As companies continue to expand their operations overseas in search for new growth markets or cost efficiencies, treasury technology and liquidity structures are evolving too. What does next generation global cash management look like and where will the march towards international business take us next?
Globalisation is not a new phenomenon. During the Han Dynasty (206 BC-220 AD), a network was built that would eventually become the hallmark of early global interconnectedness: The Silk Road. This historically important trade route, which saw desirable goods transported from China all the way to the heart of the Roman Empire in the Mediterranean, spanned 10,000km in total and operated until the end of the fifteenth century.
Today, with the internet granting easy access to new markets, and enormous container ships transporting goods from far-flung locations in a cost-efficient manner, corporate supply chains continue to globalise at a rapid rate. As a result of this, the international business environment, supply and operational chains, are becoming more complex. Together with diverse regulatory approaches between jurisdictions and a heightened political, sovereign and currency risk environment, this is making global cash management increasingly challenging - and at the same time increasingly important.
Achieving real-time visibility Since the crisis, treasurers have been doing a great deal of work to improve their international cash management arrangements - rationalising bank accounts, centralising positions, automating processes, and setting up shared service centres in tactical locations as a means to bridge the gap between international time zones and cultures. Yet, according to Treasury Today’s European Corporate Treasury Benchmarking Study 2014, cash management and cash pooling structures remain the top concerns for today’s treasurers.
For André Rijs, regional head of Sales Transaction Services CEE, US and UK at ING, this level of prioritisation continues because “cash is still king. Credit comes at a cost and is not always easy to find. So, companies naturally want to know where they have excess cash for their own funding needs. As such, visibility and control of group-wide cash remains a very high priority.
The leading banks are leveraging technology to provide a much more harmonised cash management offering to their clients, as well making their services available for their clients 24/7.
With this in mind, many banks and vendors in the cash management space are currently ramping up their advisory services and investing in innovative solutions to help treasurers to improve global cash visibility and control, and achieve the ultimate goal of ‘with the sun’ liquidity - essentially a 24/7 cash management structure that enables the company to operate and make decisions in real-time, across the globe.
The technology backbone In addition to implementing notional or hybrid pooling arrangements and interest enhancement schemes to help corporates move towards this goal, “the leading banks are leveraging technology to provide a much more harmonised cash management offering to their clients, as well making their services available for their clients 24/7,” notes Rijs.
Standardisation is absolutely key in all of the technological developments that banks are pursuing. In fact, through standardisation, banks are providing a technology backbone for international cash management, he says. “The software vendors are then building treasury dashboards and bank agnostic capabilities on top of that backbone, ensuring that their platforms that go beyond the basic transactional functionality of the past.” These new additions include powerful analytics capabilities, multi-currency transaction functionalities, multi-bank decision tools, risk management dashboards and automated compliance and regulatory alerts or limits, for example - all of which are helping international treasurers to deal with the complexity that globalisation brings.
Embracing new locations Away from evolving technology and liquidity structures, another traditional stumbling block for those companies operating internationally has been the raft of different regulatory measures and cross-border currency controls, with trapped cash being a major concern in emerging markets. But as the balance of global economic power shifts from West to East and from North to South, governments in emerging market countries - notably China and the Latin American nations - are working hard to open up their economies to benefit from international trade.
Nevertheless, as these developing economies embrace international business standards, and invest more in their service sectors, their ability to compete on manufacturing costs is being challenged. According to 2014 research from the Boston Consulting Group (BCG), five locations traditionally considered low-cost for manufacturing are now under pressure, namely: China, Brazil, Russia, Poland and the Czech Republic. The erosion, says BCG, has been driven by a confluence of sharp wage increases, lagging productivity growth, unfavourable currency swings, and a dramatic rise in energy costs. China’s manufacturing-cost advantage over the US has shrunk to less than 5%.
The rising stars, says BCG, include Mexico and North America, where the overall manufacturing-cost structures have significantly improved relative to nearly all other leading exporters across the globe. The key reasons for this include stable wage growth, sustained productivity gains, steady exchange rates, and energy-cost advantages. Mexico now has lower average manufacturing costs than China – by around 13%.
Closer to home There are significant opportunities in Europe too, says Rijs. “One of the very clear trends we see is the rise of shared service centres (SSCs) in Poland. More and more big name companies setting up SSCs in the country - HP and Herbalife – are recent examples.” Furthermore, a 2014 research report by the Association of Business Service Leaders (ABSL) looking at the Business Services Sector in Poland found that between the beginning of 2013 and early 2014, 66 new SSCs with foreign capital have launched operations in Poland. Employment in the sector has also more than doubled since 2012.
One of the very clear trends we see is the rise of shared service centres (SSCs) in Poland. More and more big name companies setting up SSCs in the country - HP and Herbalife - are recent examples.
“Poland is attractive for a number of reasons. First and foremost, proximity to your global markets is important. Corporates coming from Asia and the Americas to Europe are looking for a location that allows them to access all of those markets from one site. Poland’s skilled people are another draw – both the education level and professionalism of employees in Poland are at a very high standard. It is relatively easy to come to Poland and set up business, and economically, it is quite stable. So the country has a lot of factors working in its favour,” explains Rijs.
Elsewhere, some of the Central and Eastern European markets that are in the process of adapting to international business standards, such as Turkey - and even the transcontinental Republic of Kazakhstan, are now leapfrogging their Western counterparts. “They have quickly embraced digitisation to simplify cash management, since they are not dogged by legacy systems and infrastructure,” says Rijs. “Turkey is also a pioneer in the e-invoicing space, having mandated the practice for certain companies from January 2014, together with the electronic filing of their accounts. What’s more, the country has embraced digital supply chain finance solutions as part of its e-invoicing initiative.”
Turkey is also proving to be a keen rival to the textile manufacturers in Asia, as European firms sourcing from China are now looking for a low-cost manufacturing base closer to home. “The irony with the pace of globalisation and the advance of technology is that it has actually changed the ‘acceptable’ lead times on products. Buyers are no longer prepared to wait three or four months for their goods to arrive from China. In the age of instant communication and growing focus on corporate sustainability, it is far preferable to have your goods travelling a shorter distance and arriving much sooner.”
Making the grade For treasurers, the message here is that flexibility will be key when building next generation global cash management structures. With traditional manufacturing and SSC locations set to change, the ability to seamlessly incorporate new countries and currencies will be vital, but the added-value will be having real-time visibility over the company’s cash - and the ability to take informed decisions on the back of that information, wherever you are in the world.
“Achieving this will only be made easier by working with a banking partner that can follow the enormous speed of changing regulations, understand the dynamic economic environment, and leverage technological innovation, whilst grasping the challenges of global business within the context of a local market,” concludes Rijs.
(This article is produced in cooperation with Treasury Today.)
About André Rijs
André Rijs has over 15 years experience in banking having joined ING from 1997. After having worked for Nissan Europe for four years he started at ING Bank International Securities Lending and moved via Bank Mendes Gans to ING Central & Eastern Europe as a senior product manager. Subsequently he joined Payments & Cash Management Product Sales in Amsterdam and is currently responsible as regional head of Sales of Transaction Services for the regions Central and Eastern Europe, US and UK.
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