TIME BANDITS
As business tightens, companies are trying to preserve cash by delaying payment.
By Jasper Moiseiwitsch

In bad times, bill collection suddenly leaps from back-office job to front-office headache. In Asia, where cross-border trade is the lifeblood of tens of thousands of companies, it's no surprise that accounts receivables are swelling. With Singapore, Japan and Taiwan already in recession, the threat of defaults is rising. The Hong Kong collection agency Frontline Business Information, for example, reports a 40 percent increase in debt-recovery inquiries since January. It also says that 40 percent of businesses contacted in the past six months have experienced payment delays. Worse, 70 percent of SMEs in Indonesia, the Philippines, Vietnam, Malaysia, Thailand and Korea are now rated as high credit risk, according to the agency.

Defaults and payment-delay issues have been made worse by a regional trend towards unsecured, open-account type transactions. Large US and European buyers - particularly in the electronics and chemicals sectors - are insisting that their Asian suppliers sell goods on open-account terms, instead of using guarantees like letters of credit (LCs). The reason is plain to see. Jeremy Hampshire, director of trade credit in Asia for insurance brokerage Aon Risk Services says: "In North America and Europe buyers are saying, 'We don't want to have the extra cost [of payment guarantees].' They say, 'If I'm buying from Asia we'll insist on open-account - and if you don't like that then we'll source our goods somewhere else.'" The result: the slow demise of the letter of credit.

Another casualty has been the move to electronic trading systems, announced with much fanfare over the past few years. An all-electronic system wrings significant costs out of the labor-intensive business of trade finance. But more and more players are reluctant to take the plunge as the economic climate chills (see box, below).

The problem is not so much the cost of the new technology. It's more that a one-click system demands one-click payment. Says a CFO who wishes to remain nameless: "Some companies are resisting electronic systems because they want to keep full control over payment. If everything goes smoothly (document processing and invoicing) they lose an important excuse to pay on time."

Cracking the Rice Bowl

In China, payment collection is complicated further. Its entry to the World Trade Organization (WTO) will accelerate its already muscular growth in international trade.

Not surprisingly, Asian manufacturers are shifting production to the mainland. Taiwan's computer sector is all but decamping to China, with its semiconductor industry not far behind. And as WTO eliminates China's export quotas in textiles, the region's garment manufacturers are also expected to move north.

Suppliers to these industries are watching the shift with trepidation, as China's trade finance remains in the dark ages. Small local firms are notorious for delaying payment, and the mainland banks offer few solutions. "In China the trade finance market is very difficult. They don't have local LCs. A lot of trade is done via open account, with very long trade terms," says Nikson Ma, the Hong Kong-based group treasury director for Astec International, a manufacturer of power converters.

Astec sells transformers to mainland buyers, who in turn make computer components for large US-based PC manufacturers such as Dell. As Dell stands as the ultimate buyer for the finished goods and is fully creditworthy, Ma's Chinese buyers insist Astec deal with them on open account terms. Unfortunately, these partners tend to delay their payments, usually by weeks but sometimes for months.

"The question is, what is the customer profile? For Dell or IBM, I don't care much. First, I don't perceive much credit risk. Second, they are relatively punctual," says Ma. "What I'm concerned with is the subcontractors, those two-dollar (thinly capitalized) companies because they are usually late and their credit risk is high," he says. Ma says there is little he can do to protect himself in these transactions, apart from seeking some form of payment guarantee from the ultimate buyer - an extreme action that does not solve the main problem of payment delays.

Unfortunately for Ma, international banks are not allowed to have a renminbi relationship with mainland companies, so cannot issue letters of credit on the companies' behalf. The local banks can cover these transactions, but are only beginning to enter this market.

Stuart Tait, HSBC's senior manager of trade services based in Hong Kong say this of his institution's mainland rivals: "The Chinese banks have come a long way (in their trade finance services). The big four Chinese banks' reputations are much stronger than four years ago but they remain massive bureaucracies. It's quite difficult to get to the core of an issue when talking with such monoliths."

CFOs indeed complain about the quality of coverage for their China transactions, implicating both China's banks and the wayward payment methods of some of their mainland partners. Says Astec's Ma: "We are asking [the mainland banks] if they are willing to purchase the [renminbi] accounts receivables. But this is quite a new concept to China's bankers. We are waiting for China's banks or other institutions to come up with more innovative products."

It all makes trade with China tremendously complicated. Frank Lai, the CFO of Hong Kong-based Central Semiconductor Manufacturing (CSM), uses some cumbersome methods to manage his mainland transactions. "In China there is very limited imagination with regards to financing. We prefer to use letters of credit," says Lai. "But our buyers in China, even some of the big clients, usually offer post-dated checks. Sometimes we ask our clients for collateral - for example, property." Lai says that if CSM has an open account, he will ask for collateral for any transaction above a certain limit.

Now or Whenever

The rise of China trade and the move to open accounts both point to the single-most important trade-finance issue on CFOs' minds: getting paid, on time. Open accounts have done the most to undermine timely settlement. In a karmic working-out of the great corporate credit swap, CFOs have seen everyone delay payment to everyone.

Ma of Astec describes a lugubrious waltz between partners down the supply chain, in which all are deferring settlement. "We are all chasing the same set of money. It's difficult to control," says Ma. "If they are big buyers and they delay payment for ten days, so what? Am I going to take them to court?" Ma says that Astec sometimes offers incentives, in the form of a discount, so that buyers settle their invoices quickly. "It's actually quite silly," says Ma. "You offer a discount just so people pay on time."

More and more, CFOs are turning to banks to help them with their cashflow. Nowadays, for example, finance managers are more likely to ask their banks for loans to manage a large order or to buy their accounts receivables than to worry about setting up letters of credit.

The banks are happy to oblige as this is where they find their profits. "The banks make most of their money in trade finance from fees and interest income," says Abraham Chacko, senior vice-president of ABN Amro in Singapore. "For example, Asian suppliers to global companies would generally be interested in pre- and post-shipment financing and a quick collection cycle," he says.

Help is also at hand from another quarter: trade insurance. CFOs are increasingly looking at this means of payment coverage, which is common in Europe but is just starting to take hold in Asia. Paris-based Coface, the world's largest export credit insurer, is expanding aggressively in Asia. The group has also rolled out an Internet service, its so-called @rating Solution.

The service has much in common with other web-based trade finance offerings - on-line distribution, an indifferent approach to the capitalization of proper nouns - but distinguishes itself in its scope. The service guarantees payment on goods shipped to about 70,000 firms for which it maintains a rating, ratings that are in turn culled from a database detailing about 35 million companies.

Generally CFOs find insurance a useful substitute for transactions that can't be covered by letters of credit (that is, most of their mainland dealings) or when trading with smaller firms that are unknown by the banks. Aon's Hampshire says most of his clients look for coverage on their small-company transactions.

The China market - where companies are less likely to be publicly listed and where disclosure standards are low - stands most in need of the credit insurer's special brand of risk management. "There is very limited credit information about [China's] small- to medium-sized enterprises. We have noted that a company can expand very fast and then contract very fast in China," says Lai of Central Semiconductor Manufacturing, which uses a mix of LCs and export insurance.

It all speaks of risk. In the fourth quarter of 2001, that great sucking sound is the dollars drained by companies' collective accounts receivable. Money delayed is money lost and money at peril.

Jasper Moiseiwitsch is a freelance writer for CFO Asia based in Hong Kong