VideoTalk about losing streaks, consider Sony's troubles this year. The Japanese consumer electronics giant announced lower-than-expected yearly results in April and projected a 57 percent drop in net income this year. Its mantle is being challenged everywhere, in Asia most notably by Samsung, the Korean giant, which has shown greater skill in cutting costs and rushing cleverly designed, trendy products to market — once thought to be Sony's unique line of trade. Then as if proof that bad luck marches in battalions, Sony's Vaio laptop computers started giving harmless but disconcerting electrical shocks to its owners. At press time, Sony is still mulling recalling 18,000 of the machines as its management finesses this latest blow to its image of digital-age elan.
Little wonder, then, that pressure is building on Hiro Kurihara, the managing director of Sony's London-based Global Treasury Services (GTS) unit, the company's bold attempt at globalizing working capital and risk management. Set up in 2001, the ambition for the center was to spread its services to Sony's electronics, Playstation, music, entertainment, and movie divisions, pooling the group's working capital, centralizing foreign currency hedging and cash management, and opening a global window on risk management.
"Cost savings," Kurihara said to CFO Asia in August 2001, "are just one part of the reason why we've established a GTS. The more important thing is that we can have full control over the global liquidity of the group, so we can utilize the funds so that the size of the balance sheet can be reduced." So how does progress look so far? "We are on schedule, but not fully rolled out," Kurihara says on the day that Sony's spin doctors are busy managing the Vaio dustup.
Sony's electronics group is nearly fully plugged into the GTS services, while the Playstation unit is partially so. He adds: "Regarding the other companies, the problem is that [their] activities are quite different from electronics. We are discussing how to apply our services." Translation: it's still too early for him to say that the GTS can attain its original, revolutionary goals.
But while the benefits of the model are taking longer than expected to emerge, the GTS has already proven capable of offloading some of Sony's interest-rate costs, gaining efficiencies in funding on a global scale, and providing strong hedging advantages, both via derivatives and so-called natural hedging. In the meantime, Kurihara has discovered that the global operations of even a forward- looking company like Sony have enough moving parts to confound the most sophisticated vision of a treasurer.
Making the RTC Sing
Despite rough times, most large multinationals have embraced some form of global treasury operations — and are looking to them to produce the savings, economies of scale, and risk management opportunities that will widen currently squeezed margins. Sony pioneered the structure in Japan when the government liberalized certain areas of the finance sector in 1998.
Nissan followed suit as part of its revival plan in 1999. Others in Asia are catching up, including Japanese electronics maker NEC and SARS-beleaguered carrier Cathay Pacific Airways of Hong Kong. Shell Oil and Exxon Mobil each now have a global treasury structure of their own, as does mobile-phone maker Nokia of Finland. Reuters has just rolled out the Asian portion of its global treasury operations.
In lean times marked by profit warnings, company strategists regard treasury operations as a focal point for the incremental gains that boost margins as well as cutting costs. The pressure on Sony's GTS can be measured by the aggressive goals announced by Sony for its turnaround plan. Company CEO Nobuyuki Idei has said that Sony will more than double its profit margins to 10 percent by 2006. In a sign of market skepticism, Moody's downgraded the company's long-term unsecured debt to single-A1 from double-A3 on the assumption that Sony wouldn't boost profitability soon. Idei is anxious to disprove naysayers and is looking to Sony's innovative projects like its GTS as one of the vehicles that will do so.
These concerns have heightened the exposure on what was always, from the beginning, meant to be the gradual rollout and fine-tuning of Sony's bold bet on the future of global treasury operations. (Sony has never disclosed the cost of setting up the GTS, which is designed as a self-funding unit. However, some of the cost of conversion in Sony's operations will be absorbed by the group's recent US$1.2 billion restructuring charge.)
The jury is still out on just how much centralization will produce the magic that global companies seek. In a typical regional treasury center 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. The regional treasury center (RTC) then brings in 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 United States — are then concentrated into a master account and sent around the world.
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