The arrival of coronavirus and subsequent global lockdowns brought Asia’s supply chains to a sharp halt. With medical supplies urgently required, rapid progress was needed to adapt both supply chains and their financing. Kimberley Long reports.
Asia’s complex web of supply chains has made the region the world leader in low-cost, efficient manufacturing. Its adaptable nature has seen disputes such as the China-US trade war swiftly side-stepped, with manufacturing quickly moving to new hubs such as Vietnam. But no part of the chain was prepared for the havoc that would be wreaked by the Covid-19 pandemic.
As borders and factories were closed to prevent its spread, the production and movement of goods ground to a halt. Banks have been forced to move quickly to meet these challenges, reworking the financing of supply chains to meet the new demands of their clients.
Ajay Sharma, Asia-Pacific head of guarantees, trade and receivables finance at HSBC, has observed changes taking place. “There have been reports of manufacturing moving from a ‘just in time’ model to ‘just in case’. In an environment where it is so difficult to predict demand, there is uncertainty if the infrastructure would stand up to the challenge.”
Granting extensions
HSBC had anticipated there would be financial issues for some clients. As China began to shut down in early February, the bank could see that some small companies with payments due between February and the end of April were going to struggle. “In response, we automatically applied a 30-day payment extension to all our clients, with the option to opt out. Many of the larger companies opted out, but it provided relief for the smaller companies,” Mr Sharma says.
So Lay Hua, head of group transaction banking, group wholesale banking at United Overseas Bank (UOB), reports an increased demand for letters of credit and trade loans. “Our clients, including the anchor company and the suppliers or distributors in their respective supply chains, can opt for a combination of payment guarantees with supply chain financing solutions,” she says. “This way, the bank is able to help intermediate the cash flow financing and risk management for them.”
The nature of the companies applying for assistance has also changed. Mr Sharma says: “We are seeing requests from very good quality buyers and big companies who are asking for help funding their supply chains. There is a much greater demand for liquidity. And this is against real orders, it is not a trade loan. In the past couple of months, we have seen the number of new suppliers signing up increase by double digits.”
Prioritising supply chains
The impact on resources has led some countries to reassess where they want domestically produced products to go. Japan’s prime minister, Shinzo Abe, allocated ¥240bn ($2.2bn) to assist Japanese manufacturers to decouple their supply chains from China, particularly for higher-value goods.
Meanwhile, limited resources have meant a refocusing on which parts of the supply chain currently take priority. “The demands on certain supply chains have shifted considerably. Some manufacturers have pivoted their operations towards creating products for use in the medical supply chain,” says Marc Auboin, counsellor in the economic research and statistics division at the World Trade Organisation. “For those already operating in the sector, banks have been working to identify and prioritise those most in need, and protecting clients who may need to work with new suppliers to meet demand.”
Ms So explains that UOB’s clients in the healthcare sector have experienced a surge in demand for their products. The bank has helped these companies to keep pace via supply chain finance solutions.
“We offer solutions, such as the export letter of credit confirmation and discounting for cross-border sales, to help them mitigate the risk of non-payment from overseas buyers, particularly when dealing with new customers,” Ms So says.
“To boost their liquidity, we also offer healthcare service providers funding against their account receivables purchase almost as soon as sales are concluded. This is particularly helpful for companies that sell high-value equipment and whose customers may need longer payment terms in view of the prevailing economic situation.”
From end to end
Supporting supply chains has also required understanding every link along the chain, to ensure they are continuing to function. While this has been raised as an issue in the past, understanding the construction of a value chain has grown from being something helpful into a necessity.
Mr Auboin says: “The length and complexity of some chains has meant that some companies at the top of the chain simply do not know which businesses are involved in the whole length of the chain. Getting to the bottom of this has helped to iron out problems before they arise.”
Mapping out supply chains is even more important when they are for the production of essential healthcare equipment, such as ventilators and medical-grade N95 face masks.
Steven Beck, head of trade and supply chain finance at the Asian Development Bank (ADB), says the extensive mapping of whole supply chains has not been done before. “During May 2020, we published maps for critical Covid-fighting goods and this will enable banks, investors, healthcare workers and governments to identify which companies are operating in these supply chains to ensure they have the support, including financial backing, needed to ramp up supplies as fast as they can.”
Physically moving goods has become more complex, so the cumbersome and paper-intensive requirements for shipping have had to adapt. To expedite the process, some regulatory measures have been eased.
“The International Chamber of Commerce (ICC) has been thinking a lot about the issues and that led them to relax some of the rules,” Mr Auboin says. “For example, companies now have five days to bring together the documents and put them into the system. They are also allowed to send scans of the original documents.”
China’s response
As the pandemic moves into its next phase and countries tentatively plan relaxing lockdown and returning to work, they are looking keenly at the processes that have already been successful elsewhere. The first country to have been hit by the outbreak, China, quickly shut down its factories, but is also the first to begin opening up again.
Mr Sharma says: “China is back up and running, and is operating close to normal. But even if they can get the production capacity back up, where is the demand right now? We will have to figure out how the supply chains are being used. The most recent data shows that exports are up 3.5%, but imports are down.”
