• TRADE FINANCE

    Rethinking global supply chains

March 2021

Supply chain finance (SCF) industry experts gathered virtually for BCR’s 6th Annual Supply Chain Finance Summit to discuss how the industry is recovering from Covid-19 dislocation, embedding ESG into platforms and schemes, and progress on automation and digitalisation. flow's Clarissa Dann reports

“I don’t have very good news about what to expect in the coming years,” warned World Trade Organization (WTO) Chief Economist Robert Koopman back in January 2020 in the opening presentation at BCR’s 5th Annual Supply Chain Finance Summit. Yet at the time, neither he nor any of the attendees at the Amsterdam –based event expected that the year would see widespread disruption to global supply chains, the wider economy, and society as a whole; all as a result of the Covid-19 pandemic.

Not a rerun of the GFC

Twelve months on, setting the new scene for 2021, Koopman focused on putting the impacts of the pandemic on global trade into perspective. The effects, he argued, are “quite different” from those witnessed during the global financial crisis (GFC) of 2008−2009. “Trade has performed relatively well compared to GDP in this crisis compared with the GFC. [...] Liquidity has not dried up; the supply chain shock is not as deep and global value chains have been functioning pretty well,” he told attendees.

Pictured: Robert Koopman, WTO Economist during his keynote on SCF in the global changing environment: what is the SCF response to Covid, redirecting trade flows, and deglobalisation?

Overall, goods trade has been fairly resilient despite the disruption witnessed throughout the industry. While it inevitably suffered from the supply shock and a general drop in demand at the start of the pandemic, “aggressive” fiscal and monetary policies have been able to mitigate this, noted Koopman. That said, some sectors fared better than others –best perfomers included textiles, computer equipment, integrated circuits and pharmaceuticals. In contrast, demand for automotive products, for instance, has been weaker.

Figure 1: WTO outlook for Covid-19 impacted global trade

Source: WTO Secretariat.
Note: Figures for 2020 and 2021 are projections.

According to the WTO’s latest figures available at the event (see Figure 1), world merchandise exports decreased by 4% in Q3 2020 compared with Q3 2019. Yet, boosted by a return to production and easing of lockdown measures, this marked a significant improvement on the 21% year-on-year decline witnessed in Q2 2020.1 Meanwhile, world merchandise trade volumes increased 11.6% quarter-on-quarter in the Q3 2020 – supported by fiscal and monetary interventions.2 As a result, by the end of 2020, WTO global trade forecasts had improved from the 13% to 32% contraction predicted in April3, with estimates that the likely impact would be a 9% decrease in global merchandise trade for 2020, to be followed by a 7.2% rise in 2021.

Speaking at the time of the announcement, Daniel Schmand, Deutsche Bank’s Head of Trade Finance and Lending said that he expected trade to be one of the winners in a post-Covid-19 environment. “Given the broad correlation of global trade and GDP growth, this is very encouraging,” he added.4

Yet, recovery in demand has not necessarily been matched with the operational capability to supply. Under pressure from Covid-19, disruptions to factory output, social distancing and quarantine limitations have clashed with growing consumer demand. As a result, Koopman explained “there’s a shortage of capacity in the exporting Asian region to ship to [centres of demand such as] the United States.”

In December, interviewed by the Financial Times, Lars Jensen, Chief Planner of Services for Maersk Line, the world’s biggest container ship operator, highlighted similar concerns, warning the industry was in for a “perfect storm” resulting from rising demand and reduced capacity.5 “The entire supply chain is under pressure, […] The market situation is extraordinary,” said another interviewee, Rolf Habben Jansen, CEO at Hapag-Lloyd.6

So, when will things get back to “normal”? Koopman predicts a potentially muted recovery. “We already see weak investment globally, and I’m not sure that consumption is going to fully recover as households are likely to be relatively scarred.”

Rebalancing supply chains

This relatively bleak prognosis makes resilient supply chains all the more important. Writing in BCR’s World Supply Chain Finance Report ahead of the Summit, Deutsche Bank’s Head of Supply Chain Finance, EMEA, Anil Walia, noted how they have been affected by the pandemic. “With the crisis triggering sharp shocks to supply chains across the globe, corporates recognise the importance of shifting from cost-focused to resilience-focused practices in their supply chains,” he reflected.7

This reverses a long-running trend, as Daria Johnen, Global Product Head, Supply Chain Finance, Global Trade & Receivable Finance at HSBC, explained during a panel on the impact of Covid-19 on SME suppliers. He noted that supply chains have traditionally been optimised for cost and efficiency, but “the efficient supply chain is not necessarily the most resilient, or particularly transparent, which means that we probably are going to witness a substantial shift towards the rebalancing of the supply chains”.

