Routes to value for Asian multinationals in CEE
Trade links between Asia and Central & Eastern Europe (CEE) have grown rapidly in recent years. Most significantly, a large number of Asian multinationals from across a wide variety of industries are expanding their businesses in the region, both organically and through acquisitions. A major proportion of these are also establishing regional manufacturing, distribution and sales operations, to offset the geographical and time zone differences with their home markets.
These moves inevitably present important challenges for Asian companies, not least because of the complexity of managing different regulatory environments, currencies, payment instruments and cultures. The European treasurers of these companies must find how best to support the cash, risk and working capital requirements of these operations, while meeting the needs of the business at group level.
Rajesh Dash, regional manager Asian corporates at ING and author of this article, has more than a decade of experience in transaction banking, with a specialisation in cash and liquidity management. Having worked extensively with American, European and Asian multinationals around the world he has developed a unique understanding of the value chain across the treasury function. This enables him to collaborate successfully with treasurers and work towards customised solutions.
Asian multinationals often have different business priorities according to their business maturity, organisational model, cash flow profile and business culture. For example, Japanese automotive and hi-tech firms companies have a longstanding presence in Europe via mature businesses, and as such, are typically looking to reduce costs and streamline banking structures. Chinese companies, on the other hand, are normally at earlier stages of European expansion, and are seeking to achieve more rapid growth via mergers and acquisitions (M&A). Korean companies, and in some cases, those headquartered in India, are often a part of large conglomerates that have businesses interests run via different entities.
New ways to offer value
Irrespective of their strategy and country of origin, most Asian operations in Europe will be looking to optimise their working capital structures and leverage post SEPA efficiencies. This often implies the implementation or expansion of a shared services model.
For many Asian multinationals in Europe, the concept of European treasury shared services is not new. Early shared service centres (SSCs) were set up to centralise core competencies and reengineer processes to reduce costs, improve efficiency and enhance risk management. In many cases, the scope of these treasury SSCs was relatively limited, such as accounting, and often for a limited number of group entities.
Within CEE, one of the first issues to consider is where best to locate their treasury centres. Many have opted for manufacturing hubs in Poland, which has grown rapidly as a SSC location, while other important SSC locations include CzechRepublic, Romania, Slovakia, Hungary, and to some extent, Ukraine. The entire region continues to offer good proximity to manufacturing or distribution hubs, a competitive cost base and educated workforce, and well as a strategic location within a time zone that straddles Western Europe and Asia.
Although some SSCs have increased the range and geographic reach of the services they offer, the wide diversity of business practices and cultures in Europe has proved an obstacle in many cases, whether in technical, cultural or cash and liquidity terms. These obstacles, whether perceived or actual, have prevented companies from leveraging economies of scale and optimising pan-European cash and liquidity management.
Corporates can leverage shared service centres more effectively since instruments and formats have been harmonised
The European treasury landscape has evolved considerably in recent years to the extent that many of the former obstacles to pan-European treasury centralisation no longer apply. With the introduction of SEPA, it is now easier to centralise payments and collections with the help of an expert pan-European bank. Corporates can leverage the SSC more effectively, now that instruments and formats have been harmonised.
Equally impacted by the challenging macroeconomic and regulatory environment, Asian multinationals operating in Europe are dealing with more complex cash and treasury requirements, and with working capital and financial supply chain optimisation as primary considerations. The challenge for existing treasury SSCs is therefore to identify, implement and deliver new means of offering value to the business in Europe.
Communication is key
These are significant considerations for Asian multinationals opening a treasury centre in Europe for the first time. It may be easier to introduce a shared service model upfront rather than migrating activities from a decentralised business organisation. In practice, treasury SSCs located in CEE may experience resistance or reluctance from entities in Western Europe to a further centralisation of their treasury activities, such as liquidity management and collections. In particular, they may be concerned that locating treasury activities outside SEPA might result in sub-optimal liquidity structures or lack of support for domestic payments and collections.
In reality, locating an SSC outside SEPA does not limit its ability to leverage the full advantages of SEPA, or to achieve the same degree of sophistication in either liquidity or working capital management. SSCs located in CEE can realise the same degree of sophistication and geographic reach in supply chain finance programmes, cash pooling and payments and collections centralisation as those in Western Europe. This includes leveraging techniques such as payments on behalf of (POBO) and collections on behalf of (COBO) that enable companies to minimise the number of euro accounts they operate.
To succeed, a treasury SSC must clearly communicate the advantages it can offer, both at group level and for individual entities
To succeed, a treasury SSC must clearly communicate the advantages it can offer, both at group level and for individual entities, such as enhanced processes, reduced costs through economies of scale and improved controls. This is not a ‘one off’ process, but a constant process of dialogue to ensure that treasury understands the evolving needs of the business, and business units continue to recognise the ways in which treasury adds value.
With its broad presence across the CEE and long experience in the region, ING is ideally suited to act as an advisor to clients who share the challenges of setting an SSC in CEE. ING understands the difficulties faced by treasuries and other parts of a business that may be resistant to centralisation and the SSC concept. Our approach is to help companies overcome these challenges through their change-management strategies, while looking to support the reengineering of processes that occurs when functions are relocated to an SCC.