EVERYBODY INTO THE POOL
Asian companies and their treasurers are reducing finance costs by 'racing the sun'.
By Abe De Ramos

When Bolshevik philosopher Leon Trotsky said that economic evolution demands the abolition of national frontiers, he couldn't have imagined it brewing from the grey-fenced workstation of a bespectacled treasurer in capitalist London. By the time the corporate treasurer rises from his chair at sunset, the cash he manages has zipped through a network of hard drives to meet the sunrise in New York. When he returns to work the next morning, it would have just arrived from Singapore, waiting for his next maneuver.

It's a victory for globalization when a multinational company sweeps assets effortlessly from one continent to the next. If money makes the world go round, then a global treasury center is one of its best engines.

The mother of this invention is the necessity for efficient cashflow management. Thierry Moulonguet, CFO of the heavily indebted Nissan Motor of Japan, never tires of telling his finance team: "We've just got to have a better knowledge of where we are in terms of our working capital situation."

It's easy to understand why. Nissan may have returned to the black last year, but prospects for the US market are flat for the next three years. And don't even ask about Japan. With some saying the world economy is already in recession, depressed profits loom large even for the most global of brands. Meanwhile, shareholders persist in demanding that corporate managers create shareholder value. That demand can only be satisfied by cost cutting and making the most of what a company already has.

For the treasurer, this means pushing limits to make funds work harder. This entails the ability to move funds from a subsidiary that has garnered a surplus to another in deficit, and managing the risk in the process. After all, efficient working capital management begets a balanced capital structure, which in turn begets positive economic value. Doing it on a regional scale is tough enough; making three independent treasury centers synchronize and play from the same score seems about as easy as composing a symphony of Mozart's standard. Yet some have blazed the trail, and a few multinationals are already ahead of the curve and making their working capital sweat harder at various levels of complexity.

The consumer electronics giant Sony pioneered the global treasury structure in Japan when the government liberalized certain areas of the finance sector in 1998. Nissan started its own as soon as the French carmaker Renault took over management and implemented the Nissan Revival Plan in 1999. Now, electronics maker NEC is in the process of building one.

Others in Asia are catching up, including the bail-out candidate Hynix Semiconductors of South Korea, and the pilot-impaired carrier Cathay Pacific Airways of Hong Kong. Within this year, Shell Oil and Exxon Mobil will each have a global treasury structure of their own, as will mobile phone maker Nokia of Finland, their bankers say.

To Richard Jaggard, global centralization is a natural outgrowth of 20 years of advances in corporate treasury. A former corporate number-cruncher in London, Jaggard recalls days in the early 80s when in-country pooling - the notional aggregation of credit and debit balances among distinct subsidiaries - was manna from heaven. In the next decade he witnessed multinational companies manage treasury operations regionally in Europe. Later in Asia, he saw regional treasury centers (RTCs) mushroom. "When the RTCs mature, they're going to take the next step, which is to try to bring cross-region liquidity to bear," says Jaggard, who is now senior vice-president for global treasury services at Bank of America in Hong Kong.

The case for global centralization is getting stronger. The introduction of the Euro has made life easier for liquidity and risk managers - business can be done in one currency. Cross-border sweeps, or the physical movement of funds among different subsidiary accounts, can happen without the pain of conversion.

Regulations are also changing, however slowly. Banks, for example, have recently included Vietnam and the Philippines in their cross-border sweeps. Latin American countries, meanwhile, allow corporate treasurers to concentrate US dollar accounts in the US. Where regulations are intractable, as in most of East Asia, the 80/20 rule can always apply: do it where you get the most flows, which often are the well-developed, less-regulated markets anyway.

Technological innovation is also an obvious driver. American banks' investments in implementing global treasury platforms have run in the millions of dollars, they claim, and one of the results is the enabling of a "perpetual management" of a single book. Same-day sweeping now happens within Asia where legally permitted, and automatically in Europe and the US. "The tools we use - the sweeping, pooling and payments products - are already specialized in nature; but the uniqueness is how you put them together for the client's global structure," says Steven Groppi, senior vice-president for treasury services at JP Morgan Chase in Hong Kong.

Two Models

Aside from the economic benefits of pooling and cash concentration, a great lure of global centralization is control over risk management. A treasurer or CFO of a multinational corporation could better manage currency risks if he has a transparent, 360-degree view of group accounts worldwide - in real-time. "The whole area of exposure management is something that has become more of an awareness since the 1997 [Asian currency crisis]. With centralization, you have a lot better control, knowing where your positions are," says Groppi. Jaggard predicts: "Global liquidity is going to be a big headline."