"We probably are going to witness a substantial shift towards the rebalancing of supply chains"
Daria Johnen, Global Product Head, Supply Chain Finance, Global Trade & Receivable Finance, HSBC

This rebalancing could bring positive change to the industry, as Walia indicated in his article. “ESG principles typically dovetail with [the idea of resilient supply chains], with moves such as on-shoring, as well as simplifying or shortening supply chains to be nearer to end markets, all helping drive greater resilience and foster long-term success”.8

At the same time, integrating environmental, social and governance (ESG) considerations into supply chain management has become a growing topic of interest for corporates, banks, investors and consumers, as Eugenio Cavenaghi, Managing Director, Head of Working Capital Solutions, Continental Europe, Banco Santander, explained on Day 2 of the event.

“Our reality is that, in recent times, all new mandates we have seen, all new projects we have started in the area of SCF, most of them require at least an ESG strategic option,” he explained. “It’s a ‘must have’.” However, Cavenaghi also elaborated on the challenges faced by banks and their clients, when looking into the potential impact from an ESG perspective, particularly when it comes to their supply chain.

Pictured: Banco Santander’s Head of Working Capital Solutions, Continental Europe Eugenio Cavenaghi speaking during his presentation on sustainable development and the growth of ESG in SCF

Implementing ESG visions is not always straightforward. Today there is greater scrutiny placed on the ESG scoring of the entire supply chain, not simply the buyer. Questions remain on how exactly to go about this “greening” process. Is the ecosystem of companies around the buyer sustainable enough? Can the company’s own sustainability efforts be mirrored throughout its network of suppliers?

“It only works if the whole vertical supply chain eventually moves towards sustainability. Then we really have an objective that is meaningful on a global scale,” said Cavenaghi. His presentation went on to explain how, through an SCF scheme led by ESG principles, the company’s supplier ecosystem could improve their own standards (see Figure 2)

Figure 2: How can classical finance be good for the company’s ecosystem?

Source: Banco Santander

This isn’t an overnight affair, and banks have their role to play in this process as well. Supported by ESG principles and frameworks, they can help bridge the gap between a buyer and its suppliers, offering ESG- and sustainability-linked financing. This can then be used to create a set of incentives and motivations that can, over time, reverberate throughout the supply chain and provide the rationale for suppliers looking to improve their overall ESG impact.

“The key point here is cooperation between the bank, the buyer, and whichever party is going to provide an ESG scoring to the supply chain,” added Cavenaghi.

This is a recipe that can help companies move on in a positive way from a period of unprecedented challenges. As Walia noted: “These sustainable SCF programmes are set to change the paradigm for how business and trade are conducted and funded. They already help to drive the sustainability agenda and will continue to do so as we emerge from the pandemic.”

From physical to digital

Another side-effect of the pandemic has been an increased impetus for the digitalisation of the global trade and SCF ecosystem. Government-imposed measures to halt the spread of the virus suddenly rendered the long-held tradition of signing and exchanging paper documents untenable, necessitating interim solutions to facilitate paperless trade. These temporary measures have led to calls for permanent solutions, with organisations such as the International Chamber of Commerce (ICC) and the WTO advocating the voiding of any requirements for paper documentation and encouraging governments to adopt the UNCITRAL Model Law on Electronic Transferrable Records (MLETR).9

Progress is being made. In February, the government of Singapore followed the lead of Bahrain and the city state became the second worldwide to adopt the UNCITRAL MLETR into domestic legislation10 , helping promote recognition for transferable documents and instruments represented in electronic form.11

Investment in technology and digital platforms is a growing priority for banks, financial institutions and fintechs. Sibel Sirmagul, CFA, Regional Head Product and Propositions Europe at HSBC, explained the important role that blockchain can play in the industry’s development.

"[ESG activity] only works if the whole vertical supply chain eventually moves towards sustainability"
Eugenio Cavenaghi, Managing Director, Head of Working Capital Solutions, Continental Europe, Banco Santander

“What I see is that we are becoming more agile, as banks are working with multiple fintechs on different journeys, from procurement to logistics to payment systems, it extends beyond trade actually and it goes into cash and payments. And it starts with blockchain.”

Today, there are a number of active initiatives in the market, though interoperability concerns remain. “You’re actually working towards an ecosystem where you need to bring these players together, because there's no way that you can do it in silos – even if you have the best system as a financial institution or as a fintech, you won't be able to connect buyers and sellers and all these players in the marketplace,” Sirmagul noted.

So, why isn’t the industry there yet when it comes to adopting blockchain? Sirmagul explained her thinking. “I think the main thing is the legal framework, the standardisation of the documentation, the enforceability of […] all the transactions going through the platform. I think security, cybersecurity, and those issues are kind of clear, but the legal framework and the standard documentation not so much. I think it's the way to open it for mass adoption, we need to make it much more commercial for that.”

flow took a closer look at the evolution of blockchain in the trade ecosystem in the article Trade and the blockchain – where are we now?

Corporates in mind

“We should always remember that [the] driver is the corporate … operating in the physical world,” noted John Bugeja, Managing Director of the Trade Advisory Network. Accordingly, a number of sessions took a specific look at the corporate perspective – what makes a good SCF programme from their point of view? And how can banks best support them?

