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Taking treasury to the next level
The role of corporate treasurer is evolving to meet Asia’s unique challenges
Piotr Zembrowski 21 May 2015

When Danish brewer Carlsberg A/S, completed its acquisition of China's Chongqing Beer Group in December 2013, Aron Åkesson, the company's regional treasurer for Asia, found plenty of low-hanging fruit to pick in streamlining the new operations' finances. The Chongqing group had about 40 legal entities, and each had a significant amount of cash. The group also had a big bank debt.

 

"It's a treasurer's nightmare but, in a way, a treasurer's dream," says Åkesson, who has been in his role since 2006. Under his direction, the company quickly implemented cash pooling to soak up the balances and used the money to pay its debts. "It made the balance sheet much smaller and removed all the risks of having too much money sitting around," he adds.

 

Implementation of this project went relatively smoothly, says Åkesson, but not without having to overcome some deeply ingrained attitudes to doing business. Executives in local Chinese companies that were part of the acquisition felt they needed to keep a substantial cash balance in their account "to keep the bank happy", or otherwise their banker wouldn't be very supportive.

 

Åkesson won over his executives by pointing out that they wouldn't accept that kind of inefficiencies in their supply chain, or any other area of business. He also managed to reach an understanding with owners of theose smaller breweries even before the acquisition was finalized. They started implementing cash pooling infrastructure ahead of handover date, so that it was operational on day one.

 

Chinese banks "have been extremely spoiled" by sitting on companies' cash balances, says Åkesson, but times are changing and they need to adjust. After optimizing their cash management, the breweries faced increased rates on some of their bank loans, but in the end the calculations came out positive for Carlsberg.

 

In the process, Åkesson found that the role of a treasurer, and the benefits it can bring to a company, aren't well understood in this part of the world. "People ask me: what does a treasurer do?"",, he says. And while one part of the answer, "making sure that our companies have enough money", is easy to convey, the second part, "making sure they don't have too much money", has proven more difficult.

 

"Cash is the most evil thing you have on your balance sheet," says Åkesson, "particularly if you have debt."". Addressing local companies' capital structure is a prominent theme in the region. "You need to push the agenda of centralizing cash and using it wisely," he says.

 

Another challenge facing treasurers of global companies operating in Asia is the volatility of local currencies. For Lelaina Lim, group CFO of Al-Futtaim Asia Group, the biggest challenge is "trying to balance what we buy in foreign currencies and selling to local consumers." The privately-held conglomerate headquartered in Dubai conducts business throughout South-east Asia, where it focuses on retail.

 

 

The space has been changing fast, with increasing presence of e-commerce, and customers' ability to compare prices online. Foreign exchange and interest rates become a daily issue for a treasurer to handle, in order to enable the company to price its goods competitively and attract customers.

 

Hedging currency exposure used to be a standard modus operandi, to protect the business and the customers from rate fluctuations. Lim has found out, however, that during the last 18 months, due to the movements in the British pound and the EEuro, locking purchase prices would always result in a loss.

 

"If you order something nine months ahead, by the time it's delivered, the price has already been out of place," she says. In the retail space, where customers are keenly aware of prices in other markets or online, you must be flexible to be competitive.

 

"We've decided not to hedge," says Lim. The company buys foreign currencies in the spot market when needed and it has been better off for that. "Sometimes doing nothing is intelligent," she adds.

 

The company hasn't abandoned hedging their exposures completely. Lim has been hedging interest rates on her loans and the company has benefited from it. Treasurers have to "balance things you need to do versus things you don't need to do," she adds. Knowing the difference makes for a successful treasurer.

 

Customers of a utility company like Hong Kong's CLP, an electricity provider, will not put up with frequent price movements. While changing fuel costs, whether due to oil prices or to currency fluctuations, could be passed on to customers in their monthly bills, that approach would risk consumers' ire. To minimize the exposure, CLP meticulously hedges most of its expenses in foreign currency payments its expenses for fuel, spare parts and equipment. It also uses long-term contracts to secure fuel supply and reduce price volatility.