As lockdown lifted and manufacturing centres reopened in China, the issue then became how other countries were being affected by the pandemic. Lillian Li, vice-president, senior credit officer, credit strategy and research at Moody’s Investors Service, says the impact of Covid-19 is another blow to the Chinese economy.
During May, China’s annual gross domestic product target was dropped after the National Bureau of Statistics announced the economy had shrunk by 6.8% in the first quarter of 2020. In order to support its manufacturing sector through this time, China has put measures in place. “The Chinese government has implemented changes to support the economy, including reducing taxes and export tariffs,” Ms Li says. “We could see further stimulus measures.”
Even so, China has seen increases in forbearance on loans from entrepreneurs and small and medium-sized enterprises (SMEs).
Michael Taylor, managing director, credit strategy and research at Moody’s Investors Service, says China is able to directly fund its most vulnerable companies, unlike other markets. “China can provide financial support for its SMEs directly in the form of loans from the state-owned banks. This provides support, rather than them looking to the government for fiscal measures,” he says.
Multilaterals in demand
Unlike China, not every country that has been impacted by coronavirus can step in to finance their struggling companies. Instead, financial institutions are having to look to other sources to ensure clients and their suppliers will continue to function after the pandemic. The security that comes from multilateral development institutions, for example, has meant they have seen a significant increase in demand for funding.
“The ADB has been boosting capacity to support trade and supply chains at this time. It has become very efficient at responding to needs,” says Mr Beck. “During April, the ADB supported over 500 trade transactions worth $424m, most of it in Bangladesh, Vietnam, Pakistan and Sri Lanka.”
The scope of those looking for assistance has expanded, and Mr Beck says the ADB has seen increased demand from the private sector, as it looks to mitigate risk. In this area, multinational guarantees have become attractive.
Another advantage of the development institutions is their previous experience in emergency response. “The ADB has been able to continue operating throughout the crisis, delivering trade and supply chain finance quickly,” Mr Beck says. “The bank has experience operating in difficult conditions in challenging markets, so has been able to adapt to these new circumstances.”
The new normal
The response to the coronavirus across Asia has been one of learning to adapt quickly, as well as of adopting new ways of working that may become permanent. After years of attempts from banks to push forward the digitisation of trade, it seems the use case has arrived. The previous system, which entailed physical documents being signed in person and couriered between locations, is no longer workable when cities are locked down and staff are working remotely.
Mr Auboin says this has been a real issue for some countries. “Because people have been working from home, they have not had access to the legally binding documents needed for trade. That has been a major problem across Asia, especially in countries like Bangladesh and Pakistan, where it is compulsory to open the letter of credits to imports,” he says.
For some people, this is being seen as an opportunity to introduce reform. Mr Beck says: “Coronavirus has pushed forward the adoption of digital. For anyone who doubted it in the pre-Covid world, digitisation makes global trade and supply chains more robust, more secure. Companies, banks and governments have to adapt.”
He adds that to move the agenda forward, certain points need to be met. “First, the United Nations Commission on International Trade Law has created model laws recognising digital documents as legally enforceable and governments need to adopt [these laws] as fast as they can. Second, global adoption of the legal entity identifier for each company is required to drive transparency and mitigate the risk of fraud and money laundering in digitised transactions.”
The ADB has been working closely with other institutions to establish the standards. Mr Beck adds: “With the ICC and government of Singapore, the ADB is undertaking an initiative to create global digital protocols and standards for trade, which will drive interoperability in the trade ecosystem to enable seamless digital trade between exports, shipping, ports, customs, warehouses, banks and importers.”
Digital awareness
As some areas of the market shift, it may create a domino effect in pushing other companies to change their processes to keep pace. Banks are also seeing the value of pushing digital to their client base. “I’ve said to the team and the sales department that they’ll never get another opportunity like this to sell the digital platform,” says HSBC’s Mr Sharma.
Encouraging customers to use digital can be as straightforward as explaining to them what services are already at their disposal. “We realised we have the customer signed up to the digital platforms, but as yet they are not using them. It’s about explaining to them what is available,” Mr Sharma adds. “They are much more open to trying digital now as so many are working from home.”
For those who need some encouragement to change their operations, incentives are on offer. UOB’s Ms So says: “We have been keeping in close contact with them to fast-track the implementation of digital solutions to help minimise the disruption to their businesses. We are also offering preferential fees for trade services conducted through our business internet banking platform, UOB BIBPlus. As a result of these efforts, online trade transaction volume in April alone increased by close to 20% as compared with January this year.”
Moving towards digital will not be a fix-all solution, and there may be a need for a hybrid approach to document processing in order to encompass all the region’s economies.
Mr Auboin says: “Looking at the digitisation of trade documentation is the next step. But in regions like Asia, which have so many emerging markets in the supply chain, they might not have the capacity to digitise. We might see digital documents becoming the norm between countries like Singapore and China, but it is less likely between Vietnam and Thailand, for example. Several administrations still require paper documentation, so that would need to be changed at a legal level before digitisation could be brought in.”