Oliver Triebsees, Senior Manager, Corporate Finance at GEA, one the largest technology suppliers for food processing, explained what he sees as the key factors in deciding on a financing partner for SCF. He cited, four key elements: cost, IT integration, choice of platform and type of funding. On top of this, he noted a fifth key point: longevity. To fit the profile, the provider had to be an experienced organisation that could be relied upon in the long term, and which maintained a global presence with local representatives across the company’s key markets.

A tailored approach is also important, as Deutsche Bank’s Walia noted. “What we see is that there is no cookie-cutter solution for setting up an SCF programme. Every programme throws up surprises, even if you've already set up hundreds.”

Pictured: Deutsche Bank’s Head of Supply Chain Finance, EMEA, Anil Walia, speaking at BCR’s 6th Annual Supply Chain Finance Summit

As such, the importance placed on the due diligence process cannot be understated. “One day at this point can save you five days down the line,” he added.

"There is no cookie-cutter solution for setting up an SCF programme. Every programme throws up surprises, even if you've already set up hundreds"
Anil Walia, Head of Supply Chain Finance - Payables, EMEA, Deutsche Bank

So, what can be said of the SCF programme currently in place? One of the main keys to success is cooperation across internal and external stakeholders. Commitment from senior management is essential to help push the project forward, and constant communication between the corporate and the SCF provider helps ensure a smooth implementation. Finally, corporates looking to implement such solutions should remember that the process is more of a marathon than a sprint and should be broken down into staggered, manageable steps.

Transparency

Later in the day, Walia was back on screen with Roche’s Head of Treasury Operations, Martin Schlageter, to discuss developments with the Trade Information Network (TIN). Originally formed by six banks – ANZ, BNP Paribas, Citi, Deutsche Bank, HSBC and Standard Chartered – TIN aims to address the unmet demand for reliable financing earlier in the supply chain by enabling suppliers to put forward their purchase orders as collateral instead of the invoice, which is issued at a much later stage in the process.12

This type of financing solution can further improve access to finance for suppliers and help stabilise the supply chain by bolstering their financial viability – strengthening supplier-buyer relationships in the process. The tightly managed network of information also helps reduce fraud and, by creating one open industry network, enables banks to better serve the financing needs of their clients across the supply chain.13

Figure 3: legal structure with buyer, Trade Information Network, and Bank

Source: Deutsche Bank 

Swiss healthcare multinational Roche first developed its SCF programme in the wake of the global financial crisis of 2008, when it was contacted by suppliers facing a cash strain. Based on its AA rating, the company was able to provide some neat financing solutions for its key providers. However, this did not cover the needs of all suppliers, some of whom could already finance invoices through their own banks or by alternative means and were therefore looking for solutions to finance their goods at an earlier stage than traditional SCF can provide.

“We’ve always believed that … purchase order financing that turns into SCF once an invoice is raised is basically ideal for the supplier base,” remarked Schlageter. A pilot with TIN seemed like a natural solution to this conundrum, even more so in the face of the pandemic when many more suppliers were looking for secure financing as early as possible in the cash conversion cycle.

Opening up SCF to new market participants – not only new suppliers, but also a wider world of investors and fintechs – remains an important priority for the industry as a whole. And so, despite a turbulent 12 months, market participants have continued to move the industry forward, driving necessary improvements in terms of digitalisation, sustainability and openness.

Each new initiative, be it TIN or the legal recognition of electronic documentation, also promotes transparency, perhaps the most important element, and critical to bringing certainty, confidence and strength to the industry, even in the face of the unpredictable. As Bertrand de Comminges, Managing Director, Global Head Trade Finance Investments & Global Investment - Illiquid Alternative Investments, Santander Asset Management, concluded, “At the end of the day, SCF is simple. If it is transparent, it works very, very well, in every single respect, from a technological point of view, from a legal point of view, from a reputational point of view.”

The virtual BCR Global Supply Chain Finance Summit was held 26−27 January 2021


Sources

1 See https://bit.ly/2NLbGtD at wto.org
2 See https://bit.ly/304VeqE at wto.org
3 See https://bit.ly/3sKkdLR at wto.org
4 See https://bit.ly/2OfvIME at db.com
5 See https://on.ft.com/3e2f1PE at www.ft.com
6 See https://on.ft.com/3e2f1PE at www.ft.com
7 See https://bit.ly/30aDda5 at bcrpub.com
8 See https://bit.ly/30aDda5 at bcrpub.com
9 See https://bit.ly/3uKZpG6 at iccwbo.org
10 See https://bit.ly/3q66fSP at gtreview.com
11 See https://bit.ly/3b5EPIv at lexology.com
12 See https://bit.ly/37Y69GD at tradeinformationnetwork.com
13 See https://bit.ly/37Y69GD at tradeinformationnetwork.com

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