But unlike simple cash management products such as cross-border payables and receivables, a global treasury operation isn't a commodity that could be bought off-the-shelf; it's a strategic decision. While cash management involves simple processes that can be done with eyes shut - they can even be outsourced - global liquidity management involves in-depth knowledge of cashflows to execute better hedging, and business structure to address the tax implications of global netting. Two models, however, are emerging, after which most existing global treasury centers are patterned. Both assume advanced cash management tools are already in place.

The first applies to multinationals with existing regional treasury center structures handling multi-currency receivables. In a typical RTC structure, individual subsidiaries manage their own payables and receivables, and at the end of each business day would have either a surplus or deficit position in their local currency bank accounts. (If there are multiple subsidiaries in one country, an in-country pooling structure should be in place). The RTC then brings the local currency position as close to zero as is practical, by swapping the surplus to its preferred currency. The surplus is brought to a concentration account the RTC manages. The structure becomes global when surpluses in each RTC - in Asia, Europe and the US - are then concentrated into a master account that "follows the sun", so the funds could be used continuously within the three time zones.

The second model skips the RTC route, and it applies mainly to multinationals with few but large operations across the globe, such as semiconductor makers, original equipment manufacturers and oil companies. These companies tend to have receivables in a single currency, normally the US dollar. After managing their own local currency operating accounts, each subsidiary's US dollar accounts are then wrapped together in a master, global account that sweeps or pools automatically.

The result is cross-regional liquidity, where accounts in one region can benefit accounts in another. Inevitably, this set-up can make an efficient country or regional treasurer turn sour, but the clear, ultimate beneficiaries are the group and its shareholders. Multilateral netting eliminates expensive overdraft charges, and minimizes bank borrowings by those in deficit. Sweeping and pooling do not eliminate withholding taxes, but putting the master account in a country with multilateral tax treaties makes the expense less significant.

In both models, accounts from the country-pool level up are monitored 24/7 by the global corporate treasury, thanks to advanced banking products. Supported by a good cashflow forecasting system from regional or country subsidiaries, the central treasury can then perform the necessary exposure management. The benefit of 360-degree cash monitoring, however, is that hedging doesn't necessarily mean swaps or forward contracts with anyone. It can be passive - knowing when a receivable in a strong currency is coming can spare a treasurer the costs of hedging another exposure that's perceived to be weak. "Being able to look at your positions around the world, you can hedge more holistically, intelligently, naturally through your own flows," says Groppi.

We are Family

The numbers are enough to make Hiro Kurihara cringe, and he is doing his share to make his CFO's life easier. "Cost savings are just one part of the reasons why we've established a global treasury center," says Kurihara, managing director of Sony Global Treasury Services unit in London. "The more important thing is we can have full control over the global liquidity of the group, so that we can utilize the funds so that the size of the balance sheet can be reduced. From a structural point of view, it's better," he says.

Sony Global Treasury Services (GTS) operates a structure patterned after the first model. Each Sony treasury center in Tokyo, London and New York have individual local currency accounts (Japanese yen, Euro and US dollar). All these are then linked to a pool account that GTS established in each center. At this level Kurihara monitors the pooling from one RTC account to another. The amount pooled between RTCs depends on their individual cashflow requirements and forecasts. Because pooling is done at the GTS layer, no inter-company lending actually occurs, avoiding tax dues.

That, anyway, is how it should look by next spring. The Singapore and New York treasury centers will integrate this month and April 2002, respectively. The rest of Asia for now is off the map, while all that can be done for Latin America is to have New York manage the currency risk.

But already, Kurihara is happy with the success of the Japanese and European pools. Until two years ago, "we didn't know what was the financial situation in other regions," he says. "We could only try to utilize other regions' money at the end of the fiscal year," says Kurihara, "but now, on a daily basis, we can do this kind of control, and it's very efficient."

"One big plus of Nissan Global Finance is the capacity to monitor regularly how the financial situation is moving, compared to the budget and initial cashflow forecast," says Moulonguet. Because the global treasury center takes care of the cash management, funding and risk management for its subsidiaries, "companies can now focus on their core activities, which is for the dealers to sell cars and the industrial companies to manufacture cars, and not be bothered by finance functions," he says.

Whereas Sony puts its excess balances in overnight investment facilities with an American bank, Nissan "re-circles" its surpluses, largely benefiting its two consumer financing companies, Nissan Mortgage Acceptance in the US, and Nissan Financial Service in Japan. It's a crucial role - Nissan expects flat sales in the US in the next three years, and sales in Japan are declining. "It's a steady process," says Moulonguet. "Financial relations with banks for getting financing is reduced," he says, adding that Nissan has been able to concentrate its banking relations to ten banks worldwide.

