Based in Singapore, Mikko Sopanen is leading a project in order to consolidate and centralise the cash flows, for importing and exporting, from all companies to the Asian headquarters. He refers to having had three “cash planets” within China, as each cross-border transaction and cash transfer is so restricted.
Director of Treasury
Mikko Sopanen joined the global treasury of Lite-On Mobile (LOM), formerly Perlos, in 2006. He was appointed Director of Treasury in 2008 to lead the treasury migration from Finland to Taiwan, where he stayed until 2009. After ensuring a smooth transition, Sopanen then returned to Finland, travelling to company hubs in China and Asia on an as-needed basis. But in 2011, Sopanen relocated to Singapore, where he has worked, heading up treasury there ever since. Prior to his career at LOM, Sopanen worked as CFO and co-founder of cloud software company, Nextime Solutions. He has a Master of Finance degree from the University of Oulu and is currently completing an Executive MBA at Aalto University of Helsinki.
Established in Finland in 1953, Lite-On Mobile (LOM) is an international design and manufacturing partner for the telecommunications and electronics industry worldwide. The company is owned by Taiwanese Lite-On Group with its core headquarters based in Vantaa, Finland. LOM provides services and commodities from design and concepts to manufacturing, final assembly and testing.
The Lite-On Group acquired Perlos in 2007, a company with a wealth of experience, a history of dealing with mobile phone components since the 1980s. As part of the acquisition transition, many of the group operations were migrated from Finland, where the entire operations were previously based, to Asia, says Mikko Sopanen, Director of Treasury, LOM. “Most of the central operations, such as the CFO and finance department, are now all based in Beijing. However, some other operations are in central China where our main customer base lies. Since our funding needs are more global, we (the treasury) are based in both Singapore and Taipei.”
Employing around 14,800 people worldwide across 11 manufacturing plants in Asia and the Americas, LOM boasts a strong local presence in all major markets. Its global customers include leading handheld device brands such as Huawei, Nokia and Sony Mobile Communications.
In this relatively new structure, Sopanen describes a treasury that is mainly centralised with regards to company agenda and policy-making for major cash and foreign exchange (FX) decisions. But because the geography in which LOM conducts business is so diverse – with operations in countries such as China, India and Brazil – the electronics firm ensures that a dedicated employee is working for treasury in each location. This allows FX trade, hedging, cash management and accounts payable (AP) and receivable (AR) to be dealt with at a local level, according to Sopanen. “Effectively there are five of us that cover treasury across the globe. I’m embedded in Singapore as a director, accompanied by one assistant manager who handles FX. One director and assistant manager are based in Taiwan, mainly for cash management – effectively handling the cash flows and daily funding. The fifth person is located in Guangzhou, China, controlling the complexities of Chinese hedging and cash management,” he explains.
LOM was presented with a Logistics Efficiency Award last year (October 2012) by airport operator Infraero for its logistics work in the cargo terminals of Brigadeiro Eduardo Gomes International Airport in Manaus, Brazil. Infraero evaluated 100 best-in-class companies and their international supply chain management before selecting its award winners. Further strengthening LOM’s industrial position in the attractive emerging market location of Brazil, the firm announced a joint venture earlier this year with Yamada Electric Industrial, with the goal of developing an extended product range and more efficient deployment of manufacturing capacities on the LOM Manaus site. With net sales of €705m at year end 2012, LOM’s growth strategy appears to be working well for the company’s bottom line.
Strategic cash structures
Mobile phone component design and manufacturing is a very rapidly developing and changing industry – a high volume, low margin business. As such, LOM’s ‘order book’ of sales is for a maximum of one week, so the confirmed sales visibility is very short. This creates certain challenges for treasury in the areas of FX and cash management, for example. As such, the financial partners that the company has opted for must be capable of meeting those demands. Says Sopanen, “we have a few global banks but, in my experience, I believe that no one bank can provide everything required in terms of special needs and location. While Citi bank is the bank that we use at a global level, we also have one or two local banks at each manufacturing location, which we will use for different areas of finance management, such as daily cash collection.”
