A STAR IS BORN
Once seen as a simple route to cut costs, centralized treasury operations are now doing much, much more.
By Lynne Curry

Webber Lee hardly looks like a pioneer. Quiet and polite to a fault, he works from a modest office overlooking Singapore's Sentosa Island, and his flashiest touch is a red tie. But in treasury operations, Lee is on the vanguard. He's the treasurer of US-based DuPont's Asia Pacific operations, and is in the forefront of a major change in the way multinationals are managing their treasury operations in the region. As the head of the US$26.9 billion-a-year chemical manufacturer's regional treasury center (RTC) in Asia, Lee has championed a complete overhaul in the way DuPont handles its money in Asia.

From plain vanilla cash management and limited foreign exchange hedging activities eight years ago, Lee's facility now handles everything from netting and pooling and interest rate risk management to arranging financing for customers and vendors. His RTC also provides business consulting for DuPont managers on an array of issues, including currency and pricing strategies. And for the future, Lee and his team hope to market their know-how to companies outside DuPont, opening up a new profit center for the group.

Becoming a pioneer, according to Lee, is not all that difficult. For starters, it's a matter of the right mind-set. "When most people think about treasury, the very first thing they do is talk about hedging and risk management," Lee says. "They never think about how that knowledge could be used. They are in a more reactive mode. The real need is to understand your customers, the competition and the customer's position in the market."

This is heady stuff considering that the concept of a regional treasury center only arrived in Asia fairly recently, imported from the US and Europe where they've been in use for several decades. Today, RTCs have become the core of financial operations for many companies in Asia, with greater powers, wider geographic responsibilities, and commanding great clout at the boardroom level. "It's not a backroom function as in the past," says Lee.

Indeed, since the establishment of DuPont's RTC, the company has moved beyond its original reason for setting it up - cost reduction. Lee says the RTC's benefits today are primarily in generating more revenue for the group. For example, in the first year, the RTC offered a finance scheme for letters of credit, and the division's sales jumped by US$23 million. By giving customers more flexible terms and lower financing costs in US dollars than those offered by banks, the scheme appealed to customers in highly regulated currency markets. The RTC's exchange risk sharing pricing strategy, which adjusts US dollar prices when the dollar moves beyond a certain pre-agreed range, has also kept customers loyal.

Going Global

Bankers in the region, far from feeling the heat from this trend, applaud the RTC revolution. "More and more companies are seeing the benefits of having regional treasury centers and how to use them," says Mark Myers, head of cash management at Standard Chartered in Singapore. "The benefits are different for different companies, but they fall into two categories: first, there is a dramatic reduction in cost, and second, centralization [which] can help give companies greater control." He explains: "Imagine you have family members in five countries with bank accounts in each in different currencies, and you have to rely on bank statements and what each one says about what is going on. You can see how much easier it is to see the information and do transactions versus trying to piece together all of the information."

Five years ago, Nokia Treasury Asia, a treasury operation of the Finnish mobile phone company, was just such a family. Each division in Asia of the US$20 billion-a-year company paid its local vendors from individual bank accounts, set up within separate cash management structures. Also, the Finnish group focused on funding, risk management and cash management activities in only those countries where it had the biggest sales - Hong Kong, Singapore, Australia, Thailand and Japan. Today, Nokia's Singapore-based RTC handles all of these activities in much greater depth and covers the group's treasury needs in all the countries it has business in Asia.

Last year, Nokia took an even bigger step, leveraging its web-based systems to link the Singapore operation to a global treasury operation. Managers integrated the Asian RTC with the group's two other RTCs, based in Texas and Switzerland, consolidating all functions into one database. Now, for example, when a finance manager in Bangkok calls up a report on his PC, Nokia's global position also appears on the screen. Nokia based the integration on Quantum, a treasury management system developed in New Zealand and now distributed by SunGard treasury systems. Nokia uses the SAP R/3 enterprise resource planning system as a global finance and control platform. The result has been both lower costs and improved productivity. "We handle all non-payroll payments directly out of SAP R/3, with great savings in resources and transaction fees," says David Blair, the managing director of Nokia Treasury Asia, in Singapore.

This kind of development, according to DuPont's Lee, heralds the future of RTCs worldwide. "[With] the Internet, there can be a database that is accessible anywhere, anytime," he says. More and more RTCs, he says, will evolve toward a global role in a world with a 24-hour business and trading day. "A regional treasury center [will] become just like a satellite orbiting the earth," he muses. "It can become a transaction or processing center. Trading is only one small element. The whole idea is to leverage the transaction business, a treasurer's knowledge, around the world."

