Structural shift in Asian trade finance
The landscape of Asian trade finance is undergoing a seismic shift that is reshaping the way the region does business.
Fallout from the ongoing financial problems in Europe and the US has amplified longer-term evolutionary pressures exerted by the increasing complexity of supply chains, leading to a new trade geography, and new winners and losers.
Asian manufacturers are coming under unaccustomed pressure from the knock-on effects of the slowdown in developed markets, particularly Europe. In September, the World Trade Organisation cut its 2012 trade growth forecast from 3.7 percent to 2.5 percent and, although they predicted growth would bounce back to 4.5 percent next year, they warned that there are still significant downside risks.
Against this backdrop, Asia’s manufacturers are looking for greater efficiency in their supply chain management, and financial services can be both a potential source of savings itself and a promoter of cost benefits elsewhere in the chain.
For consumers, trade finance costs are falling. Lower global interest rates are playing their part, but the biggest driver has been increased competition. Although European banks have been pulling out of trade finance in Asia, the void has been more than filled by hungry regional and local banks keen to open up new business lines.
But the combination of increased competition and slowing trade growth has led to lower margins within the finance sector, and some of the newer entrants are struggling in an environment where businesses are demanding a more comprehensive service from their finance suppliers.
The new local and regional players may have made the trade finance pool wider, but they are entering the fray just as clients are looking for more depth. Manufacturers intent on eliminating financial friction in the supply chain are increasingly looking to banks that can provide a streamlined service across a broad range of geographies and products.
The key is connectivity. Supply chains today are exponentially more complex than they were even five years ago. The components that go into an iPhone come from many different countries: there are banks supplying trade finance that might be able to cover two or three of those but very few can supply all of them.
Even something as simple as an Australian machinery manufacturer that exports products globally might involve a process where other parts of the manufacturing supply chain are conducted in Thailand and other parts imported from Europe.
When exports were growing strongly, Asian businesses could afford to allow some slack in their supply chains, but as trading conditions have become tougher, they are becoming increasingly aware of the advantages of being able to exert influence both up and down the chain.
The search for increased efficiency has prompted a re-examination of the supply process from first principles. Manufacturers are becoming increasingly “vertically aware” as they examine all aspects of the chain in order to understand where costs are accruing.
They are clearing up their balance sheets; shifting inventory holding up or down the chain; cutting out unnecessary steps in logistics handling; and negotiating contracts between tier three and tier two suppliers.
And they are looking at maximising the efficiency of their finance models. We are seeing a clear trend, especially among our biggest Asian customers, towards extending and modifying off-the-shelf products to create coherent full-service packages that combine traditional trade and foreign exchange products with new solutions to manage risks and maximize opportunities in the extended supply chain.
Asia’s biggest manufacturers are no longer satisfied to be merely a link in a long value-added supply chain. As the global trade environment has deteriorated, they are increasingly taking control of the process, searching for cost efficiencies both up and down the chain, and presenting new challenges and opportunities for trade finance banks.