One region that creates added complexity for the LOM treasury in relation to these ‘special needs’ is China. For over a decade, the company has been using a cash pool specific to the country’s regulations that Citi helped to set up. The pool consists of entrust loans whereby the bank basically acts as the middle man, setting up a new loan for each requirement. And being renminbi (RMB)-based, Sopanen feels that the company has been in a good position so far. However, he has been leading a project in order to consolidate and centralise the cash flows for imports and exports from all companies, to the Asian headquarters.
According to Sopanen, there are at least two substantial benefits. “One is that by setting up the inter-company payment terms and managing the payment timing we can actually use the operative cash flows to allocate our cash between China, India, Brazil and the rest of the world. I would say that we have three cash planets, not even countries, as every cross-border transaction and cash transfer is so restricted. This is in stark contrast to cross-border transactions and funding in Singapore and Western countries which operate much more smoothly.”
This structure also allows for strategic decisions to be made regarding varying currency amounts at any given time much more simply, Sopanen continues. “For example, in China we increase RMB as much as we can so that the exposure in China (or India etc) will be minimised. I started this project back in 2009 but it has been very much a cross-organisation project. Our vendors will have to centralise their transaction and the sales team will have to globally invoice on the customer side as the company location has changed for them. This has also given us huge benefits regarding sourcing as we can now monitor and combine the orders.”
When it comes to credit facilities, LOM is part of a lending syndicate with some Taiwanese and global banks, and also holds several single bank facilities, including term loans. These revolving facilities provide a flexible funding tool for the company to manage its rapidly changing working capital needs and funding for LOM’s investment appetite.
Although treasury technology may also seem to lag behind its Western counterparts (LOM’s treasury is still mainly spreadsheet-based), Sopanen – with an extensive background in the Nordics – believes that the methods used are quite advanced, nonetheless. “We have a slightly older, smaller system in our treasury – but it works well and is an excellent reporting tool. Our enterprise resource planning system (ERP), SAP, is also integrated into our existing systems and as we have not encountered any complications to date, we can see no reason to change from our excel structure.
“The decision to invest in a new system will most likely happen, but currently the cost question and the large change involved in such a modernisation plays a large part in deterring the upgrade. The salary cost that constitutes the addition of one or two people is minimal compared to a new system and we are currently very satisfied.”
Taking into account the industry Sopanen is immersed in, it’s understandable – if not assumed – that mobile treasury is a way of life at LOM. “We can use all the reports and can access the system through mobile devices, which can be really helpful as physically our treasury is so widely spread. Our IT system is so extensive that I have internet access and access to all systems everywhere. I have the same connections whether I am at home, travelling or in the office – that’s been a big advantage for the entire company, from the sales teams through the finance departments and up to Board level.”
Having access to work systems remotely – while extremely effective for home workers, frequent travellers, or in the event of natural disasters (where travel to work is impossible) – can also play havoc with work/life balance for employees. Does Sopanen see this as a worrying trend in his treasury? “To be honest, it would be more common for our Finnish staff to work from home, but our Asian contingent would definitely use this option too – purely for reasons of convenience. One example of this is that, with the new Asian headquarters, we have significantly tighter reporting schedules compared to the timetable we previously adhered to.”
This area has improved dramatically for LOM treasury as consolidation and finance of cash flow, cash balances, and even sales costs are conducted on a daily basis, says Sopanen. “For example, one of the special reports that we do is cash closing on a monthly basis – on the first day of every month, the entire P&L (profit and loss) is balanced, regardless of whether its Saturday or Sunday. To accommodate the instances when this date falls on the weekend, we mostly opt to work at home.”
This rigid reporting process is very impressive compared to the lax reporting standards that many Western companies follow and Sopanen believes that this structure allows close scrutiny – and rapid reconciliation – of the company’s P&L operations.
