In Asia Pacific, Honeywell’s revenue is in excess of $6 billion, and the company employs close to 34,000 employees across 14 countries. Within its diversified business portfolio, there are certain lines of business which are active in the tender/bid process related to project/contract work. Such a commercial model requires the extensive issuance of bank guarantees (BGs) such as bid bonds and performance guarantees.
Photo of Freya Yao, Honeywell, Sebastian Bechtold, Deutsche Bank and Joy Macknight.
Treasury Analyst, Shanghai, People’s Republic of China
Honeywell is a Fortune 100 diversified technology and manufacturing leader, serving customers worldwide with aerospace products and services; control technologies for buildings, homes and industry; turbochargers; and performance materials. Based in Morris Township, N.J., Honeywell’s shares are traded on the New York, London, and Chicago Stock Exchanges.
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As Freya Yao, Treasury Analyst, explains: “We issue about 700 BGs annually, and the application (issuance), submission and tracking of the BGs is a challenge in itself. While Honeywell has established a robust internal process for the internal review and application process, the different requirements imposed by our diverse customer base inevitably requires us to be issuing BGs from a number of banks which may not be our banking partners or our primary cash operating banks.”
The problems and challenges can be summarised as follows:
Honeywell’s BG landscape was littered with different application process for each country within the region.
Where the issuing bank is not Honeywell’s cash operating bank, the payment for the BGs become a challenge.
Furthermore, due to the possibility that the invoices were manually prepared, Honeywell had detected errors and inconsistencies in the invoices, and in some cases, even rejected payments from the BG-issuing banks after payment has been made.
Tracking the status of BG application is done manually, and the applicant will usually inquire through treasury; then treasury will have to place a call with the issuing bank.
Periodic reporting of issued and outstanding BGs is also a challenge as data needs to be gathered from the various sources, expending time and resources.
Given the above, Honeywell wanted to be able to work with banking partners which have an electronic BG platform that is available across all countries in the Asia Pacific region. Furthermore, Honeywell would also like to have a seamless application process, even where it does not have a bank account with the BG-issuing banks.
The availability of a single electronic BG platform across Asia Pacific is not as prevalent as a cash management platform. There are however, a few banking providers which provide such a platform. But where the challenge lies is in the payment mechanism for the guarantee that is issued. Most of the banks would like bank accounts to be opened with their banks, but that would breach Honeywell’s objective of keeping the number of bank accounts to the minimum.
An alternate solution was proposed whereby specific invoices would be raised for payment, and subsequently, statements would be provided to Honeywell for periodic payments. As described earlier, such a billing arrangement is prone to inefficiencies and errors, as the whole process would involve a number of intermediaries along the entire billing/payment cycle. Besides, Honeywell has first-hand experience on the shortcomings of such billing arrangements.
What Honeywell wanted, which is common practice in other parts of the world, is a direct debit arrangement with the BG-issuing bank. Deutsche Bank, one of Honeywell’s global partner banks and one of the current BG issuers in China, agreed to provide such a billing arrangement.
The uniqueness of this solution is that Honeywell was able to challenge the status quo and prevailing market practice in this region, pushing the ‘envelope’ for a certain process to be adopted. While the technology is available (the platform), packaging the technology around a commercially adoptable solution required a certain amount of effort, initiative, and the willingness of the banking partner to support changing the status quo and ‘business as usual’ mentality.
As Yao concludes: “Some of the biggest achievements can come from resolving the seemingly smallest issues that are often overlooked and ignored.”