Cash Management

The Perfect Treasury

Backed by the latest IT advances, treasurers of multinationals in Asia leave nothing to chance.
Abe De RamosApril 1, 2002

On any given day, Cyrill Scholer does a balancing act that would make a circus performer proud. As vice president at ABB Treasury Center Asia Pacific in Singapore, Scholer juggles as much as $3 billion a month between the various Asian operations of the Swedish-Swiss power and industrial equipment giant. On one day, he may be insuring that cash-short subsidiaries are internally funded from the surplus of subsidiaries elsewhere in the region. On another, he’ll be checking the foreign exchange commitments of his Asian units, working with them to hedge their risk with forward and options contracts.

Scholer knows his responsibilities are enormous, and he’s not just referring to the volume of cash he handles everyday. “We consider our operation as a profit center, and from a group profit contribution point of view, we consider that to be extremely important to ABB’s investors,” he says. As Scholer knows, the importance of the treasurer’s role goes beyond number crunching for day-to-day cash needs. Like CFOs, treasurers nowadays are increasingly aware of the implications of their work in creating shareholder value and maintaining good corporate governance.

And why not? Take any company in the region that was humbled since the 1997 financial crisis, such as Asia Pulp & Paper or Philippine Airlines. One of the root causes of their troubles was poor financial risk management, either seeking short-term funding for long-term projects or overexposure to foreign exchange or both. And then there’s Enron’s disastrous off-balance-sheet transactions. In the wake of that scandal, every treasurer on the planet now knows how much is riding on her or his ability to manage risk.

In sum, today’s treasurer sits in the hot seat. “While most treasurers would say their job is still to protect the assets of the company, the assets themselves have changed,” says Tarek Anwar, director at Bank of America in Singapore, in an article called “The Evolving Role of Treasurers.” “Assets are no longer short-term tangibles such as cash,” says Anwar. “They could well be construed as anything that relates to creating value for shareholders — accounts receivables, inventory, production cycles, intellectual property,” he says. Add to that off-balance-sheet obligations such as forward contracts, commitments to purchase assets in the future, and even debt guarantees.

Tools of the Trade

The treasurer remains the CEO of cash flow, the most prized metric of any company’s financial health. And the key to managing that metric is information: knowing a company’s financial position and risk exposures at any given time. Today, backed by fast-evolving technology, a treasurer has the ability to know more, to do more, and decide more independently. Through enterprise resource planning (ERP) systems, information about a company’s operations, supply chain and accounting are easily accessible.

Even better, automated cash management processes are already commoditized. ERP modules that power shared service centers are pervasive and getting cheaper. Oracle, for example, just cut the price of its business management software by 75 percent due to fierce competition. Those who do not want to be bothered with running their own shared services can outsource the process to banks, and even accounting firms.

Managing liquidity is getting easier. Treasurers of multinational or large local corporations can now perform in-country sweeping and arrange local currency pooling in many Asian countries. They can also do cross-border, even cross-regional, US-dollar pooling around the clock. Banks enable automatic investing of balances in overnight investment instruments, or they can actively manage short-term excess funds in investment-grade US commercial paper. Foreign exchange may be done over the Internet with the promise of straight-through processing. Treasury integrators even automatically input hedging information into FAS 133-compliant general ledgers.

In short, there should be no excuse for bad treasury management for large, wealthy multinationals or Asian corporations, thanks to the risk management capabilities that emerging technologies allow. No wonder then that treasurers see their roles evolving as well. According to David Blair, director of Nokia Treasury Services Asia in Singapore, which serves the Finnish mobile phone giant: “We add value by effectively reducing the financial risk and applying a very broad view of risk, [envisioning] enterprisewide risk, so that management and the people in operations can focus on designing great phones and selling them.”

All in the Family

At the $24 billion-a-year ABB Group, Scholer thinks the same way. Scholer oversees Group Treasury Services, which offers in-house banking services to ABB companies in 12 countries in the region. Being an in-house bank means all ABB units need only to contact ABB Treasury Center in Singapore for foreign exchange and money-market transactions. Most of these are done through an electronic trading platform at the treasury intranet page of the ABB Web site. The intranet integrates financial- and treasury-related information and serves as an automated trading and reporting platform.

The intranet application gives ABB management a comprehensive, real-time view of its foreign exchange risk exposures. Today, this couldn’t be more important. “Our risk at present is not so much internal or commercial cash flow, but foreign exchange, where we see the region devaluing further,” Scholer says. The four-year-old treasury center in Singapore can now do spot, forward and money-market transactions with units in countries where regulations are most liberal: Australia, New Zealand, Japan, Hong Kong and Singapore. “They contact us via the intranet, and if one says, ‘I want to sell $250,000 against Australian dollars,’ then we execute that,” says Scholer.