Risk and opportunity
Bearing in mind the scope of these operations – LOM company sales are $1 billion annually worldwide – the FX transactions involved can be quite specific and the volumes can be incredibly high. Aware of their exposures, Sopanen and his colleagues keep a close eye on market trends but also deal directly with the banks over the phones or on the banks’ electronic platforms, with a preference for the vanilla products. “We love simple structures so we deal mainly with forwards and swaps, especially as we’ve been focusing a lot more on actually reducing the hedging by creating these operative positions,” says Sopanen. “We still have exposures in Indian rupee as well as for RMB in China and certain exposures for euro and the Brazilian real.”
LOM has been expanding its local hedging in India in recent months, trading both offshore and onshore currency in the region. But it is the FX operations in China that Sopanen really finds fascinating. “When hedging in China, there are three different rates (local currency, offshore RMB and CNH) so we have been optimising this for our benefit. Now there is even a fourth rate in some countries. Four different rates for the same currency makes it very interesting from a FX perspective. It’s a huge opportunity but also quite a risk to manage.”
Perlos/Lite-On was not part of the flurry of merger and acquisition (M&A) activity borne of the financial crash, as the merger occurred before the downturn in 2007. Nevertheless, Sopanen maintains that the company has felt some of the impact of the aftershocks, and the crisis in the Eurozone in particular, as global volatility (although somewhat eased now) had increased significantly, creating a domino effect with its own banking relationships. “Certain dealings with banks have changed in the sense that some international bank’s funding and FX limits have become more conservative and restricted.”
Yet, being based in Asia, the financial crisis itself did not have a hugely negative effect on the company’s operations and profits themselves, other than the acknowledgment that European demand was a little bit slower. In fact, business has been improving, says Sopanen. “Overall there have been major shifts and innovative developments in the mobile industry worldwide. These shifts have impacted our business in a positive way, regardless of location.”
For many corporates expanding or relocating operations to Asia, one of the main concerns is the difficult recruitment arena in the region. Sopanen is rather the exception as he was, in fact, pleasantly surprised with the talent pool – and successful in his efforts to retain them. “We were always expecting recruitment to be very tough. In 2008, we began the search for employees in China for the first time but, over the past five years, the potential has grown considerably and there are very skilled people across China and Taiwan.”
Sopanen is also looking outside the box when it comes to recruiting staff for his team – and this is a result of the regional demands of some of the geographies they are operating in. For example, as a publicly listed company, heavily regulated Taiwan is very tough on LOM’s treasury. “There are many processes and activities that we must report and this has to be open and transparent. For instance, when it comes to derivatives (either foreign or not) or funding, there are many rules and regulations to follow and we need to write up a report for it all. These reports are all publicly announced so people can see what deals we have done.”
The upshot of these strict requirements is that because there is now so much reporting to be completed as part of the treasury work quota, Sopanen has been hiring people from outside treasury. “They might have a background in finance or in auditing, for example. This has been very successful as sometimes the treasurers don’t enjoy this ‘hard work’ so employing someone from a very busy company with a different background who might even be very keen on reporting can be very helpful – they must also have a passion for treasury, of course.”
The most suitable person would naturally be local to the region, for many reasons, says Sopanen, and this has been the company policy of late. Despite the fact that LOM is a very Western-managed company – CEO Cor Saris is Dutch and CFO Donal Breen is from Ireland – the ambition is to have many locally managed organisations, perhaps due to the regulatory difficulties in the geographies of the company’s hubs. “In China, for example, language and culture are essential so having local people in that context would be a real strength. They can communicate better with the sales teams and are much better at understanding the environment and liaising with the local authorities. That’s the talent we are looking for.”
An organic firm, LOM has been constantly growing over the past five years and has been busy creating new hubs and enterprises in Asia. Perlos’ acquisition spelt a measured change for the company’s operations in many ways, especially for treasury. “Treasury was the first one that was required to get in line in many ways with the parent company, when it comes to treasury policy, structure and, of course, the funding,” says Sopanen.
The further opening up of RMB and cross-border funding options internationally for China, in addition to the (albeit slowly) maturing money markets in India and Brazil, will provide more interesting projects for LOM to work with in the near future.