Global Supply Chains and Working Capital Ensuring resilience to enable recovery July 2020 PUBLIC
HSBC Global Banking & Markets Taking stock of the treasury function post COVID-19 Having dealt with the “survival” aspect of COVID -19, a number of firms are now moving ahead with more strategic topics. While resiliency is still key, Treasurers should be continue to be mindful of the opportunities that exist when markets begin to open again¹. Even in the face of economic strife, as treasury teams seek to assess liquidity, risk capacity and operational flexibility, the potential to unlock synergies increases. Operational Flexibility Exposure Treasury Setup ▪ Ensure sufficient cash levels and credit lines ▪ Gauge ability to recover lost revenues when ▪ Accelerate and automate treasury functions the outbreak ebbs through digitisation, while ensuring systems ▪ Substitute and localise / regionalise parts of offer real-time, global information / payment ▪ Manage ongoing need to service customers the supply chain as needed (i.e. shift from execution “just in time” to “just in case”) (and for customers to purchase goods / ▪ Deploy a centralised liquidity and risk services) ▪ Consider the time needed for adjustment management framework ▪ Review sales model, potentially increasing e- ▪ Review any capex requirements that need to ▪ Leverage treasury hubs in key regional commerce / direct sales (considering new be transitioned methods of collection) markets ▪ Reconsider reliance on any unfinished goods ▪ Review risk management guidelines for FX, sourced abroad commodities and rates 1. HSBC: Mitigating the corporate impact of the Covid-19 pandemic (May 2020) PUBLIC
HSBC Global Banking & Markets Optimising working capital post-COVID blends operational efficiencies and financial tools, enhancing cash flows and reducing costs Order to Cash Operational Efficiencies Purchase to Pay Forecast to Fulfil Cash & Liquidity People Policy ▪ ▪ ▪ ▪ Regional, localised suppliers Building supply chain Accelerating digital Enhanced credit risk resilience solutions ▪ mitigation Much greater focus on ▪ ▪ ▪ financial stability of key Near-shoring production Centralising liquidity, Payment terms extension to suppliers – large & small control, risk management ▪ facilitate sales Low-tier supplier focus ▪ ▪ ▪ Injecting liquidity into Cash flow forecasting ▪ Digitise OTC process SKU rationalisation Process Systems supply chain tiers ▪ ▪ Investment strategies ▪ Re-energised, targeted Re-tasking production lines ▪ Digitising PTP process ▪ collections & dispute Funding structure (e.g. In- ▪ Postponing final assembly resolution House Bank) ▪ ▪ Asset-based finance Receivables finance – to Financial Tools ▪ Mobile Collections ▪ Accelerate supplier on ▪ enable terms extension, Commodity finance ▪ Real-time payments boarding to Supply Chain accelerate cash flow and ▪ Pre-shipment finance Trade Payment ▪ Cross-currency / cross-bank Finance (SCF) programs mitigate credit risk ▪ Tokenisation pooling ▪ ▪ Sustainable SCF Documentary credits ▪ SWIFT GPI tracking ▪ ▪ Pre-shipment Finance Forfaiting ▪ Interest enhancement and ▪ Virtual Purchasing Cards liquidity solutions ▪ Documentary credits Liquidity Risk ▪ Virtual accounts ▪ Guarantees and bonds ▪ Settlement and cashflow ▪ Transactional FX solutions database (via DLT) Source: HSBC analysis PUBLIC
HSBC Global Banking & Markets Trends and anticipated shifts in supply chains¹ Trends Shift in trade from West to East Supply chain Sector transformation resilience = / + ++ + Vertical and Reshoring / horizontal near shoring Pace of change integration ++ + in supply chains is accelerating ++ ++ Accelerated pace of Govt. Growth intervention in non- change and national physical ++ + champions trade Increased pace of changed Shift from Sustainability B2B to B2C Equal or slightly increased pace 1. HSBC: Mitigating the corporate impact of the Covid-19 pandemic (May 2020) PUBLIC
HSBC Global Banking & Markets Trends and anticipated shifts in supply chains¹ Trend Pace Drivers Considerations • Middle Income population growth in Asia 1. Shift of • Growth in intra-Asian trade; RCEP, ASEAN, CPTPP • Growth in imports/ domestic trade of high value added trade from =/ + • New : higher impact of Covid in Europe, US compared products in developing markets West to East to Asia • Focus on diversification, agility and transparency of • Higher risk and revenue mitigation needs (e.g. 2. Supply supply chains, avoiding single point of failure; data documentary trade and related financing) • Capex/ investment in ASEAN, India, Africa chain + analytics as key enabler • Geo-political tensions between US and China; • Higher working capital requirements; built-in buffers, resilience • Partial decoupling from China; “China+” strategy higher inventory • Production coming closer to point of sale, aided by • Working capital implications from high inventory levels automation and new technologies, such as 3D printing; • Protectionism; push for re-shoring and domestic 3. Reshoring/ and higher operating costs; + • Reduction in trade of intermediate products near-shoring sourcing • Shift from “low labour cost” hubs to “skilled labour/ • Shorter supply chains; domestic trade growth specialised” hubs • Increased pace of digitisation, eCommerce, IOT, cloud- • Continued expansion in Tech & Telecom space (e.g. 5G); 4. Growth in non-physical ++ based services; extension of payment terms as sales tool (e.g. tech • Shift from physical to digital trade licensing, cloud computing services) • Change in consumer buying behaviours, accelerated during lockdown • Growing importance and protection of brands and • Place less reliance on retailers and distributors by 5. Shift from + client experience making use of third party marketplace platforms and B2B to B2C • Networked and digitally connected supply chains developing subscription services • Transparency leading to reduction of intermediaries in value chains 1. HSBC: Mitigating the corporate impact of the Covid-19 pandemic (May 2020) PUBLIC
HSBC Global Banking & Markets Trends and anticipated shifts in supply chains¹ Trend Pace Drivers Considerations • Consumer preference for more environmentally sustainable goods and for companies/ brands with • Supply chain reconfiguration and the ability to tap into clear purpose and a social contract sustainable financing solutions; e.g. green bonds, green • Relevance of ESG across businesses’ broader 6. Sustainability ++ loans, supply chain finance stakeholder base, leading to more balanced operating • Working capital implications from higher operating models; e.g. lighter carbon footprint costs (e.g. Wage increases, green standards) • New : renewed ESG focus driven by increased role of Government I • Focus on self-sufficiency in areas of critical goods and 7. Government • Export/ investment curbs in certain sectors services intervention and • Protection of strategically important sectors • Working capital implications: tariffs, self-sufficient ++ national • New : Increased role of government, given bail-outs/ operations, high inventory champions businesses operating backed with public money • Significant restructurings; weaker companies going out of business • M&A activity 8. Vertical and • Consumer and company preference for larger/ safer • Change in working capital needs from emergence of horizontal ++ suppliers integration intra-Group Supply Chains • Vertical integration as companies look for self-sufficient supply chains • Some sectors will fade in prominence (e.g. real estate, • Darwinian principles applied creating new opportunities 9. Sector retail, travel & tourism, hospitality), with economic ++ transformation models transformed for the fit and agile • Emergence of new sectors and business models 1. HSBC: Mitigating the corporate impact of the Covid-19 pandemic (May 2020) PUBLIC
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