In terms of hedging, ABB keeps a low FX risk tolerance, which Scholer enforces. “All our companies have to hedge every committed cash flow, and they come to treasury for mandatory trading,” he says. Forward contracts normally range from three to six months.

In turn, the treasury center conducts active risk management with banks, either for its own trading gains or hedging. Scholer, for example, uses single-bank trading platforms when he wants to hedge a foreign exchange position. He is not yet trading on multibank platforms — such as FXall, Currenex and Atriax which promise better spreads — but he is in the process of doing so. “We’re still looking if we should trade with multibank [platforms], and are discussing this with users in other ABB Treasury Centers,” he says.

Scholer’s concern is typical: These platforms are still developing straight-through processing, so for now, dual-entry is necessary to record the transactions. “Our requirement is that this platform links to our front-office system, because we don’t want to do double input. If we input a trade into the multibank system, it has to upload directly to our front-office system for processing,” he says.

Covering FX exposures gives Scholer greater comfort to manage excess liquidity. The treasury center has cash concentration arrangements for Australia, Singapore and US dollars, but it is more active in using loans and deposits for intercompany funding. That means Scholer takes deposits from subsidiaries in surplus, and uses them to offer loans to subsidiaries in deficit. “If Hong Kong is long on cash, they will place deposits with us, which we will use to finance Australia, or Japan, or any other country which will be short,” Scholer says.

As in arranging foreign exchange transactions, the subsidiaries and the treasury center use the intranet for loans and deposits. “If Singapore needs money, they would use our intranet module, where they input the loan they require. We price it, and they get it,” he says. In the unusual event that the treasury center in Singapore falls short on cash and could not extend loans to Asian units, Scholer then borrows funds from the ABB World Treasury Center in Zurich. “We do not use any bank money-market lines for Asia Pacific treasury,” says Scholer. The money remains all in the family.

Despite ABB’s volume of business in Asia, Scholer thinks regional pooling may not be practical for now. First, cross-border pooling is highly regulated, possible only in the five most developed Asian markets. Second, he thinks returns from investment options for the amount concentrated in a regional account will not be much different from yields available through domestic instruments. “It is still very difficult for me to offer a better rate on a cross-border structure, because local markets already pay quite well,” he says. ABB currently invests in money markets in the five developed countries, plus Thailand, South Korea and Taiwan.

This treasury model serves ABB well. Last year, ABB Financial Services, under which the five ABB Treasury Centers belong, contributed $2.1 billion to group revenues, from $1.9 billion in 2000. However, due to a change in accounting and increased provisions against expected claims related to the September 11 attacks, ABB Financial Services posted a loss of US$32 million, from a profit of US$349 million in 2000.

Even so, Scholer says the treasury centers create value because transaction fees that would have gone to external banks stay within the company. “If the subsidiaries pay to the bank, we lose the margin; if they pay to the treasury center, the money stays within the ABB Group,” he says. Given this benefit, ABB Treasury Centers can afford to charge commercial rates for all their services. There are no transfer pricing issues — and consequently, complex tax issues — involved.

Ringing Tones

Nokia Treasury Asia — which is responsible for risk, cash and liquidity management and funding for Nokia’s operations from the Gulf to the international dateline — does not trade for profits for its treasury services. But its role in preserving and creating shareholder value is clearly stated in the group’s annual report. “The treasury function supports this aim by minimizing the adverse effects caused by fluctuations in the financial market on the profitability of the underlying businesses, and thus on the financial performance of Nokia,” says the report.

Nokia enforces a monthly reporting cycle that collects foreign exchange exposure data from the affected companies. “We have a policy that our sales companies are invoiced in their local currency; this concentrates the FX risk to factories and distribution centers,” says Blair. “This way, the risk is not spread out across the region,” he says. The reporting cycle projects FX exposures for up to 12 months. The net position is then hedged in financial markets through forward and options contracts, rarely exceeding one year.

A simple hedging strategy isn’t enough for Nokia. The company uses the value-at-risk (VAR) methodology to assess the foreign exchange risk. VAR is a figure representing the potential losses for a portfolio resulting from adverse changes in market factors, using a specified time period and confidence level based on historical data. Blair calculates this by using a risk management module called Q-Risk, provided by SunGard, a vendor of treasury integration systems.

