As Asia growth slows, treasurers seek technologies, models and strategies to get ahead.
The ATPG had its tenth meeting in April, sponsored for the fourth time by Deutsche Bank. Peer group members are looking for ways to support their companies in a region where the growth boom is slowing. Consequently, members heard from Deutsche Bank and one another on regional hot spots and emerging product applications, including:
Business Implications for Treasury in 2016. Low interest rates will not be enough to overcome the many other drags on Asia’s economies, so expect some volatility around regional currencies.
Dynamic Discounting in the Supply Chain. Although supply-chain finance programs are less common outside the US at the moment, members see the likelihood for more SCF programs in the region if economies continue to slow.
Digitalization, Blockchain and Beyond. As regulatory requirements and needs for efficiency grow in the region, technologies like blockchain may see rapid adoption.
Business Implications for Treasury in 2016
Asia’s growth is losing momentum. According to Diana Del-Rosario, an economist with Deutsche Bank, three key factors underpin a lackluster growth trend: rising debt levels, trade stagnation and an aging population. We should brace for increased volatility in regional currencies surrounding any RMB devaluation, as the RMB is gaining importance as a trading currency, with statistics showing that MYR, KRW and THB are most sensitive to RMB fluctuations.
Key Takeaways
1) Exports from Asia are in decline. Numerous Asian countries are seeing a slowdown in exports due to economic stagnation in the rest of the world. Deutsche Bank is expecting low growth of 1.4% in the US and similar low growth in Europe and even less in Japan. The slow growth equates to low demand for Asian products. Certain Asian countries, such as Indonesia and Malaysia, are being hit doubly hard by low commodity prices. What exports they do have offers lower revenue.
The slowdown in China bears much of the blame and has resulted in significant overcapacity in manufacturing and real estate. Deutsche Bank expects 2016 growth in China to drop to 6%. India has also been disappointing but there is some hope there because the government is working to boost consumption.
2) High debt levels impeding growth. High debt levels further increase risk in the region. Chinese manufacturing and real estate are highly leveraged to support overcapacity, and there is risk of growing loan defaults among Chinese lenders. Corporate debt in Hong Kong is also substantial. Household debt in Singapore is one of the highest in the region, but it at least has been improving. With debt levels so high, there is little room for further consumption.
3) Aging populations are increasing economic burdens. Similar to the US Social Security system, where more people are going into it than contributing to it, Asia’s population is also aging. The downside to an aging population is that it reduces the labor force, lowers income tax revenues, and increases government expenses for government-provided healthcare and retirement benefits.
Outlook
Deutsche Bank expects the Fed to raise rates only once in 2016 and predicts that ASEAN countries will maintain current interest rates or possibly lower them. But low interest rates will not be enough to overcome the many other drags on Asia’s economies. Until the US, Europe and Japan implement policies that encourage growth and investment instead of actually discouraging it, the economies dependent upon those countries can expect to stagger along slowly just like their larger benefactors.
Keep an Eye Out for Bloat
Treasury teams can get bloated. One peer group member’s organization’s global treasury team has 240 people on staff. There’s enough cash in the organization, but there is a current effort to define what is actually treasury. Activities such as document review, technology support and accounting top the list. The fundamental question is whether these activities are better administered by the activity experts or the subject matter experts.
If a treasury department elects to own all of these activities, then they will surely be more heavily staffed than comparably sized and complex organizations that outsource them to other departments.
Separately, it is interesting to note what other areas treasurers can become responsible for that are quite outside of traditional treasury responsibilities. One member’s treasurer also has responsibility for facilities and global purchasing. Another’s treasurer has credit and collections. Others reported that their treasurers also have tax.
Case Study — Dynamic Discounting in the Supply Chain
Supply-chain financing continues to be a big topic in treasury, especially with the emerging “dynamic discounting” model that allows for daily change depending on the needs of the client and its vendors. One ATPG member explained in a presentation to the group how his recently completed a needs evaluation and vendor selection process (but hasn’t yet implemented it).
Key Takeaways
1) Is SCF a no-brainer? Yes, for some. The catalyst for this company to launch its program was its desire to leverage a strong cash position to enhance relationships and engagement with suppliers. In today’s ultra-low-interest-rate environment, using its strong cash-rich balance sheet to gain discounts on supplies is a better use of the company’s short-term cash than investing in Treasuries, MMFs, CP or short-term bonds. Early payment discounts translate to the positive business impact of improved yield on current idle cash, without taking on credit or counterparty risk. For suppliers, it is an alternative source of funds, which is cheaper, quicker and reliable.
