GETTING A HEAD FOR YIELDS
Asian treasurers come to grips with how to create more value from cash.
By Abe De Ramos

Shutting down a plant in Mississippi wouldn't normally create tension in a Hong Kong office. But when Paul Tong, the CFO of Johnson Electric, walks past the desk of group treasurer WH Ng, the air in the Tsuen Wan headquarters practically crackles. The reason? Tong's superiors at the US$677 million-a-year maker of electronic components are expecting to hit a major bump in US sales this year. That's why they shut the Mississippi plant.

But that's only part of the reason why Tong is making Ng nervous. Tong wants to exceed shareholder expectations by making an acquisition that would allow the company to better capitalize on juicy opportunities it sees in China. But his net cash position of just US$25 million does not put him in the best position to pounce and Ng knows it. As Ng puts it: "We should try to make our cash position as liquid as possible, because we just don't know when our boss is going to make another acquisition," he says.

The fact is, Ng may have been hired to monitor Johnson Electric's payables, receivables and liquidity management, but for Tong, Ng's job is all about value creation. Efficient cash management, he believes, inspires effective liquidity management, which in turn enhances working capital management. Proper use of working capital then reduces capital employed and interest expense, which increases operating income, and keeps the firm's capital structure in check.

These are things that make investors happy. "We talk time and again about a more effective use of working capital, better control on capital expenditures, and enhancing cashflow. To me, cash management should be a part of shareholder value creation," Tong says. This kind of pressure, even Tong would admit, is unusual for Asia. But the CFO's views have widespread currency in the rest of the world. In recent years, Tong's counterparts in the US and Europe have worked hard to pull their treasury departments into their companies' overall business strategies.

In Asia, however, the majority still view cash and treasury management as nothing more than survival tools - processes to ensure that payments are made on time and receivables are collected quickly to keep the business running. Consider this from Joseph Lee, senior treasury manager at the US$2.4 billion-a-year Orient Overseas, a Hong Kong-based shipping company: "My personal view is that we are not supposed to make profits on the treasury function, as far as the structure of our organization and our mission are concerned."

Ahead of the Curve

Linking cash management to shareholder value "may be ahead of its time in Asia," admits Jimmy Yap, Asia Pacific head of global cash management at Deutsche Bank in Singapore. But perhaps no other part of the world needs to see that link more clearly than Asia - and no other time is better than now. Just as Asian companies are enjoying their return to profitability after the financial crisis of 1997-98, along come the US and Japan, their two largest trading partners, heading for a possible recession. Today, Asian currency and interest rate outlooks are anything but positive. In short, risk is very much back in vogue, and treasurers need to prove they can manage their assets around it.

To be sure, there is no shortage of help available for treasurers who want to improve on what they do. The advent of enterprise resource planning (ERP) systems, such as those provided by SAP, Oracle, JD Edwards and Systems Union, have made information flow easier for treasurers, enabling them to keep track of inventory, payables and receivables in real-time. This then allows them to forecast their cash positions anywhere from three months to a year.

Paying suppliers has also become as easy as a few strokes of a desktop keyboard. Johnson Electric, for example, has outsourced all its national and international payments to Standard Chartered Bank. Under the system, Ng, the group treasurer, sends his file of payables to the bank's computer system, and with Johnson Electric's digital signature to confirm the transactions, Standard Chartered executes the payments from the company's designated bank accounts.

Outsourcing accounts receivables is less common, and quite understandably because revenues are the lifeblood of any company. But this hasn't stopped banks from offering new products to tempt treasurers. HSBC, for example, this month launches a pilot project in the Philippines named Domestic Collection Services. The system will allow participating treasurers will send computer files of receivables to HSBC, which will then print the invoices, post them, and collect payments in cash, electronically or by check. It will then reconcile them and report back to the treasurer on who has paid and who has not.

Deutsche Bank, meanwhile, is about to take its pilot electronic bills presentment and payment (EBPP) system to more industries in more countries in Asia, and will roll out a global version of it in the third quarter. The system, called db-ebills, is currently in use by the air cargo community in Singapore, and has cut the float time - the time it takes for an invoice to turn to cash - from two-and-a-half weeks to just two to three days (see TechWatch, CFO Asia, March 2001).

