The decentralised nature of Honeywell’s structure in China was inefficient and introduced unnecessary risks so they totally redesigned their credit facilities around a consolidated and centralised model focussing on six prime areas.
Photo of John Chen and Lawrence Chang, Honeywell.
China Treasury Manager
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 Plains, New Jersey, Honeywell’s shares are traded on the New York stock exchange.
While Honeywell is cash-rich in China, the company still has several standalone credit lines in the form of trade facilities to issue bank guarantees (BG) and bank acceptance drafts (BAD). These credit lines are arranged separately at individual entity level, with the respective Bank of China branches.
Lawrence Chang, China Treasury Manager explains: “Such a decentralised arrangement reduces our operational efficiency and introduces risk in the form of tracking and monitoring individual lines and limits. Our continued growth and expansion will further complicate the process. A redesign on the arrangement of credit facilities needed to be made so as to be able to support such continued growth.”
Focus is on the following six areas:
Consolidation of Bank of China credit lines
Currently, Honeywell has four standalone Bank of China credit lines for issuance of BGs and BADs. Each year, individual entities have to go through a credit line renewal process with the respective Bank of China branch which reduces finance operational efficiency.
Centralisation of Bank of China credit line management
Honeywell has an internal control process where all credit facilities have to be reviewed and approved by treasury. However, Honeywell has a presence in more than 15 cities in China and most of their entities have bank accounts with Bank of China.
Improvement on M&A integration
Honeywell’s M&A activities offer an opportunity to re-evaluate the integration process. Many newly acquired entities are directly owned by offshore entities. This ownership structure hinders the integration process.
Containment of bank account expansion
One drawback of standalone credit lines to issue BGs is that a company is required to maintain a bank account for debiting of bank charges. The consequence is the proliferation of bank relationships and accounts.
Pricing and commercial term discrepancy
Existing credit line arrangement creates differential pricing and commercial terms by individual entities. Although Honeywell as a group has strong bargaining power with the banks, individual entities do not have access to such a privilege which increases Honeywell’s financial costs.
Geographic constraint on credit line arrangement
Given that the regional headquarters resides in Shanghai, it is more efficient for Honeywell’s various entities to manage issuance of BGs and BADs from Shanghai.
Best practice and innovation
Whether a company is in a net cash or net debt position, a credit line is a double-edged sword to treasury. It is an essential lifeline to a sustained working capital and funding requirement; however, an ill-structured credit line could incur operational risk and/or reduce future flexibility. Honeywell Treasury took a bold initiative to challenge the status quo among local lenders, and partnered with Bank of China to construct this umbrella credit facility.
“The award itself endorses the innovation and resourceful spirit of the Honeywell treasury team. One essential task of our treasury team is to fuel Honeywell’s business growth while managing the risks incurred by business expansion. This award not only recognizes our efforts but also provides us with the encouragement to continuously perform better. Through this award, Honeywell hopes to provide recognition to the financial institutions who possess the same spirit so as to continuously push the limit of innovation and efficiency.”
Lawrence Chang, China Treasury Manager, Honeywell (China)
Chang comments, “It is about viewing current operational challenges through new strategic perspectives, and coming up with bold new solutions to resolve such challenges. This case study demonstrates that treasury is a field which requires the continuous challenge of the status quo. With the right banking partner, new solutions can be formulated that provide a winning strategy to all the relevant stakeholders, further elevating the treasury profession in China.”
Whilst the solution with Bank of China is still in progress, the following benefits are already being seen:
Reserve ample credit line to fuel company’s growth and expansion in China.
Centralisation of credit line management.
Establishment of country relationship management model.
Key learning points
In a restricted country, such as China, treasurers are always facing challenges to conform to global treasury policies while adjusting to the local environment. In our case, the winning strategy is to find the right banking partner and create a customized solution to suit Honeywell’s unique situation. It must be remembered that a restrictive macro-environment whilst a challenge can actually encourage innovation.