Asia’s supply chain financing: from tech innovation to China’s belt and road

The estimated size of the global supply chain that requires financing is US$2 trillion, according to a survey by McKinsey. Of that total, no more than 10% or US$200bn is being financed by banks, so “there’s enough room for everybody to play,” according to Bank of Tokyo Mitsubishi senior vice president, Shiresh Garg.

Garg was a speaker at the International Chamber of Commerce (ICC) Academy’s fifth Supply Chain Finance Summit, held in Singapore earlier this month, where technology experts provided insights into the innovations that are making a difference.

Although supply chain systems have been put in place to ensure the right goods get to the right place at the right time and an increasing proportion of trade has become digitised, companies still use traditional processes and much of the transactional data is in private hands, says Robert Lin, chief executive officer (CEO) of the supply chain finance (SCF) provider Seabury Trade Finance Exchange.

Those traditional manual processes are error-prone and slow, with a lot of paper-based and Excel spreadsheet-based processes. Moreover, the data firms need “is with the suppliers, logistics companies and financial institutions – not sitting internally.”

Seabury has developed a network information model with networked supply management, financial supply chain, demand fulfilment and transportation management to improve the situation. “We’ve connected with supply chain systems,” says Lin. “We look at transactions, bring in purchase orders (POs) that go back 10 years, and analyse them to be able to identify traditional patterns, seasonality, defaults and PO cancellations. That has allowed us to do true multi-stage supply chain financing, from when a PO or production starts, to shipment, pre-ship in-transit financing, post-ship in-transit financing and inventory financing.”

The advantage of this connection is the ability to spot changes or anomalies in production or shipping cycles, or see a build-up of transactions that may indicate potential risk. Additionally, companies have the ability to request funding at the click of a button.

Trade finance and blockchain

While blockchain is the next big thing and will have a major impact, there is a huge misunderstanding about it claims Roberto Capodieci, CEO of blockchain solutions specialist Open Trade Documents, aka OTDocs.com. Blockchain is a communication channel to guarantee quality and the benefits that it provides include decentralised data, user-side authentication, digital signatures, timestamps, a majority consensus on transaction validity and security based on mathematics.

Capodieci makes a clear distinction between a blockchain and a distributed ledger. “Distributed ledger is one use for blockchain. Blockchain is a messaging system; a way to make sure everyone respects the rules. It is a centralised server-based network, where everyone has the rules.”

Other appealing aspects of blockchain are that “it is low maintenance, cheap to deploy, secure and irreversible, with an automatic audit. The idea is not to disrupt the way you are working. We can offer another layer to make things better.”

An example of how blockchain can improve SCF is offered by Iqbal AliKhan, IBM’s strategy and business development executive. “We take a transhipment of oranges into Dubai, move them from the port to a factory to convert them to orange juice, then transport that to the airport from where it is flown out. There are 17 steps in all and everyone has their own documents.”

By using blockchain, “we put it all on one document. We are able to show that a process that takes 18-43 days can be brought down to half a day, not including the time to grow or manufacture. You can dematerialise the documentation. If it’s US$2,000 to ship and US$2,500 for documentation, you can do it for less than $400.”

Alternative finance and fintech solutions

Speaking in a panel discussion on alternative finance and fintech solutions, AliKhan singled out as a key challenge the fact that it can cost twice as much to move the documents as to move the goods, according to a 2013 Organisation for Economic Co-operation and Development (OECD) study, so “if you can digitise documents it’s phenomenal.”

Garg sees technology as becoming the enabler in matching funders with the needs of people who can’t find financing or get it at a higher rate, in a more time and cost-efficient manner.

An example of this is invoice financing, says Sandra Ernst, CEO of the financing platform SmartFunding. In Singapore, for example, “40% of small and medium enterprises (SMEs) are not financed by banks. There are a lot of middlemen who try to bring SMEs and banks together, while loan brokers are not cheap, typically charging rates of 3% and 7%.” Her firm provides digital invoice financing to get funding directly to SMEs and avoid those intermediary costs.

