The rise of the multinational company began in 1945, and just kept going. Frances Maguire looks at the impact the multinational has had on the globalisation of banking and on treasury and cash management systems over the decades.
The rise of the multinational company began in 1945, and just kept going. Frances Maguire looks at the impact the multinational has had on the globalisation of banking and on treasury and cash management systems over the decades.
The 100 biggest companies in the world control about 20% of foreign assets, and employ 6 million workers. Multi-national companies (MNCs) account for two-thirds of world trade, and one-third of world trade is intra-firm trade between branches of the same company. These MNCs account for more than 33% of world output.
In 1998 there were 53,000 MNCs with 450,000 foreign subsidiaries. The 100 biggest companies in the world may now account for as much as 7% of total world economic activity. The multinational company’s role in the world today is an astounding development considering that they accounted for little more than 3% of world economic activity in the early 1950s. In the space of half a century, multi-national corporations have come from nowhere to achieve global dominance of the world economic order. Less than 100 such companies represent half the value of world stock market capitalisation.
Furthermore, more than half of the 100 biggest economies in the world are now corporations, not nations. Thus, Mitsubishi is bigger than Indonesia, Ford is bigger than Turkey and Wal-Mart is bigger than Israel, according to a report published by the Institute for Policy Studies in 1999. The study, The Top 200, by Sarah Anderson and John Cavanagh, used statistics from Forbes, the business magazine. It compared companies’ annual sales against national gross domestic product (GDP). Taken together, the world’s 200 biggest companies control 28% of the globe’s economic activity.
While there were companies with an international presence in the 1900s, by the end of the Second World War, the only real global players were US oil, mining and agricultural companies. The first appearance of the multinational as we know it today was in the 1960s and the first significant rise in multinational investment took place during the late 1960s.
US multinationals led this development. They built relatively self-sufficient replicas of themselves in foreign markets, relying on local suppliers for replacement parts. One of the reasons they did this was to penetrate markets that were protected and thus difficult to access. IBM, for example, set up production facilities in France and other European countries in the 1960s in order to be able to sell computers within the Common Market, which was protected by tariffs.
A further leap in internationalisation came in the mid-1980s. This was the result of important changes in the international economy. Starting in the 1970s there was a growth of the Eurodollar market (dollar accounts in European banks) that was sustained by the overseas expansion of US banks and led to the emergence of a global, closely integrated, financial market. This was further enhanced by other changes in the financial sector such as deregulation, the removal of capital controls, and the increased size and velocity of financial flows. Particularly important were the huge Organisation of the Petroleum Exporting Countries (Opec) monetary surpluses and the need to recycle them in the international economy.
Nick Diamond, European sales manager for global treasury services at Bank of America, remembers a much larger, more decentralised treasury function within global companies than there is today. He says: “Twenty years ago, corporate treasury departments were much larger and more disbursed, simply because more staff were needed to do basic fundamental administrative tasks. These tasks have now been replaced by technology.”
Mr Diamond adds that although banks were supplying corporate treasury systems as early as the late 1970s, most weren’t very sophisticated. He says: “They were no more than basic banking systems and larger companies were still using other systems to record treasury information.
“Corporate treasuries were also very decentralised, with a treasury department in each subsidiary, often using different banks and different accounting platforms, and not very well connected to the treasury function at the head office.”
Treasury management
This local control eventually disappeared with the arrival of treasury management systems. These were initially supplied by the banks in the mid-1980s and then by software providers, followed by the adoption of single enterprise resource planning (ERP) platforms. This really enabled multinationals to collect information and manage treasury operations more effectively.
In addition, as multinationals began setting up regional treasury centres using various finance vehicles in Europe incorporating the services of both US and local banks, they began using the power of treasury management systems to facilitate the continued drive towards centralisation. “This gave rise to the demand for a small number of truly regional banks as multinationals looked to centralise with a single regional/global banking partner,” says Mr Diamond.
The introduction of the euro was another reason to centralise more and pull back functions from the local treasuries as there was less of a need for managing FX exposure. Mr Diamond says: “Many multinationals pulled even more of the treasury operations within Europe into a regional treasury centre or a shared service centre. Some US multinationals even looked to try and take things back to the US, although this was more difficult.”
Centralisation drivers
Today, Mr Diamond says new technology and the global services offered by a few banks is the biggest driver for not only centralising regionally but also for setting up a truly global treasury operation: “The wave we are in now is one of globalisation and standardisation. Companies want to know that they can have one single truly global treasury operation with common standards, such as Swift. Bank of America already has multinational clients that are using a single treasury management system worldwide, one ERP and as little as two banks globally.”
Mr Diamond believes there will be continued consolidation and a continued drive towards globalisation. “The challenge that multinationals are now putting to banks as they venture into new markets around the globe is how they can have the same control, security, services and support that already exists in the established markets,” he says.
Foreign direct investment (FDI) by multinational corporations increased by 30% a year between 1985 and 1990, much more rapidly than world trade and economic output. This rise has continued into the 1990s when investment outflows from major industrialised countries to industrialising countries rose at approximately 15% annually while FDI flows among the industrialised countries grew at about the same level. In the late 1990s the cumulative value of FDI amounted to hundreds of billions of dollars. Most of this investment has been in high-tech industries, such as automobiles and information technology. But in the service sector too, insurance, banking and retail multinationals, particularly from the US, have played an important role.
