Q: Which industries and which domestic or international trade corridors show the greatest demand for supply chain finance (SCF) in your region?
A (Elke Doser, trade services Asia-Pacific, UniCredit): The industrial landscape in Asia is shaped by international and local corporates producing and/or sourcing in the lower-cost labour markets of the region. Almost all manufacturing industries are present; for example automotive, textile and electronics. Those are also the companies primarily interested in SCF.
A (Dr Eugenio Cavenaghi, head of global trade and SCF products development and facilitation, UniCredit): A few sectors have experienced very successful implementations, particularly in industries with mature and highly integrated supply chains such as automotive, retail and technology. The sovereign debt crises widened the gap in the interest rates available to corporates between northern and southern Europe. This makes some south-to-north trade corridors very attractive, such as the ones from Italy, Greece, Spain or Turkey towards Germany, Holland or the UK.
Q: Which current trends and developments in the corporate or banking world are driving the demand for SCF?
A (Cavenaghi): Definitely plain vanilla lending activities have become less attractive for European banks. The liquidity injection from the ECB [European Central Bank] has slowed down the trend, but in the long term financial institutions know that they have to find alternative ways to finance corporate clients under the new Basel III rules. SCF is now advancing as a possible way to provide short-term financing to companies without consuming too much risk weighted assets [RWAs]. Moreover, corporates have learned their lesson from the 2008 crisis and are placing more emphasis on their supply chain’s financial resilience.
A (Doser): Some countries in Asia are loosening their regulations, making international trade easier; the most prominent example would be China. The financial industry is now making use of these openings and their experience over the past few years enables them to establish supply chain management programmes. The current debt crisis is also affecting corporates in Asia, particularly small and medium-sized companies, which makes them receptive for any sort of liquidity.
Q: Which internal or external factors are hindering a faster take up of SCF across the corporates in the two regions?
A (Cavenaghi): Most corporates still have a long way to go to reconcile the conflicting interests of their treasury, procurement and logistics. However, the general level of awareness and cross-functional co-operation is increasing. Banks, on the other side, still have some work to do to standardise product definitions and practices in order to facilitate the education of market players and grow the overall appetite for SCF. In this respect, the initiatives of inter-bank committees such as BAFT-IFSA [the association for organisations actively engaged in international transaction banking] or the EBA [Euro Banking Association] are laying the right foundations for a future harmonisation and simplification of the product offering.
A (Doser): In Asia, which is an emerging market, many corporates only rely on documentary credit for their trade business. In 2011, 43% of all SWIFT trade messages were sent from Asia-Pacific1. The reasons are various and include amongst others, for example, the use of letters of credit (L/C) as a method to finance or guarantee payments between parties that do not know each other well yet. SCF is based on open account payments and long-lasting commercial relationships, which in Asia will still take some time to develop.
Q: What are the typical characteristics of a SCF programme in your respective region?
A (Cavenaghi): Because of the structure of most multinational corporates in Europe, which operate through local independent subsidiaries in each market, international programmes typically follow a multi-domestic approach, whereby providers are asked to set up multiple domestic programmes in the relevant countries. However, cross-border transactions are growing more and more popular, particularly thanks to the already mentioned credit arbitrage, not only between northern and southern Europe but also between Europe and Asia.
A (Doser): Regulations on SCF products in Asia might be tighter than in other western countries and legal experience is not so vast, which means that larger programmes across multiple countries often require additional documentation and the support of local partners.
Q: What are the key success factors for a SCF programme in each region?
A (Doser): Generally, I would say precise knowledge of the individual markets and the local business factors are key because countries in Asia are in a very different economical state. In more developed economies, such as Hong Kong and Singapore for example, a very attractive pricing is the most important discussion point; while in emerging markets such as Vietnam corporates would appreciate access to SCF altogether.
A (Cavenaghi): Unsurprisingly, the most important factor for a successful roll-out in Europe is the full engagement and commitment of the buyer’s purchasing department. The best onboarding arguments come from the procurement officers themselves, who can credibly position the SCF programme as a strategic tool in the overall relationship with suppliers. On the bank side, lean contracts and an intuitive, fully automated web platform are pre-requisites to compete in the European market. The difference is then made by banks that can leverage on large commercial networks deeply rooted in the suppliers’ home markets.
Q: What are the most common mistakes that one should avoid in the implementation of a SCF programme?
A (Cavenaghi): We have seen many SCF programmes fail because the parties tried to over-engineer the solution. Before investing in a complex integration with the buyer’s ERP [enterprise resource planning], it is savvy to start with a simpler but pragmatic approach. Another common pitfall consists in underestimating the supplier onboarding effort, particularly in multi-country programmes. The process can neither be industrialised nor executed remotely – there is no substitute for a face-to-face discussion with the most important suppliers.
A (Doser): Regulations are numerous and legal systems are different from one country to another or even within a country, which definitely makes it challenging to gather all the necessary information. The likelihood of overlooking something or relying on incorrect information shouldn’t be underestimated.
Q: Which role are the different categories of SCF providers playing in the region, such as local banks, international banks and non-bank providers? Who is prevailing where?
A (Doser): Besides very mature markets such as Singapore and Hong Kong, SCF is generally offered by international banks. Local banks are catching up quickly though and are expanding their SCF business. They are often state-owned banks with in-depth experience in local regulations and law systems. International banks, on the other hand, are still preferred by some local corporates because of their product experience and standardised processes. So far we have only seen non-bank providers in the factoring market, not yet in other SCF areas.
A (Cavenaghi): We are seeing more and more demands for multi-investor deals. Large clients are therefore often tempted by bank-neutral platforms, but we believe that international banks should prevail, thanks to their capacity to set up structures open to external investors and their access to the secondary market.
Q: What do you expect from the SCF market in your respective region for the next two to three years?
A (Cavenaghi): In Europe SCF still has a lot of untapped potential. The market is not yet as mature as the US one, but we expect SCF to become a standard topic for discussion between banks and all large European corporates in the next two to three years. The looming recession in the EU will sharpen the interests in SCF as an additional source of liquidity for small and mid-size suppliers. At the same time, European banks will push for converting a major portion of their loan portfolio into more secure forms of financing, with SCF being among the preferred ones.
A (Doser): Growth and stability are the two major trends I would expect over the next few years. Growth comes with economic expansion and will drive the demand for SCF business offered by international and local banks. Stability, especially with respect to legal systems and regulations, comes along with economic maturity, providing the basis for further SCF growth.
1GTR, Volume 10/Issue 4, p38 “SWIFT Reveals Documentary Trade Fall in 2011”.
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