While many financial professionals are familiar with the practical aspects of SCM that requires on-the-ground expertise, such as legal, tax and regulatory issues, a less well charted -but critical – aspect to consider is that supply chains take place within a cultural context.
Brazil: A Case in Point
Korea’s most important trading partner in Latin America
and the trade linkages between the two countries continue to grow. Total Brazil-Korea trade has doubled since 2009, with Brazilian exports to Korea rising 375% to reach US$4.7bn in 2013, while Korea’s exports to Brazil that year reached US$9.5bn – an eight-fold increase over the past decade.
With the country’s middle and upper classes growing at a staggering pace, Brazil is recognised as an important market for Korean consumer goods such as electronics and automobiles. In addition to this, by 2020 Brazil is expected to become the world’s fifth largest consumer market, overtaking France and the UK with a predicted US$1.8 trillion in household consumption and making it
one of the top three markets for automobiles and motorcycles
. Brazil also plans to invest US$235bn in infrastructure in the coming years, covering the transportation, energy, oil and gas sectors.
Large communities of Korean suppliers are operating in Brazil today. The model of working with known Korean suppliers – versus establishing new vendor relationships with non-Korean companies – is a cultural aspect that is unique to how Korean companies execute their global supply chains.
Many large Korean companies such as Hyundai, Samsung, and LG have been making large investments in Brazilian operations. What’s unique is that while these companies establish physical manufacturing facilities onshore, they bring along their supply chain partners and management techniques with them as well. However, many of the small and medium enterprises (SMEs) in these supplier ecosystems are unknown to Brazilian banks, making it challenging to establish a credit relationship.
Exacerbating this challenge are language and cultural barriers to doing business. For example, at one company it is not uncommon for senior management meetings to be conducted in three languages – Portuguese, Korean, and English – depending on who is in attendance.
Executing Successful Financing Structures in Korea
Like most companies establishing a physical presence overseas, these supplier communities need to understand the Brazilian market, its regulations and banking system. They are looking to establish banking relationships and require credit and support for their trade and investment needs.
One way to address the challenge of establishing local bank relationships is for first and second tier suppliers to establish relationships with a global bank that supports their Korean client’s trade and investment needs. The ability to address the financing and investment needs of a Korean client’s supplier and buyer/distributor network is key to supporting large Korean companies in Brazil.
At the same time, the global bank must have a strong on-the-ground presence in Brazil to execute the financing structures. Transactions must comply with local rules and regulations for taxes, import licenses, foreign exchange, and other requirements. Depending on the nature of a deal, specific registrations and approvals will be required.
Relatively few global banks are prepared to offer these abilities. It requires a strong on-the-ground presence in Korea in order to perform the due diligence associated with establishing a credit relationship. Also vital is the credit appetite and scale to onboard large numbers of suppliers.
Nuanced Approaches Best Serve Supply Chains
The Korea-Brazil trade corridor is but one of many examples that exemplify how supply chains can operate in novel ways and have unusual attributes. Supply chains for other significant trading partners with Brazil and their relationships – such as China and India – have their own nuances that require tailored approaches to doing business as well. The ability to understand how global supply chains function within unique contexts will be key in ensuring that resources and solutions are aligned to deliver in response to clients’ needs.
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