Moulonguet also directly credits Nissan Global Finance's contribution to the Nissan Revival Plan, a blueprint of cost-cutting and debt-reduction measures that brought Nissan back to profitability last year. Finance costs dropped by half to 311 billion yen (US$2.5 billion) in 2000. "It has contributed to the reduction of net debt, in addition to the reduction of the financial cost of the debt that we still have in the balance sheet," he says. Nissan still owes creditors some 2.5 trillion yen (US$20.5 billion), and is aiming for zero by 2006.

Implementing a global liquidity structure has distinct advantages for a company under restructuring, Moulonguet says. Hynix Semiconductors, formerly Hyundai Electronics, a US$5 billion a year company, is another living, albeit struggling, example. Chae In-Sug, head of the finance team for the cash-strapped company, has an accurate calculator - Hynix expects to save around US$2.2 million a year from interest expense and FX cost reduction.

Falling into the second model, Hynix didn't have regional treasury centers before it implemented a global cash pool. But it did have the advantage of having receivables mostly in US dollars, simplifying its bank accounts. Each of Hynix's entities in Asia, Europe and the US have US dollar accounts. These are linked to a Hynix master account in Bank of America in Singapore, which Chae and CFO Chang See-Chung monitor from Seoul. Bank of America automatically offsets the positive and negative balances on the separate subsidiary accounts in the pool. Of course, Hynix remains in trouble, but that's US$2.2 million more to spare for debt payments.

On the receivables side, Cathay enjoys the benefits of being in the airline industry, where payments for plane tickets all go through the International Air Transport Authority, which serves as the clearing house for the industry. Check payments from agents are cleared through IATA and are disbursed once or twice a month to the airline, while credit card payments are disbursed daily in major countries.

Cathay usually maintains two bank accounts in each country. The resident bank account, which could be a local bank in the country of operation, holds the day-to-day operating needs of the branch, and surpluses are transferred to a non-resident bank account - any of HSBC, JP Morgan Chase or Citibank.

Ng is able to see the balances of each non-resident account, which are concentrated in master accounts in Euro and US dollars. Ng doesn't have to be in either New York or London to perform the necessary sweeps. He doesn't even have to be awake. "Every day, if there is any credit or debit balance, it will automatically sweep to the master bank accounts," he says.

Taiwanese carrier EVA Airways operates a mirror image of Cathay Pacific's operation, and for Ng and his EVA counterpart David Tsai, their work is focused on controlling the currency risk exposures. As such, they rely heavily on the accuracy of cashflow forecasts reported to them weekly and monthly by finance managers in their branches. Says Ng: "Information is very important for us to manage our cash and currency risk exposures." Once Cathay ascertains its position in different countries and currencies, it can then make better decisions on hedging its unwanted risk. "We may choose to keep a currency in deposits, let it generate better interest, and save it for later forex conversion. Or we may sell forwards if this currency is risking depreciation," Ng says.

With many Hong Kong and Singaporean firms acquiring assets in the US and Europe, some Asian companies could also explore global treasury management. Andy Dyer, head of cash management products at Standard Chartered Bank in Singapore, says Asian companies tend to keep the treasury operations of overseas assets autonomous. "Treasury is only one factor in an acquisition, but it still needs to fit in the overall picture," he says. Asian companies are headed in that direction, Dyer adds, as more and more of them consider US dollar pools.

If you're like Alfonso Jim, director of finance at National Semiconductors in Hong Kong, you could add value to your job with business risk counseling. NatSemi, a Silicon Valley-based company, runs a global liquidity operation like Hynix's. The Asia Pacific headquarters runs a shared service center with accounting responsibility, and only a limited treasury capability. What Jim does is minimize the group's forex exposure in the first place. One way to do it is "strategic purchasing", trying to match the currency of payables with receivables. For example, Jim negotiates with vendors to accept payments in Singapore dollars, a substantial receivables currency for NatSemi, even if the vendor is outside Singapore.

Jim is also enhancing the group's credit management. "You monitor the customer's financial position to make sure that they are not an excessive credit risk," he says. "If they are, we will have to use appropriate credit terms, or we may even use other instruments to minimize our risk, such as credit insurance," says Jim.

To be sure, a global treasury structure is still an emerging trend, and organizational changes will be frequent. Sony Global Treasury Services, for example, was based in Japan until May this year. If there is one function within a corporate structure that is constantly evolving, it is that of the treasurer's, and sooner or later, he will find his own place under the sun.

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