 

"We believe that we should manage the risk profile in a proper way … on behalf of the customers," says Francis Ho, director of CLP Holdings' group treasury. He recalls the Asian Financial Crisis of the late 1990s, when the precipitous drop in the value of domestic currency in certain currencies caused electricity bills and other daily expenses to soar by 30-50%. By hedging the currency exposure "we allow [our customers] to sleep well," he adds.

 

While Ho admits the markets have become more volatile, he sees opportunities in exercising prudence in his role as treasurer.

 

"We look for long- term relationships in management of our hedge counterparties," he says. "Equally, we look for most cost-effective, risk-averse execution terms in our transactions," he adds. The company hedges interest rate risk in its debt portfolio. Currently two thirds of its funding is at fixed rates. "Electricity business is a very long-term investment," says Ho. "It requires long-term Capex and long-term payback."

 

The company makes the extra effort to lower the exposure of its business to market volatility, so that the management can focus on optimizing the company's operations.

 

"We have more opportunities nowadays," adds Ho. The company has increased private placement, cross-border debt transactions, in particular in Europe and Japan. It has been able to set up business relationships with regional and city banks in Japan to tap into the lower-cost, very liquid market for its funding. It does, however, swap all foreign currency loans to Hong Kong dollars to minimize the currency exposure.

 

The role of treasurer has been evolving to expand beyond conventional management of the company's finances. "We can better work with the business … to identify forms of funding in equity and debt market," says Ho.

 

In addition, treasurers have more opportunities to use new technology solutions to optimize internal reporting and other treasury activities. This has allowed CLP to look at more options in cross-border loans and bond issues, both public and private, to fund its subsidiaries in Australia or China.

 

Banks are instrumental in uncovering these new opportunities and facilitating them. This requires banks to adapt and find new ways of working with treasurers. "It's no longer good enough [for a bank] to provide transactional services," says George Nast, global head of product management, transaction banking at Standard Chartered. "Providing advice, providing insights, providing real-time updates on what's going on in the markets" has become bankers' bread and butter.

 

Banks' advice is particularly essential in navigating China's integration into the global economy and the internationalization of its currency. "Five years ago, for most treasurers, China was a financial island," says Nast. Unlike then, when "trapped cash" was the dominant problem of highly-profitable foreign companies in China, today's challenges and opportunities lie in maneuveroeuvring the ever-evolving regulatory landscape. "It's a complex journey of liberalization," says Nast. "Having a trusted partner to help treasurers through that journey is where financial institutions need to add value."

 

The role of China in the region is also much more dominant than it was a few years ago, n. Not only as an opportunity, but also as a driver of business, for good or for bad. "Singapore, Malaysia and Thailand are the key markets Chinese tourists like to visit," says Al-Futtaim's Lelaina Lim. "They form a huge part of our sales, and when that dries up, we can really tell."

 

The three Malaysian air disasters in 2014 have affected the region and the number of Chinese tourists hass declined. "It caused double digit decline in our revenue," she adds. On a larger scale, if China's economy slows down, the effects will ripple throughout the region. "When China sneezes, the world has a fever," she quips.

 

Beer is a more stable market. Even in times of economic decline, sales tend to stay robust. Carlsberg's Åkesson illustrates it with an example of Russia, the company's biggest market. "We still sell almost as much beer now as we did a year and a half ago," he says. "The problem now is obviously that the rouble is worth less." This has increased the importance of Åkesson's Asia division by propelling it from 15% of the company's business in 2011 to around 25% today.

 

It's time now to reach for higher-hanging fruit, says Åkesson, and the key agenda is information. "In Europe we have very good reporting," he says. "In Asia, it's more difficult to have small banks provide good MT940 reporting," he adds, referring to the SWIFT MT940 bank statement file format common in Europe.

 

Lim agrees. "Today we're looking at a treasury management system to see how we can link everybody from Vietnam to Middle East together to have a one-stop view on what we have and what we owe," she says.

 

In her ten years as CFO, she's found that she needs to be on top of more and more issues: technology, tax environment, changing regulations, new corporate treasury centres competing for business in the region. "It has become a lot more challenging," she says. "Ten years ago I could do a lot less for the money I earned. Today it's hard work!"

 

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