So while not all the solutions are in place yet, technology is already bringing benefits to SCF. The additional solutions underway can help to deliver even more financing and the lower costs that companies actually need.

Linking China to Europe: the impact of ‘one belt one road’

Summit panellists also considered China’s one belt one road (OBOR) initiative to link trade between China and Europe by land and by sea and what that means in practice. From a historical perspective, says International Institute for Management Development (IMD) Emeritus Professor Jean-Pierre Lehmann, “we’re seeing the decline of western domination. Before the 18th century, Asia was integrated, joined together by the Silk Road. Europe was a destination. We’re seeing a return to a multipolar world, with chaos and uncertainty.”

There is a possibility that the old Silk Road will be an indicator of the future environment we’ll be living in. China’s share of world gross domestic product (GDP) was 33% nearly two centuries ago, in 1820, had declined to only 4% by 1950 but is now steadily moving back up. Similar to the old Silk Road, OBOR can facilitate growth by linking China to Europe through Asia, Eastern Europe and the Middle East. “Belt” refers to land corridors and “road” refers to the sea.

OBOR and supply chain finance

“When we hear OBOR,” says Bruce Alter, head of global transaction services, DBS Bank “the lead would be from project finance for large infrastructure projects. In a granular way, some of the products used are guarantees or standby letters of credit (LCs).

“Even the traditional trade flow of LCs comes into play. OBOR can thus go from the complex standby LC to the LC to open account transaction. We’ve seen a lot of those transactions, not just in Southeast Asia but in the Middle East and Africa.” He adds that “cash management is often the consequence of the trade transaction.”

Looking further at opportunities for financing, bank senior advisor Yaseen Anwar at ICBC Singapore agrees that infrastructure is the backbone and consists of three stages: “First is planning and development; second is construction; third is operational and the least risky. These phases are where the opportunities arise.”

“This US$2 trillion OBOR effort provides the catalyst for investments. Given geopolitical trends, you need regional integration to ensure that trade flows remain unencumbered. The gap is US$1 trillion per year for the next five years, and $50 trillion is needed by 2050 – OBOR has the resources to support it.”

He expects the result to be a new China-led ecosystem. “China is the largest exporter in the world and 43 countries view it as their largest export partner. Regional integration and linkages are shaping supply chains. World connectivity has changed.” OBOR, Anwar concludes “is a source for the resources to jumpstart the economy and increase employment, for inclusive growth and reduced poverty. Commensurate trade flows will be generated.”

Asked about concerns that OBOR could become a competing or mutually exclusive initiative to other trade agreements, Singapore Management University law professor Locknie Hsu says “there is no belt and road agreement yet. China’s plan is a vision to energise the region of 60-odd countries for trade and investment.

“The initiative does not have a unifying legal structure. It means we don’t have a common legal definition of the supply chain.” The result is that “you’ll find divergent regulatory requirements in OBOR countries, which translates into cost and compliance issues. Secondly, there are also different import export requirements and thirdly, new supply chain participants.”

Asked whether OBOR is too China-centric and how much it might be affected by widespread distrust, Lehmann believes it is important to consider at two levels. “One, there is global distrust, an imperial rivalry between the US, China, and Russia. The other thing is that Asia is an economic miracle, with some exceptions, and a geopolitical cauldron.

“Every Asian country has a dispute with at least one of its neighbours. There is political instability, and a rise of nationalism. Institutions are weak, confidence-building factors are weak. There’s more alarm.” While OBOR is very exciting, at the same time it presents many obstacles.

Alter adds that in the long term, renminbi (RMB) internationalisation – both for OBOR and outside of OBOR – will to continue to grow. The currency will continue to be critical to trade payments and cash management. Despite the tensions in the long-term OBOR will continue to support both the growth of trade and RMB internationalisation.

 

 

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