The case study below is based upon an entry that won the Payments category at the gtnews Awards 2014:
Siemens is now running an innovative payments-on-behalf-of (POBO) and receivables-on-behalf-of (ROBO) model to facilitate payments and collections in Chinese yuan (CNY). The treasury project has delivered economies-of-scale savings from centralised pricing and a reduced number of global bank accounts – not to mention simplified admin, procurement and processes.
This case study will explain how the company introduced its new procedure late last year and is now successfully running it in 2014, detailing the problems overcome and the benefits accrued.
The Project and the Problem
Siemens’ regional treasury centre based in Hong Kong has been constantly monitoring the development of the Chinese CNY currency, examining the government’s liberalisation moves and its increasing internationalisation to ensure that the corporate uses the currency in the most appropriate way.
The initial scoping out of the project to make CNY a global invoicing currency internally at Siemens began back in 2012, with the project launched last year and coming fully to fruition during 2014 in terms of its benefits. The aim was to make CNY an additional currency for all Siemens group companies outside of China, allowing them to pay third party suppliers in China and collect from customers in China as well as use it as an internal currency within Siemens.
The setting up of a single parent CNY bank account through the establishment of a central payment factory (PF) means that the company can now operate a POBO and ROBO model on its payments and receivables. In order to make maximum use of this new central bank account, and introduce all its supporting tools and processes, Siemens had to link-in the group companies’ intragroup cross-border business. This covered more than 60 group companies inside China alone and more than 500 outside of China, so integration was no small feat. Volume-wise the annual number of cross-border invoices in the intragroup business with China was in excess of 300,000.
The project also coincided with Siemens’ compliance programme for the single euro payments area (SEPA), which meant that resources were quite tight for the PF. A virtual project team was formed with global experts from all areas of Siemens to deliver the project. Led by the treasury department, a process analysis exercise was launched to identify all the potential stakeholders and scope out what would be needed to complete the CNY project in terms of logistics, new technology, employee communication and training and so forth.
New Hedging Programme Required
Additional to the new PF, Siemens treasury also realised early on that this overhaul to its procedures was going to necessitate a change to its hedging regime as CNY was introduced more fully to the company and the old way of doing things was swept away.
A decision quickly had to be made on the future Siemens CNY hedging instrument and its International Organisation for Standards (ISO) code. Initially, the corporate considered continuing to use CNY non-deliverable forward (NDF) instruments and to merely introduce deliverable forwards in parallel. However, Siemens’ treasury management system (TMS) could not accommodate one ISO code for two revaluation curves, so this option was discounted. Creating an artificial ISO code ‘CNH’ for deliverable CNY was also considered, but discarded due to multiple interfaces between the bank account and Siemens’ TMS (among others) presenting problems.
A close alignment with teams from front office, back office, risk controlling, IT, accounting and operating business units, as well as the external auditor, was deemed necessary. Once achieved, Siemens terminated all its existing CNY NDFs and re-hedged them at the same moment as CNH deliverable hedges. Several hundred deals had to be migrated by different global teams.
On-boarding of pilot entities, especially outside of China, was a challenge as business was typically done in US dollars (USD) or euros (EUR) and the need to changeover to CNY and its benefits were not immediately seen by all stakeholders. An education effort was required, so to create a better understanding about the topic and its benefits multiple rounds of internal communication and presentations were launched.
The major strategic benefits of the new single bank account, PF and POBO and ROBO models, plus the re-jigged CNH deliverable hedges, have been obvious to Siemens. In terms of the latter, the elimination of the old hedging programme has meant there is a reduced need for foreign exchange (FX) lines, documentation or settlement activities in China, which can be costly. The movement of hedging to a more competitive offshore environment has also created more internal efficiencies. Exposures can be netted on a group level, for instance, and thus the volume and number of hedging transactions overall has been reduced.
In regard to the payment procedural overhaul the main benefits have been generated by faster collections from customers due to their easier access to CNY compared to foreign currency. Siemens’ supply chain is also better supported as external suppliers can pass on saved hedging costs and are able to get their value-added tax (VAT) rebates for exports faster, which should filter through to Siemens via better payment terms and conditions.
Further benefits include simplified processes and administration onshore in China for the 60 plus group companies in the country. Faster credit of export proceeds in CNY due to the elimination of pending verification bank accounts for foreign currency exports has been one key resultant benefit. Less bank accounts also means less maintenance and cost to the company. The new system is now up and running and delivering on-going benefits to Siemens.
In this case study, the group treasurer of South Africa’s Imperial Group describes the generic and specific challenges of its treasury environment, and how an integrated team works together to achieve best practice treasury and risk management results.
This month’s meeting of the financial planning and analysis (FP&A) board of senior practitioners in London discussed the pros and cons of rolling forecasting, how best to introduce it and heard a case study from Maersk Group about how the shipping, transport and oil firm has benefitted.
The Chicago company’s slogan is ‘Technology that combines geek with chic’. In this interview its chief financial officer and chief operating officer, John Everts, describes how Madiafly’s use of dynamic discounting has boosted its business performance.
Mario Del Natale is director of global treasury operations, systems and applications at Fortune 500 group Johnson Controls, the US’s biggest supplier of auto batteries. The group is undergoing a major reorganisation that impacts its technology systems, since announcing plans to merge with Ireland’s Tyco. In this interview, he discusses the deal and the changing technology landscape.