August 26th, 2012 | Global Times A stronger link
As credit has become tighter over the last year, a new method of providing less risky assistance to small firms has emerged: supply chain financing.
Jim Yeh, 45, a former bond trader with Credit Suisse, built a supply chain financing platform for Foxconn Technology Group last year, to help its myriad Chinese suppliers get funding more efficiently.
“A huge company like Foxconn has over 200 subsidiaries [which operate separately]. In truth, no one is able to tell exactly how many orders the subsidiaries have placed [with suppliers] without the supply chain financing center,” Yeh told the Global Times.
Since a supplier may get orders from multiple Foxconn units, if a bank that is considering lending to the supplier asks one of the units if the supplier has 30 million yuan ($4.7 million) worth of orders, the unit may reply that it is only aware of 3 million yuan of orders, Yeh explained.
“Then the bank would drop the idea,” he said.
The financing platform Yeh built can scan across Foxconn’s system and check if several Foxconn subsidiaries have, in total, placed 30 million yuan worth of orders with the vendor.
“[If verified], then the supplier can get 20 million yuan in bank loans instead of just 1 or 2 million,” said Yeh, who is also the chief advisor on supply chain financing at Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University.
Supply chain finance, or “reverse factoring,” has become popular with banks and other financial service providers amid the economic downturn.
The economic slowdown has threatened banks’ bottom lines, forcing them to seek new areas of revenue. Bank of Communications, Shanghai Pudong Development Bank, Bank of China and Hua Xia Bank are expanding into supply chain financing for small and medium-sized enterprises (SMEs), Nanjing-based Chinese Securities Journal reported on July 25.
Traditionally, “banks lend mainly to the real estate sector, local government financing platforms and big State-owned firms, rather than SMEs,” a senior supply chain finance manager at China Resources Bank of Zhuhai told the Global Times Sunday on condition of anonymity.
The banks have turned to the SMEs because loans to the property sector and government financing platforms have been restricted or banned, and the risks of reverse factoring are much lower than from lending to the SMEs, the manager said.
Factoring is a tool to improve a company’s working capital by selling its receivables – such as IOUs from other companies – to a financial institution in return for cash. A bank buys receivables from a vendor so that the latter can continue production.
However, according to the World Bank, “ordinary factoring has in general not been profitable in emerging markets,” where good historical credit information is unavailable, fraud is widespread, legal systems are weak and electronic business registries and credit bureaus are incomplete.
This is where reverse factoring can come into play, the World Bank said.
Instead of buying the receivables from small suppliers with insufficient creditworthiness, a bank can choose to buy them through a high-quality customer company of the suppliers, also known as a core enterprise, such as Foxconn, which can verify the IOUs.
Liu Baoya, a deputy to this year’s National People’s Congress in March, proposed developing supply chain finance to support micro-sized firms and managing their risks through core enterprises, Xinhua reported.
An SME financing services center was established in Wenzhou, Zhejiang Province on July 28 as part of the city’s ongoing financial efforts to solve financing problems faced by SMEs.
The center helped check the creditworthiness of more than 100 micro vendors whose core enterprise was a shoemaker, and facilitated bank loans to the suppliers, Xinhua reported.
In 2011, Chinese banks recorded 2.24 trillion yuan in factoring revenues, a record high and the highest in the world, according to the China Banking Regulatory Commission.
Not every core enterprise is willing to adopt such a financing tool, for fear of compromising its bargaining power and control over its suppliers, the manager from China Resources Bank of Zhuhai said.
“Supermarkets (in China) are particularly stringent with vendors … and they usually demand one to 12 months to pay them back,” he said. In his experience, small vendors usually follow the supermarkets’ requirements.
Meanwhile, in some Chinese and foreign joint venture supermarkets in China, vendors have to bribe a purchasing manager or an accountant in order to get paid, so the vested interests feel threatened by the possibility of vendors being paid by a third-party financial company, he explained.
Yeh echoed his views, saying he had also met opposition from accountants and purchasing managers during his construction of the supply chain financing platform for Foxconn.
The electronics manufacturer accepted the platform because it needs powerful and stable vendors that can supply 500,000 or more parts at one time, Yeh said.
Foxconn’s production cycle between receiving an order and delivery is short, usually two months, he said. “If the suppliers do not cooperate, it cannot deliver.”
Cooperation from core enterprises and banks is key to making reverse factoring work, experts said.
The Wenzhou SME financing services center has only seen two deals so far, because both the core enterprises and banks are reluctant to cooperate, Zhou Dewen, president of the Wenzhou Council for the Promotion of SMEs, told the Global Times Tuesday.
Yeh said that when Foxconn was trying to promote the financing platform, vendors were initially suspicious and did not get involved. It was only when the CEO of Foxconn’s purchasing arm in Shenzhen asked the purchasing managers to invite vendors to the firm that the deals started to flow.
The manager from Zhuhai said that he once bought 10 million yuan in receivables from a convenience store supplier in Beijing, and he had to manually double-check nearly 500 receipts for a week. “That was too painful,” he said.
The supply chain platform has made it much easier for the banks. Yeh said that Bank of China, one of the participating banks in the Foxconn platform, only checks a small sample of receipts, and relies on the accuracy of the platform’s information.
Yeh said the Foxconn platform has so far struck financing deals worth over 300 million yuan, and the banks pay the vendors within a few weeks.
Now he is targeting some major shipbuilders and steel mills in China, as their lackluster performance makes them more likely to adopt such a tool to pay suppliers and paper over the losses.
By Cong Mu