Long on Yuan

Back down on earth, Nokia's Singapore RTC depends on an entirely different set of skills when it comes to dealing with the treasury activities of the lesser-developed countries in Asia. The complex regulatory environment in China, Nokia's biggest Asian market in terms of sales, for example, has prompted Nokia to transfer an RTC employee from Singapore to Beijing and hire a second Beijing-based employee to provide a center of treasury expertise on the mainland. As part of the Singapore RTC team, they report directly to Singapore. Their brief is to develop relationships with national Chinese banks and help improve the company's cash management activities. Other tasks on the agenda of Nokia's Beijing treasury staff include exploring China's nascent electronic banking system, and enhancing the company's risk management, for example, by using the onshore forward yuan-dollar market. Bank of America's Tarek Anwar, senior vice-president of global treasury services at Bank of America in Singapore, agrees with this approach. "Proximity gives market intelligence and knowledge about what the other corporations are doing. If a company is not present, it may find it tough to keep its finger on the market pulse," he says.

The heart of the RTC, however, remains in Singapore. In addition to cost benefits, the RTC has given Nokia a better handle on potential problems. "By concentrating all financial flows in Singapore, we are able to obtain the benefits of economies of scale with our service providers," Nokia's Blair says. "With the improved visibility of our cash flow, we know what the risks are, and can react faster to changes arising from our underlying business or from market conditions." Having a centralized cash management system enabled Nokia to gather its US dollar funds from across the region and sweep them into a global pool managed in Geneva. "This was a necessary and key link in achieving global US dollar pooling," Blair explains.

Hewlett-Packard (HP), a US-based more than US$40 billion-a-year computer and printer manufacturer, has followed a similar route. Since establishing its treasury center in Singapore two years ago, HP has gradually strengthened the investment expertise and alternative funding options that it provides to operations in other Asian countries. "Treasury activities are being transferred to the Singapore treasury center on a country-by-country basis," says Lawrence Chim, treasury consulting manager at Hewlett-Packard Far East, in Singapore. By the end of last month, the treasury center will cover HP's treasury activities in 13 countries - from Delhi to Tokyo - in Singapore. This is a major change from the previous practice when treasury functions were dealt with at the country level. The HP facility, however, has a different structure than other RTCs based in Singapore. It divides responsibilities into two groups within the same department. Each group requires different skills, with one group handling cash management, including funding, investment and financing. A second group manages consulting work with HP's business in other countries, plus currency exposure and risk management.

Although the treasury center has existed for nearly two years, Chim reckons it took about 15 months to consolidate treasury center activities effectively. Today, the results are better control of cash, and the development of a critical mass of treasury expertise and knowledge. The center now makes all investment and funding decisions, including whether to make fixed deposits or intercompany loans. The treasury center operates a kind of virtual bank allowing other branches to contribute excess money to a cash pool. The computer maker has a US dollar cash pool in Hong Kong, but manages it from Singapore. At the end of each day, it pools its funds with Europe. Foreign currency hedging is another significant treasury center responsibility. It assists other HP operations with their balance sheet forecasting, and generally handles any treasury questions.

But the benefits to HP go further than that. The treasury center allows corporate headquarters to view the company's stock of cash, investments and loans at the push of a button. "In the past, headquarters needed to ask each country's office to provide information and financial data," says Chim. "Now, you just go into the system, and track the position wherever you want." The treasury center has streamlined and automated each country's work, allowing it to eliminate jobs at the country level, but creating jobs at the treasury level. Transferring cash from treasury to accounts payable is now done with multi-bank software that provides electronic access to bank accounts at different banks.

The treasury center has also enabled HP to strengthen its relationship with its main banking partner. In the past, individual HP companies throughout Asia all had different banking partners. "Now, we only need to deal with one or two banks instead of handling 12 to 13 different banks," Chim notes. Chim declined to reveal which banks HP uses, saying it could jeopardize the company's relationships with other banks.

Learning to Share

A similar evolution has taken place at Motorola's RTC over the past six years. Back in 1994, the Illinois-based US$31 billion-a-year mobile phone and telecommunications company kicked off its RTC as a kind of liaison office for activities originating in the US. "At that time, the RTC was a one-man show," recalls Tan Boon Hui, regional treasurer at Motorola Asia Treasury, in Singapore. "If a person had a specific problem, he would fly there and troubleshoot it." Today, it is a full-fledged bureau with a team of five. According to Tan, the RTC now primarily manages the company's foreign exchange exposures, stays abreast of regional regulatory changes, handles cash surpluses in the region, and uses those cash surpluses for intercompany loans around the world. And like Nokia, Motorola has three mainland-based staff handling treasury functions. "China is the one place where you must have people on the ground," Tan explains. "The regulatory environment is difficult. You have rules, but they can be interpreted in many ways, and the practice is different from theory."

Still, despite the difficulties of operating in China, the availability of cheap labor and strong foreign language skills prompted Motorola to open an accounting shared service center (SSC) in Tianjin last year at its factory there. The SSC handles accounting services, maintains the books for subsidiaries in the region, and processes payables for China, Singapore, Australia, New Zealand, Taiwan, Hong Kong and Japan. Other countries are being added over the next year or two.