The Past Again

Despite the profusion of cash management products, any treasurer who is still grappling with the various technology options is far from alone. Systems Union, a UK-based provider of financial software tools, found that only 38 percent of respondents in a recent survey of finance directors in Hong Kong were "indicating a desire to subscribe" to centrally managed financial software. More surprisingly, 60 percent preferred the old-fashioned manual methods of processing orders.

Anthony Solimini, senior vice-president for cash management at HSBC in Hong Kong, says these results don't surprise him. "But the mindset is changing," he says. "Treasurers, as they learn more and more by using the Internet, are becoming more inquisitive about how technology can enhance cash management," he says.

Still, at a recent seminar on cash management, Solimini recalls: "I looked at my slide and thought, 'Oh my god, this is the same stuff that was on my slide five years ago!'" Treasury topics that were hot five years ago - regional treasury centers, shared-service centers, and outsourcing - are still hot today. The difference between 1996 and 2001, however, is this: "Rather than doing 5 percent of their processing (through technology-enhanced operations), we're probably now doing 15 percent," he says.

This kind of slow progress is not entirely due to the conservative nature of the Asian CFO. Governments are also to blame. Bureaucratic regulations and tax rules limit the full benefits of netting, sweeping, pooling, and even foreign exchange hedging in many countries in Asia (see box). As such, justifying the move towards cross-border, inter-company funding - or moving funds from a subsidiary in surplus to a subsidiary in deficit - is itself a challenge. "It seems that we take one step forward and two steps back. South Korea is liberalizing slowly, while Malaysia and Indonesia have actually imposed currency controls," says Yap of Deutsche Bank.

As a result, according to Robert Yenko, regional treasurer at Intel Technology Asia in Singapore, there are only about 50 to 60 true regional treasury centers in Asia Pacific. And almost all of them have been established only in the last five years. He also says that more than 60 percent of shared service initiatives fail to deliver fully on their promises, for reasons ranging from lack of clear goals to lack of management support.

All told, the mix of technological boom and economic bust that Asia witnessed in the last five years has polarized CFOs and treasurers of both multinational and regional companies, with the majority whose operations are totally decentralized on one end, to the handful who are at the cutting edge of centralization on the other.

The Few and the Brave

Clifford Hammond is among the handful. As regional finance and treasury manager for German chemicals manufacturer BASF, Hammond runs a Singapore-based re-invoicing center which he helped set up three years ago. Nick Franck, director at CFO Solutions, a Singapore-based consultancy which advised Hammond on setting up the center, says this kind of facility is close to the nirvana of RTCs as it cuts across the trade activities of a company and the treasury risks that go along with them.

In essense, a re-invoicing center centralizes the finance operations of intra-group trade. For example, a subsidiary in Country A buys a product from another subsidiary in Country B through the re-invoicing center, in its local currency. The re-invoicing center takes care of the cash, risk and liquidity management involved in the transaction. And since all orders are placed through one unit, inventory management is also centralized. "When you're centralizing the company's trade, you're centralizing your whole liquidity management. This gives greater control over your whole working capital," says Franck.

The US$28 billion-a-year BASF, which relies on Asia Pacific for 14 percent of its revenues, does that and even more. "The currency issue is helped by the re-invoicing. We now can invoice in domestic currencies and bring the risk to Singapore," Hammond says. "At this stage we are now embarking on the next phase: how do we begin managing our information flows that are now coming at a more rapid rate?" The CFO is also looking at how he can leverage the result into better balance sheet management and into funding foreign exchange risk in Asia.

Hammond has taken an initiative towards that phase by running a front-office treasury system that has a direct interface to electronic banking. Whereas treasurers running a simple regional treasury center still trade currencies through brokers, Hammond looks forward to doing it himself, thus getting yields without cuts. "I have the capacity for straight-through processing - I have automatic reconciliation the next day as the accounts are uploaded, and that allows me to manage a lot more with minimal headcount increases," he says. "All I need is to be able to plug in to some possible foreign exchange and money market portals like Bloomberg, FXall, Atriax," he says. But these portals are just developing. "I've helped develop a portal-based system that is ready to go, but I'm waiting to see how long it takes for them to be up and running. In that respect, we're ahead of the curve," he says.