Blair hedges “almost all” of Nokia’s currency exposures. He is also an early adapter of FX portals; Nokia was the first company in Asia to trade with Currenex. Like Scholer, he expects a volatile Asian currency market this year. “We didn’t see any major disasters last year, but anyone who forgets 1997 is taking serious risks,” says Blair. “That implies that we don’t just rely on VAR, but we have to do some serious stress testing as well, and be prepared for major discontinuities in terms of market price risk,” he says.

Year-long forecasts of purchases and sales is not simple guesswork for Nokia. Its phones and equipment may be hot property in Asia where mobile phone demand seems insatiable, but what makes forecasting easy is RosettaNet, an Internet-based XML trading platform between information technology, electronic components, and semiconductor manufacturing companies and their suppliers. “RosettaNet specifies the format for all kinds of business transactions that are important to our industry segments, from product planning, volume planning, ordering, invoicing and remittance,” says Blair. Nokia expects that 40 percent of its purchases this year will be done through RosettaNet, a nonprofit organization owned by a consortium of companies that use it.

RosettaNet is, in fact, far more ambitious than an E-business hub for the technology industry — it is a standard for XML communication between trading partners and service providers. Through RosettaNet, Nokia wants to automatically settle payments between vendors and clients as well. This will enable companies to automate reconciliation of money transfers with their accounts receivables and payables. Unusual as it is, RosettaNet’s settlement functionality is still a pipe dream. “When we buy and sell products and services, we have to settle them, and at the moment, banks own this space,” says Blair. “We’re still trying to see how the banks fit in. For the moment, we’re trying to make a lot of noise about it, but banks are saying we’re the only excited ones,” he adds.

But if it happens, Nokia’s cash management process will reach a kind of cash Nirvana, because its payment system is already fully automated globally. The system, called Nokia BankLink, is custom-designed in-house to act as a gateway between the invoices in SAP and the payment systems run by the banks. Enabling this is Nokia’s global ERP implementation. Subsidiaries all over the world post invoices on Nokia’s SAP system. BankLink then extracts the invoice data from SAP, generates the appropriate payments and remittance advices, and executes them on behalf of group companies globally. Cost efficiency is achieved through netting internal payments, or payments between Nokia subsidiaries. (Netting refers to lumping remittances, which reduces transaction fees.)

Blair complements his efficient cash management system with US-dollar pooling, to offset day-to-day liquidity imbalances, at least in the countries where US-dollar pools are allowed. The regional pool is swept daily into the global US dollar pool. In terms of longer-term funding, Blair transfers funds where regulations allow. “We try to get as much [surplus funds] into the treasury center as is legally possible, and then lend out to the companies that need it. This is on a monthly cycle,” explains Blair.

Nonetheless, transactions such as these are rare, as most of Nokia’s units are liquid. Also, in almost every country it is present in, Nokia has already consolidated its business units into a single legal entity.

How Taxing

Consolidation is what Timothy Lo, regional director of treasury and mergers and acquisitions at AT&T in Hong Kong, is trying to accomplish. His goal is to rationalize the legal structure of all AT&T units in Asia, and ultimately make regional cash and treasury management more tax-efficient. Paula Eastwood, partner at PricewaterhouseCoopers in Singapore, says tax is a common pitfall in establishing regional treasury centers in Asia. “Active tax planning, as an integral part of the corporate treasurer’s overall risk management function, is crucial in order to realize opportunities for tax savings,” says Eastwood. “If left as an afterthought, tax has the potential to significantly erode the commercial benefits achieved on a pre-tax basis,” she says.

Tax issues, in fact, spoil Lo’s otherwise efficient cash management operation in Asia. He runs a shared service center in Hong Kong that handles the accounting, payables and receivables of entities in eight countries. He and a staff of two manage foreign exchange identification for the region. “Once FX exposure is identified, we report it to the headquarters, and then we arrange hedging instruments for the subsidiaries in the region, but the trade is actually executed in New Jersey,” says Lo. That goes for amounts above $1 million. Spot and hedging transactions under US$1 million fall into Lo’s hands.

Currently, AT&T is present in 13 countries in the region, with an average of two legal entities in each country. These subsidiaries fall in either of two legal structures governing US multinationals: check-the-box (CTB) and controlled foreign corporation (CFC). The two categories make a distinction whether a US multinational is a partnership or a corporation, and each has its own tax treatment. Having separate legal entities within the same country, and having different legal structures around the region complicate Lo’s ability to run a regional treasury center.

