporate governance, risk management and the impact of regulations on corporates as well as key banking partners.
What has become very apparent in recent years is that the treasurer’s role has broadened beyond liquidity, foreign exchange, credit and risk management to a much stronger focus on identifying creative working capital solutions for business units to deliver cost reduction and support business growth. To achieve this, they need to look at processes from end-to-end to ensure maximum efficiency and streamlined information flows. Companies in Emerging Markets have the opportunity to ‘leapfrog’ their Developed Market peers, since many have little legacy global treasury management infrastructure and they can design new leading-edge processes to facilitate straight-through processing, and provide transparency over accounts with enhanced risk management.
In response to our client’s requests to help them convert the volumes of data they get from different sources into useable treasury management information, GTS has invested substantially in data management and analytic tools to help clients gain better visibility, conduct benchmarking and identify areas for improvement, e.g., treasury vision, treasury diagnostics, and our global online electronic banking platform, CitiDirect.
For treasury and finance managers who have faced pressure to create more economic value with limited resources, our treasury diagnostic service has been extremely valuable in helping them provide in-depth analyses for strategic decision-making and in re-engineering day-to-day transactional processes.
The global financial crisis illustrated the importance of establishing supply chain stability.
To facilitate improved workflow management, GTS has also continued to invest in our global customer service architecture. Included in our enhanced architecture is the roll-out of a single global tracking and reporting system, and the establishment of a client service academy which provides innovative series of online seminars conducted by Citi’s leading industry experts, and is developed to enhance our clients’ knowledge of Citi’s electronic banking systems, cash management processes and solutions.
A commitment to customer service, global technology platforms, consistent products and services and a truly global approach to doing business are amongst the reasons why our clients work with Citi. It is our objective to continue growing and developing in each of these areas to give our clients the best possible experience over the long term, and help them in addressing the trends of globalisation, urbanisation and digitisation and position them for improved competitiveness.
The three mega trends of globalisation, urbanisation and digitisation are converging and creating new transformational opportunities as clients are engaging in newly evolving global business ecosystems, beyond their traditional industry connections. With globalisation, the legacy industry ecosystem is now interconnected across new boundaries as innovation has opened new doors of business opportunity. These mega trends will undoubtedly continue, and accelerate, which will lead to a new set of market dynamics, and as the competitive landscape changes we will need to evolve our business models to stay relevant.
Globalisation means that increasingly the majority of a company’s suppliers and customers might be outside their home market. The global financial crisis illustrated the importance of establishing supply chain stability, and this will remain a priority, particularly as the cost of financing is still high for many companies. Consequently, global programmes for receivables discounting and supply chain financing have become, and will continue to be, important techniques. As a result, there is a great opportunity for us to work in partnership with clients to implement effective programmes focused on providing financing solutions, best-in-class technology, payment / collection tools and liquidity optimisation where it is most needed.
Additionally, a recent BCG study highlighted the fact that emerging global trends such as resource constraints (e.g.,corporate social responsibility, alternative energy sources), continued technological advancement and convergence (e.g.,cloud computing, smart devices) and health and wellness trends (e.g.,biotechnology) will influence how companies need to evolve their global operating, treasury management and supply chain models.
GTS through its focus on clients, global geographic footprint and industry specialisation has a deep understanding of these evolving industry ecosystems such that we can assist clients in achieving their commercial and financial goals. Whether it is setting up new global, regional or local cash management structures, designing solutions to assist in leveraging trapped working capital, or providing financing to suppliers, Citi Global Transaction Services has the platforms and the global network of experts to partner for success.
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