Playing Catch-Up

So is Iain Torrens, who manages the Asian treasury issues of the Cookson Group from its headquarters in London. His most sophisticated liquidity management tool is notional cash pooling in countries where it is allowed - Australia, Singapore and Hong Kong. "All these pools have come about this year, and the drivers behind that are inter-company loans," says Torrens, deputy group treasurer of the US$3.6 billion-a-year Cookson, which trades in ceramics, electronics and precious metals. "It gets rid of local pockets of cash. We're very cash-generative in Asia so we have a need to remit Asian earnings back to the UK treasury center to reduce group borrowings," he says.

In this aspect, Cookson is even ahead of DHL, the courier company that operates in 228 countries worldwide, which is only beginning to look at pooling arrangements in Asia, according to Dennis Tan, DHL's regional treasury manager for Asia Pacific and the Middle East.

The same is true of Celanese, a US$4.8 billion-a-year German chemicals firm. "We just started experimenting with global cash pooling," says Singapore-based Lim Kee Huat, regional treasurer for the company, which has sales offices in eight countries in Asia. "We will basically pool our cash resources and give the balance to Frankfurt. Frankfurt will then try to consolidate from other [offices] to try to determine who has some overdraft, and then neutralize it so that the net borrowing of the company becomes lesser overall. We don't want to have cash placed in a bank account with a low interest rate, while some other entity is borrowing at a higher rate," he says.

Government restrictions on offshore movement of funds are not the only roadblocks to a centralized treasury operation. How governments treat inter-company fund flows could also render sweeping or pooling meaningless. Some countries view such flows as inter-company loans, and declare them liable to withholding taxes, says Paula Eastwood, partner at advisory firm PricewaterhouseCoopers in Singapore. One solution to this is to locate the master account in a tax-favorable environment, but this does not totally eliminate tax dues.

Another common concern in centralizing treasury operations is politics within a company. Any multinational or regional corporation that decides to have the treasury concerns of the whole group run by a select group of people from one location will encounter resistance from local finance managers in each subsidiary. "I think there would be some reluctance.

A lot depends on what we aim to do," says Torrens of Cookson. "If, however, you have an ERP system that allows [local finance managers] to retain control over the payable process, it would help. At the end of the day, our local controller is responsible for his local working capital. I don't think we can say to them, 'Manage your working capital, and by the way, we're going to do all your payments for you.'" In fact, he says, such an attitude directly conflicts with the company's incentive program for management, which includes efficient working capital management as a criteria.

Orient Overseas actually runs that structure, although for a different reason. Senior treasury manager Joseph Lee says while the group's bank account from receivables is centralized, the physical settlement of payments to suppliers and service providers are done by the individual country offices.

As a company with offices in 48 countries, Orient Overseas has bank accounts all over the world, where collections made by the local offices are deposited. Lee then concentrates these funds, and using information provided by his ERP system, remits funds to subsidiaries with payment obligations. "For some time, we have been centralizing the payments, but we found out that it is more appropriate for the local office to do the physical payment," Lee says. "The local office is the one that appoints service suppliers, and it has day-to-day contact with them. Once there are payment queries from suppliers, it is usually directed to the local office first. If we go for a centralized settlement process, the geographic and time zone difference will cause a lot of problems communicating with them. So for about eight to ten years, we've gradually de-centralized the process," he says.

Hopefully, it shouldn't take that long for the rest of Asian treasurers to dedicate as much of their jobs to shareholders as their CFOs demand from them.

"Collections and payments information ultimately lead to liquidity and investment management," says Tim O'Keeffe, vice-president for treasury services at JP Morgan in Singapore. "You have to know what kind of investment management decisions you can make. If you understand all the risks out there and you employ your cash efficiently, the market will like that. But if you can't forecast where your money will be, it will cost you, and it will make an impact on shareholder value."

WH Ng, group treasurer at Johnson Electric, sees the equation more positively. "If we can increase the return on our surplus cash, then that will increase our shareholder value." An acquisition in China may not be far away after all.

Abe De Ramos is a senior writer for CFO Asia based in Hong Kong.