2) Banks don’t have to be involved. Banks are the first in line to talk about these programs and pitch their versions of a solution. However, the company’s treasury director, who led the session, explained that if you have plenty of cash you don’t need the support of banks. That said, it is helpful to have the technological support of a third party who specializes in this space.
3) Why C2FO? The most common third-party are SAP’s Ariba, Taulia and C2FO. This company chose C2FO because this is the company’s only offering — they therefore have nothing else to sell you. The C2FO model involves the supplier offering what they will take, and the company sets just two daily parameters: the dollar amount committed and the total APR required.
Outlook
Innovative and effective financial products are always welcome in finance and treasury circles. But much of the success is dependent on other factors. As one member noted, onboarding suppliers is critical to the success of the program, and a strong push toward adoption is also needed. Whatever solutions are used must also have a clean integration with the company ERP system. Members noted that SCF programs are less common outside the US but that, as the Asian economies continue to slow, it is likely there will be more of these programs emerging in the region.
Lessons In Leadership
For treasurers, effectively leading projects and the people associated with them can mean the difference between the next opportunity and an extension of the current role. So attending to the art of listening is essential. Andy Chan, an executive coach with Lee Hecht Harrison, described three key ingredients to conversations and how a thoughtful leader and listener should respond:
- Facts. An artful listener responds to the facts by echoing them back to the speaker. This assures the speaker that the listener is paying attention.
- Feelings. Important conversations will usually bear feelings from the speaker about the content of the conversation. The artful listener will recognize those feelings and reflect them to assure the speaker that the listener is listening with all their senses, encouraging deeper sharing.
- Values. Important conversations also will include the values of the speaker regarding the subject matter of the conversation. Since they may not be explicitly communicated the listener has to work to identify them and acknowledge what is important to show engagement and support to the speaker.
Digitalization, Blockchain and Beyond — A Catalyst for Change
At the top of the banking industry’s agenda in 2016 is investment in technology, underlined by continuing regulatory change, and the need to define a digital client-value proposition. Digitalization, and especially the topic of blockchain, is considered to have the potential to change the rules of the game, and is calling for a review of services, processes and business models. Edward Budd, Chief Digital Officer for Deutsche Bank’s Global Transaction Banking division attempted to remove some of the mystery around blockchain by walking the group through the details of this new technology, its benefits and potential applications.
Key Takeaways
1) Exchanging relationships with data and transparency. Blockchain, the technology behind Bitcoin, is a dramatic paradigm shift in how transactions are monitored and executed. Data structure blocks, made secure by distribution and encryption, can hold data, programs and batches of individual transactions and executables results — all timestamped and tethered by information to a previous block. Transactions, assets and contracts are part of a historical public record that allows you to know their history and origin. It allows for immutable records, simultaneous access and a single consensus among stakeholders. These features serve to reduce risk due to falsification, increase efficiencies and streamline and automate processes. Of course, in any process where risks can be removed as opposed to mitigated, efficiency will naturally occur.
2) Blockchain applications. Mr. Budd offered a timeline of blockchain development where commercial examples will begin over the next two to three years and full blockchain adoption will be embraced by 2022. He offered examples of applications:
- Supply-chain transparency. In this example, components in a supply chain can be validated regarding facts such as their place of origin, date of shipment and quality control results.
- Know Your Customer (KYC) validation. Blockchain technology can be used to house the required KYC credentials of relevant employees and company information that could be available to all banks.
- Payments. The path of payments from start to finish is fully transparent in a blockchain environment. This makes payments easier to follow and would therefore create a more fraud-proof payment infrastructure.
Outlook
Most people would agree that supply-chain management, contract negotiations and payment infrastructure are massive activities that have varying degrees of efficiency and automation as well as varying degrees of fraud risk. Blockchain is in the early days of its development, and most ATPG members had limited understanding of it at best. But based on the enthusiasm of the visionaries, blockchain technology has a big place in the future.
Mutually Beneficial Banking Relationships
Banks need clients and clients need banks. How can clients and banks manage their respective needs and wants from each other so that relationships are mutually respected and thrive?
1) Tell the banks what annoys you. Deutsche Bank’s Carl van der Elst informed the group that the bank really wants clients to share what they find irksome. In an effort to get such feedback, Deutsche Bank has recently begun doing client surveys.
2) Banks need to understand the client’s business. While this might seem pretty basic, it is surprising how often bank representatives embarrass themselves with their lack of knowledge. Bryan Richardson with The NeuGroup noted his own prior experience where a bank made a call and pitched three products, two of which had no application to the business.
3) Free research is valued, but not necessarily free. Asked how the bank views requests for free research, Deutsche Bank answered: “The fact that a client comes to the bank is well-received and communicates that the bank is valued. The research is eventually paid for somewhere in the relationships.”