The trend towards treasury centralisation is not a new phenomenon, however, the drivers and opportunities for multinational companies seeking to centralise their treasury activities have changed in recent years, fuelled by the continuing globalisation of markets, changing corporate objectives and new opportunities in technology. These factors are causing multinationals of all sizes to transform their cash and treasury management activities in order to achieve their operational and strategic objectives.
A Global Trend Towards Centralisation
While treasury centralisation, either at a regional or global level, has been an objective for many North American and European multinationals over a number of years, this trend has become more common amongst Asian companies as a result of their international expansion. The same also applies to North American or European multinationals’ Asian business, which has historically been less of a priority than other parts of the world. This was due to the fact that other regions may have been more important in revenue terms, as well as regulatory constraints in Asia. Due to Asia’s rise on both these fronts, there has been a corresponding internalisation of the treasury function itself. According to JPMorgan’s Global Cash Management Survey, 2010, 74% of treasury departments organised their cash and treasury management on a global rather than domestic basis in 2010, compared with 66% in 2009, a trend that is continuing.
New Trends in Centralisation
There are a variety of factors that are contributing to the move towards centralisation in Asia. Some of these hark back to objectives of pioneers in treasury centralisation in the 1980’s and 90’s, where the desire to rationalise processes and resources, fund intercompany businesses efficiently, and achieve greater visibility and control over cash was topmost. However, new dynamics have emerged over the past five to ten years. In the past, regional treasury centres in Asia have often acted more as co-ordination hubs than strategic treasury centres due to a number of constraints:
- Firstly, in a fragmented technical environment, it was difficult to rationalise and centralise processes.
- Secondly, regulatory constraints further hindered these attempt.
- Thirdly, the proportion of a company’s business in Asia may have been less material than activities in North America or Europe.
- Finally, while liquidity and risk management have always been key treasury objectives, the global financial crisis emphasised that managing liquidity and risk proactively can make the difference between business success or failure.
All of these factors are now changing: processes are being standardised on single enterprise risk planning (ERP) platforms; regulatory conditions are evolving; and the relative importance of Asia continues to grow strongly, so that liquidity and risk management in the region have become a higher priority.
Technology and Cash Management Innovation
Many companies are striving to implement a common ERP across all of their subsidiaries, which is a major enabler in achieving centralisation objectives. The business environment has also changed. The ability to unlock liquidity from across the business, and identify and manage counterparty, foreign exchange (FX) and interest rate risk on a group basis, is an essential prerequisite to a successful liquidity and risk management strategy.
Many companies that are standardising technology with a view to achieving standardisation and enhancing financial processes are also taking the opportunity to review their incumbent banking partner(s) and the cash management structures that are in place. In Asia, fiscal and currency restrictions in some countries, such as China, may constrain companies’ efforts to achieve full centralisation of cash; however, the regulatory environment is changing in many countries. In some cases, long-standing banking partners are taking the lead and being proactive in suggesting enhancements, and cash management structures that were put in place some years ago could be refreshed to take advantage of new opportunities for centralisation and cash optimisation.
Many banks provide not only the geographic footprint and comprehensive breadth of products and services that clients based in or operating in Asia require, but also the expertise to help craft solutions and processes that achieve corporate operational and strategic objectives. Every company has its own opportunities and challenges, with the potential for either incremental or transformational change, on a domestic, regional or global basis. Reviewing new opportunities every few years is vital to leverage the latest technology, fiscal opportunities and innovative solutions to cash and treasury management challenges that may be available.
Leveraging the Opportunity
Despite the challenges of fiscal regulation and diverse financial infrastructures that exist in Asia, many companies have been very successful in centralising and making use of cash across the region, particularly those whose primary currency is US dollar, such as those in the technology and oil and gas industries. A company may generate revenues in US dollar, but may still have both US dollar and local currency expenditure across Asia. It may therefore be appropriate to use offshore accounts to centralise cash flow, with auto concentration rather than manual cash movements, so that cash is effectively paid into one location. When a local entity makes a payment, cash from the pool is transferred automatically to the relevant account in the right currency. Intercompany netting is also more acceptable in many parts of Asia than it has been in the past.
China is typically seen as the most significant challenge when constructing an efficient cash and treasury management strategy, not least because of the relative scale of many companies’ activities there, and therefore the materiality of cash requirements and revenues, in addition to the prevalent regulatory constraints.
Future Potential for Treasury Centres in Asia
Looking ahead, we expect to see global or regional treasury centres in Asia expanding their strategic as well as operational role, fuelled by continued relaxation of regulatory constraints, technology innovation, the growing importance of Asia for foreign multinationals and the global aspirations of Asia-headquartered multinationals. With continued market volatility and the importance of liquidity and risk management now well-established, Asia-based treasury centers will have an essential role in contributing to corporate financial objectives, and can increasingly take advantage of financing and capital structuring opportunities that exist in the region.
The cost of entry for sophisticated cash and treasury management technology has historically enabled only the largest companies to take advantage of these tools; however, costs are gradually reducing and licensing and deployment options becoming more flexible and convenient. Consequently, a wider spectrum of companies is increasingly able to automate cash and treasury management processes and perform sophisticated analysis of financial positions and flows. Bank connectivity, and the automation and control of payment and collection processes also continue to evolve, with SWIFT connectivity, for example, now more accessible to corporate users.
To take advantage of the opportunities for efficient, centralised cash and treasury management structures and processes, companies of all sizes, and headquartered in all locations, are increasingly turning to banks that have proven expertise in devising, implementing and supporting innovative, highly specific cash management solutions, and strength in US dollar clearing, which is till the predominant trading currency for global trade. As the regulatory climate continues to evolve, particularly in China, and Asia develops its importance as an economic powerhouse, companies that leverage the cash and treasury management opportunities that exist will create valuable operational, strategic and competitive advantage.
To read more from JP Morgan, please visit the company’s microsite.
Why corporates should consider the multi-currency virtual account (MCVA) - a bank-offered cash product which allows them to maintain foreign currency balances and affect cross-boarder transactions where a physical account doesn’t exist in the local currencies.
Steel producer thyssenkrupp and chemicals group BASF were among the multinationals to report on their experiences at the recent SAP Ariba Live event in Prague.
Financial services and healthcare are two of the sectors on the verge of being radically transformed by the rise of artificial intelligence and robotics.
Sometimes, bank relationships simply don’t work anymore. However, changing banks is rarely straightforward - from rejected KYC documentation to technical hitches, the potential hurdles are significant. This article outlines how detailed preparation, messaging standards and a strong moral compass can help the switch go smoothly.