For US$5.8 billion-a-year 3Com, a California-based network equipment manufacturer, its Asian RTC has had to adapt to internal changes, not external ones.

Until recently, 3Com was attempting to sell "everything to everybody," says Jonathon Woon, treasury manager for the Asia Pacific rim at 3Com's headquarters located in a breezy, leafy section of Singapore near the airport. Today, it is focused on selling cable modems, wireless technologies and Internet telephony. It is getting out of selling desktop analog modems and has spun off its hand-held computing division that made the Palm Pilot organizer. 3Com has also redefined its target customer. Although it still sells to large corporations, the company's focus is more small- and medium-sized companies, Internet service providers, telecommunication companies and individual consumers.

As a result, Woon's challenge is to modify 3Com's approach to credit and foreign exchange risk. The difference "is how we deal with a potentially larger customer base who have weaker credit-worthiness and hedging capabilities," Woon says. "We might need to undertake more risk, provide local inventories and offer local currency billings. Other possibilities are business-to-consumer Internet sales and credit card payment options."

Currently, 3Com's RTC is highly centralized, following a commission model with no dedicated treasury staff elsewhere in Asia. "We bill customers from here," says Woon. "All other offices are sales offices in major countries. Once we clinch the sale, the order actually comes in here. Payment comes in here. Other offices get a commission."

Modifying this system, with the help of 3Com's RTC, however, will not be as difficult as it would have been a few years ago. At that time, before 3Com's RTC was set up, the company dealt with a long list of banks. Today, it is working toward dealing with only one bank. It is also attempting to automate its cash management process, particularly its accounts payable system. When that is accomplished, the company is evaluating whether it will centralize those functions in the UK.

The Bechtel Group, the US$12 billion-a-year engineering, construction and development conglomerate, also uses its RTC to help further its strategic business objectives. After moving its RTC from Hong Kong to Singapore in late 1997, it now covers the treasury functions for the group for 12 Asian countries. The Asian financial crisis in 1997 dramatically heightened the construction giant's understanding of the impact of foreign currency risk when it accepted Thai baht for a particular project. Though the revenue it lost from the baht devaluation represented a relatively small amount, the company learned a lesson. The "importance of cash flow was not high on the radar screen prior to July 1997," says Frank Waterhouse, CFO of business management for Bechtel Asia Pacific in Singapore. "Since that time, we have become better able to understand the foreign exchange risk and to take action to minimize those risks."

Waterhouse says, however, that using an RTC has had other equally important benefits. It means "we don't incur unanticipated cost surprises, and this gives our cash management an advantage to capture investment opportunities that we might not otherwise have known." In Singapore, among other tasks, Bechtel's RTC is primarily responsible for managing local banking relationships, credit arrangements, cash management, taxes and foreign currency risk. When it is unable to balance its regional costs and revenues, it gives instructions to its headquarters in San Francisco to hedge its foreign exchange risks. Its head office has a broader perspective of the company's global risk position, which enables it to better manage its foreign exchange exposures.

The Web Advantage

Companies like Bechtel, of course, are now faced with integrating their RTC operations into their new e-commerce activities. Bechtel, for example, has formed a global alliance with Free Markets, an on-line auction site for industrial parts, raw materials, commodities and services, to purchase US$600 million of equipment on-line by year-end. For treasury, Waterhouse says, the Internet-based business should help improve the company's global cash management abilities, mainly by bringing in information much more quickly than traditional businesses.

Nokia's Blair sees other advantages from moving into the on-line world. He foresees a time when the Internet will provide better advance notice of incoming funds and will better facilitate reconciliation of bills. "E-business will make it easier to get information about what is going on within the company," he notes. "We will be able to process the information faster within treasury and act on it more effectively."

The Internet is also likely to have a far-reaching impact on Asian RTC's relationships with banks. Indeed, DuPont's Lee believes that over the long term traditional corporate banking requirements will change. MNCs receive preferential treatment with banks for their foreign exchange trading, he says, because the volume is big. But with the Internet, market information is instant, and "volume is not the key driver," he says. The key is counterparty risk. "MNCs may get together to establish an auction site. They know their partners' credit and are willing to trade with those who have a rating of a single "A" and above. The bank can be the financial intermediary rather than deal in foreign exchange trading ... The problem with the Net is the other side - who is buying or selling. Corporations could register with a site and specify the counterparty risk they will feel comfortable with," he says.

Indeed, Nokia's Blair points to currency trading on-line offered by Internet currency brokerages like Currenex.com. "Instead of picking up the phone and asking the rate from a bank dealer, [CFOs will get it] on a web-based product," he explains. "This will enable you to get quotes from five or six banks with whom you have lines. Currently, you can trade over the Internet on proprietary systems offered by most banks, but multi-bank services (these are services that enable users to obtain rates from different banks) integrated with treasury systems are clearly the future. This will greatly enhance work flow."

Which, after all, is what a good RTC is all about.

Lynne Curry is a contributing editor at CFO Asia