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The region needs more working capital and greater risk control as the trade landscape evolves, writes David Lake.
Asian trade finance is going through a gradual but important evolution that will push the region to greater efficiency. While this change may be measured in years rather than months, the landscape is already noticeably altered and the impact is substantial for an expanding legion of traders. All in all, a maturing trade environment underlines the trend as regional enterprises become more sophisticated and move closer to global practices in areas such as open account, where exporters ship goods based on a buyers' payment promises rather than through letters of credit.
Three factors dominate Asian trade finance trends, according to Alistair Currie, head of trade services for Asia-Pacific at HSBC. "One driver is ever-changing technology. This is an area that evolves rapidly and is of great importance to customers who are always eager to further streamline operations and increase efficiency," he says. Currie adds that there is a second trend: the methods used to fund trade finance along the supply chain are also changing. "The increasing emphasis on open account trade is at the fore, as trade services providers respond with products such as receivables finance and credit insurance for companies to secure or enhance credit," he says. Finally, trade flows are changing with a surge in intra-Asian trade, as consumption increases and capital investments rise to support economic growth, particularly in China.
Asia comprises around US$1.5 trillion of the US$6 trillion in global trade, according to Citigroup. The bulk of this activity takes place in North Asia, and almost half of all Asian trade is inter-regional. If China is the factory of the world, then it is a factory fuelled by regional powerhouses such as Japan, Korea, Taiwan and Hong Kong. While China runs surpluses with OECD countries, it maintains a large deficit with the rest of Asia. The inflow of components for original equipment manufacturers (OEM) is one reason for this state of affairs.
Open account alters risk equation
The move to open account is attracting more and more attention across the region. Overseas purchasers have put tremendous pressure on vendors to provide open account services in order to move away from the high costs of letter of credit (LC) trade. By consolidating orders with fewer vendors and increasing order sizes, buyers have the bargaining chips to demand a shift to open account. Still, bankers are quick to point out that writing off the LC business is premature. The higher-risk nature of the Asian economies makes LCs attractive for those selling into the region, and many suppliers demand LCs despite the higher costs.
Grace Wong, general manager of finance and accounts at Toshiba Singapore Pte Ltd, is one trade finance practitioner who has seen her business move to open account over the past few years. Toshiba Singapore sells into South-East Asia, the Middle East, Russia and Africa, and must provide open account services to all large and most medium-sized clients or face the loss of business to aggressive competitors. To rise to this challenge, Wong now spends more time on risk analysis, hedging transactions through the extension of credit limits and strict customer analysis.
"We have little choice but to move to open account and in so doing we must deal with the changing risk equation," she says. "One way we have responded is to insure our trade flows with insurance companies to mitigate risk. The cost of credit insurance has dropped to reasonable levels. The fact that it costs 20%-40% of an LC to insure the same level of trade has brought insurers to the forefront of trade."
Sanjiv Gupta, finance director for Guardian Industries Group in Asia, a US-based glassmaker with two factories in Thailand, sees the move to open account as more gradual for the building materials sector. With the exception of Australia, Gupta does all his business on an LC or a wire transfer basis prior to delivery. He notes that most competitors follow similar practices.
Wong and Gupta have one thing in common, however. They are both concerned about the role of technology in the trade finance business. Wong notes that trade banks have invested heavily in technology and made a real effort to serve clients, but e-commerce platforms are still not flexible enough. She does not want to make the regular software changes it takes to keep up with new platforms, nor does she find it easy to talk clients into using her preferred platform. The situation is further complicated by the number of banks her many customers use.
The banks are the first to admit that technology is still not at the level that it should be, despite huge resources spent on new platforms and systems. As one banker puts it: "It is not about system, it is about process. You can have the system that does everything, but the slow take up of the relevant parties hinders the development of a paperless business. In order for the platform to work properly you need all the parties to accept the same standard and we have not got to that point yet."
Gupta has a different issue. He says banks have made headway with regards to the delivery of e-commerce services and believes trade platforms create efficiency. He has used B2BeX (a web-based trade and supply chain platform) for two years, and can eliminate all paper associated with trade, subject to other parties also using an electronic platform. However, straight-through processing falls down when dealing with parties who cannot electronically communicate and a bill of lading is paper-based. While large shippers are generally electronically enabled, Gupta uses smaller shippers in Asia to cut expenses and admits his supply chain is hindered by their comparative lack of sophistication. He does not see a solution in the near future and feels it will be some time before there is a system that can accommodate his needs, or those of other material suppliers.
Size matters
Andrew Au, managing director of regional trade for Citigroup, says: "One offshoot of this rising tide of trade flows is a rationalization of vendors. Buyers place bigger orders with vendors to improve efficiencies and benefit from economies of scale." He says this forces working capital needs to change, which puts financial stress on enterprises. "The balance sheet of some vendors turns over three to four times a year. Underlying this process is the move to open account. That makes risk mitigation more of an issue and the challenge for regional companies to raise finance for trade activities is far greater than it used to be."
The need to streamline document flows by electronic means is another key trend driving trade finance, according to Bruce Alter, vice-president and Asia trade head for JPMorgan. Alter cites studies that show that millions of dollars are lost annually due to inefficiencies and discrepancies in paper document flows. He believes that e-commerce is the best solution, and that is the primary reason why trade banks have invested significantly in technology resources and development.
The more technology there is in place, the fewer documentation discrepancies there are, says Alter. That translates to buyers getting their goods quicker and vendors getting paid faster. "Corporations move from the manual document processing end of the business," he says. "A corporation's time might be better spent focusing more on other value-added areas such as credit analysis and sales. Technology also has a key role to play in mitigating risk as current information platforms provide essential data to support risk mitigation and analysis."
According to Ken Stratton, global head of trade, supply chain sales and B2BeX at Standard Chartered Bank, a central issue trade financiers face is working capital management. Historically, CFOs have generally focused on cash management and treasury strategies when looking to improve working capital flows. Today, they look to their entire supply chain, including domestic and international trade transactions. This trend is prompting the merging of treasury and trade services, as banks look for ways to more effectively combine cash, treasury and trade marketing efforts.
Trade banks will move more towards consultancy as a result of financial engineering in the trade supply chain. "Think of the data we have within the banks that when mined effectively provides management information that can lead to significant efficiencies in a company's working capital," says Stratton. "We can study client trade flows and come back with ideas on how to streamline the process, leading to reductions of inventory holdings, stronger management of account payables and taking receivables off balance sheet to improve working capital."
SHAKIRA 