“There is a different US tax implication for each of these, and lending between CFC and check-the-box entities is not tax efficient,” says Lo. For example, in a CFC, any cash that moves away, or that is construed as an active investment into another entity, will be viewed as a deemed dividend back to headquarters. “If it’s deemed dividend, there are complex calculations to see what its tax implications are, but the simple consequence is, about 34 percent of the amount will be exposed,” says Lo.

That amount practically negates whatever cost benefits a pooling structure offers. Lo’s solution: He is giving himself until the middle of 2003 before he converts all entities in the region into a CTB structure. “Check-the-box seems to have a better way to move funds across the region, and even from the region to the US,” says Lo. The US government introduced CTB only in 1996, long after many of AT&T’s subsidiaries were established in the region under the CFC structure. In the meantime, “our philosophy is, if there is excess cash in any country, we’ll find the best way to just repatriate it back to the headquarters” in New Jersey, says Lo.

That doesn’t mean Lo doesn’t orchestrate intercompany funding. “Lending from CFC to CFC, or check-the-box to check-the-box, is not much of an issue. But in each instance we have to do a tax analysis to see if it makes sense doing that,” he says. The reason for the self-imposed 2003 deadline is that AT&T will have more companies under its fold this year. Concert, an AT&T joint venture with British Telecom, has been dismantled, and seven entities are coming back to AT&T — two in Australia, and one each in Singapore, Hong Kong, Japan, South Korea and New Zealand — which may have different legal or tax structures. These new entities are expected to add substantially to AT&T’s current turnover in Asia of about $500 million a year.

“The practical reality is, in today’s corporate world, restructuring is happening every two or three months, so by the time you have streamlined legal entities, there might be another set of entities coming,” he says. When Lo has finished consolidating the AT&T units in 2003, his own balancing act should have been much, much easier.

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

Moving Money on the Net: Power to the People

The vigilance of treasurers in local Asian companies is growing. John Laurens, head of cash management products at HSBC in Hong Kong, says the drive for efficiency through treasury hardware and software upgrades was the most notable trend in treasury management last year and will continue to top the agenda this year. “There has been an ongoing focus among companies on investing significantly in terms of IT infrastructure, enterprise resource planning systems, and using their rich functionality to optimize relationships with clients and customers,” he says.

Not surprisingly, multinational corporations in Asia are the heaviest spenders in IT systems, says Laurens, but more local companies are also spending eagerly. Philippine real estate group Ayala Land, for example, has just implemented an SAP system last year, including treasury. “It’s a comprehensive implementation, not just the financial side but including project systems, asset management, customer relations management, treasury, human resources, materials management, strategic enterprise management and business warehousing,” says CFO Jaime Ysmael.

Lee Kum Kee, a Hong Kong-based private company that makes condiments, spent eight months of last year implementing an SAP in its domestic units, and CFO Mike Lim will oversee this year its rollout among overseas subsidiaries.

Laurens calls these companies the “post E-hype” generation of IT adopters. Then again, banks too have a post E-hype Internet strategy for cash management. Until now, banks have provided cash management solutions to their clients largely through proprietary workstations, where banks install a trademarked software on the company’s PCs, from which the clients interface with the banks to execute payments, check balances and the like. For larger clients such as multinational corporations, banks offer more expensive host-to-host channels, which are customized to accommodate the volume of transactions and geographic spread of the clients.

After some delays, large regional banks such as HSBC and Standard Chartered are expecting to roll out this year an Internet-based delivery platform for cash management, to E-enable processes such as managing accounts receivables, accounts payables and liquidity management. Both banks hope the product will appeal to treasurers of SMEs who might not be able to afford the proprietary workstations, much less customized cash management products. “We see an opportunity to market these services to smaller customers, but large customers may also find it better to use Internet technology rather than traditional electronic banking,” says Andy Dyer, head of channel management and solution delivery at Standard Chartered in Singapore.

The Internet delivery platform works very much like a proprietary workstation. Treasurers will able to upload their payment files into the bank’s Web site, and the bank then executes the payment in any form the treasurer desires, such as check or electronic transfer. The same goes for collections. As in proprietary workstations, sophisticated security is required to interface with the bank. But unlike workstations, banks are aware that the perceived lack of security for financial transactions over the Internet will be a concern. “We’ll be spending a lot of time this year educating customers to the advantages of using the Internet, while allaying their fears over security,” says Dyer. No doubt, he’s hoping that these security fears were also buried alongside the “E-hype.” —ADR