Getting capital to work: Part 2

 

getting capital work

Part 1

Regionalized supply chains: opportunity or challenge?

“An Asian supply chain benefits corporates, as sales and procurement are easier to manage with less lead time and reduced inventory. The closer proximity leads to more efficiency in the supply chain with lower transportation costs,” says Vijay Vashist, global head of trade and supply chain, DBS Global Transaction Services.

However, Asia is not one economic zone like the EU, and laws regarding trade across its many countries differ widely. When dealing with new suppliers and buyers in the region, corporates thus need to be careful to abide by the local regulations, paying special attention to the relevant tax implications.

In this context, it is crucial for corporates to note the dynamic nature of Asian markets. For example, China dominates intra-Asian trade and cross-border transactions in the region (and beyond) are increasingly denominated in renminbi. In order to remain competitive, corporates will have to be liquid with this new settlement currency and familiarize themselves with the corresponding regulations that Chinese authorities have issued.

“Regionalized trade is an opportunity, particularly when working in partnership with the pan-Asian banks that offer supply chain financing solutions in their trading markets. Counterparty risk can be managed more easily as well,” adds Vashist.

Managing counterparty risk

Since the global financial crisis, corporates have naturally stepped up scrutiny when evaluating the counterparty risk their banking providers carry. Corporates are also eager to bank with well-capitalized partners that are committed to the region and enjoy excellent credit ratings.

“Without a doubt, counterparty risk management is one of the foremost priorities for treasurers. In fact, as the purview of their position within the corporation extends into new fields, their desire to effectively manage and mitigate counterparty risk rises proportionally. They will do so either internally or with the assistance of banks, credit insurers and, where accessible, export credit agencies (ECAs),” says Vashist.

Average DSOs in the Asia-Pacific

The average DSOs in the Asia-Pacific was 52 in 2011. “As a note of caution, such a figure across the entire region and all industries probably holds limited value. DSOs differ significantly from sector to sector, as a result of varying business models, level of competition and other commercial realities. This number generally has deteriorated (increased) slightly, which can be attributed to the aftermath of the global financial crisis as well as worsened receivables and collections experiences,” Vashist adds.

“We are observing a focus on efficiency gains in the DSO management process and therefore are confident that the ratio will improve. Sales on credit terms have become a necessity for many companies as a response to market competition and requests from buyers facing a liquidity squeeze. We urge our clients to make sure this approach does not veer out of control.”

A survey carried out by Coface earlier this year highlighted a 2% increase of overdue incidences as reported by respondents in the Asia Pacific region. An alarming 43% of respondents indicated that overdue amounts were higher in 2012 than in 2011 – up from 29% a year earlier.

“Offering sales on payment terms therefore needs to be managed carefully to avoid occurrences of excess overdue receivables,” explains Vashist.

The degree to which this presents a problem in Asia varies, however. While corporates in Taiwan and Japan offer closer to 90 days’ credit, their peers in Singapore and Hong Kong extend 30-day credit terms on average.

Coping with excess liquidity

Short-term verticals are key to working capital. Visibility and access to funds thus remain important considerations when investing. Today’s liquidity products are becoming multi-dimensional in nature and do not focus only on traditional cash-concentration structures, such as domestic and cross-border sweeps. Rather, more engaging models that involve regional interest optimization, net contribution and net group position are applied.

“Investment tenors vary from corporate to corporate. They depend on investment strategies each firm pursues. It is important to note that liquidity management is not limited to corporates with excess liquidity per se but represent a critical treasury task of leveraged companies as well. Liquidity management optimizes short-term liquidity by reducing funding cost, enhancing yield and improving cash flow productivity,” concludes Batra.

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