Global reach
The global reach of commercial banking has two major dimensions: cross-border lending and direct investment in the financial services sector of other nations. In the past two decades both types of global banking have expanded, although the rise in multinational banking has been more dramatic. The banks that followed their customers abroad have become multinationals in their own right. In mid-1997, US banks had a foreign loan portfolio of $131bn, whereas their domestic assets totalled $511bn. US banks account for about 15% of all cross-border lending. Citibank, the world’s largest bank, now has operations in more than 90 countries.
Lowered regulatory barriers and advances in technology have reduced the cost of supplying banking services across borders. At the same time, growth in activity by multinational corporations has increased the demand for international financial services. As a result, many observers believe that global integration is under way in the banking industry, and that many banking markets will therefore develop even larger foreign components.
The financial markets facilitated reorganisation and transformation of international business. Steve Groppi, senior vice-president of JPMorgan Chase Treasury Services for Europe, Middle East and Africa (EMEA) and Asia-Pacific, says: “The roots of US and European banks, and their expansion efforts globally, were to serve their customers’ needs. For example, the British banks went to China and Hong Kong to serve the trading needs in the mid to late 1800s and the US banks went to Europe and the UK, and later to Asia.”
JPMorgan’s oldest branch in the world is in London, and was established in 1838 to enable US corporate customers that were trading between England and North America. Says Mr Groppi: “This is really how the payments and trade system started. Our corporate customers needed a way to transact business between two continents.”
JPMorgan effectively followed its customers overseas. The French branch of JPMorgan was established in 1868; the bank then moved into Belgium in 1919, Italy in 1929, and Germany in 1948.
The advent of Swift
As corporate customers expanded internationally, a more efficient method to move information and money was required. This demand gave rise to the development of the telex machine in 1932, which held the banking industry in good stead until the launch of the banking co-operative, Swift, in 1975. The impact of Swift on the corporate sector cannot be understated. It drove payment transaction prices down dramatically and both enabled and encouraged growth and globalisation.
“The price of a bank-to-bank transaction in the 1980s was around $8 a wire. Today, that same transaction costs 75 cents to $1,” adds Mr Groppi.
The impact of multinational companies on the banking industry is perhaps best illustrated by what happens when things go wrong. Says Mr Groppi: “There was a period in the 1990s when the banking industry was not listening as well as it could to the corporate community. The corporates were frustrated that the banks were not keeping up with the demands of the payment factories, corporate access and low-value payments around Europe, and this spawned the development of RossetaNet and Twist as a direct result.
“Now we are turning this around as corporates have an active voice in the Single European Payments Area [SEPA] and corporate access to Swift.”
Multinationals still play a major role in the generation and diffusion of technology, and they account for about 80% of world trade in technology and for a large share of private R&D. Joergen Jensen, head of product management at Trema, a corporate and financial treasury software provider, says that modern corporate treasury management systems came on to the market in the early 1990s in a bid to level the playing field, in a wholly bank-led market where banks provided corporate customers with banking systems, which, to a large extent, tied the corporate customer to that bank.
Freedom with Trema
Trema, which launched in 1992, brought corporate treasurers sophisticated real-time position-keeping systems that they really did not have before, and to this day, offers multinational customers greater freedom to move banks. Trema’s first customer was ABB, the power and automation technology group now spanning 100 countries, and today it names multinationals such as DaimlerChrysler and Lucent Technologies among its customers.
Mr Jensen adds that the sheer size of the multinationals by the late 1990s enabled them to capitalise on their economies of scale and build centralised payment factories.
“The idea is to have an internal bank that acts as a central bank for all payments of the corporate, so internal payments are settled internally and the multinational can convert international payments to domestic payments as the company has the size to open accounts in the countries where it operates,” he says. “Any payment will be guided to the bank account in the country where the receiver of the payment resides.
“The biggest benefit from an in-house bank is, however, the concentration of cash, enabling multinational companies to set off negative balances in one subsidiary with surpluses in another, and then go to the capital markets with the rest and get a better rate than if each subsidiary did it with its local bank.”
Says Mr Groppi of JPMorgan: “Even with the first large corporate payment factories, which date back to the early 1990s, you still needed all the connections into all the different low-value payment systems. For the scale players, or aggregators, like JPMorgan, the introduction of the SEPA and the multinational payment factories are a good thing, but not for the smaller domestic banks, which have less of an influence.”
It seems that the focus in the future will continue to be on scale and globalisation, with more, rather than fewer, multinational companies, as it becomes more and more effective and efficient financially for companies to conduct their business around the world.
GRASS ROOTS: FROM HUMBLE BEGINNINGS
1812 Citibank is founded
1838 JPMorgan opens its first overseas branch – in London
1865 HSBC is established
1868 JPMorgan opens its first branch in France
1886 Coca-Cola was founded as a soda fountain beverage
1899 Coca-Cola is bottled for the first time
1909 BP is founded as an Anglo Persian oil company
1920 Coca-Cola bottle sales overtake fountain sales
1945 Coca-Cola builds 64 bottling plants around the world to supply US troops
1948 JPMorgan opens its first branch in Germany
1955 McDonald’s hamburger stand opens its first US restaurant
1967 McDonald’s opens its first outlet outside the US – in Canada
1971 McDonald’s opens its first European outlet – in Germany
