The challenge

China is an important market for Medtronic. In fiscal year 2020, the greater China region generated US$2bn sales, achieving double digit growth from the prior year. This resulted in a large amount of foreign exchange risk. The current solution of using a single cash management bank had become outdated and obsolete. As currency volatility increased, due to a USA/China trade war and resulting from PBOC’s continued effort to internationalise the Chinese Renminbi (RMB), a more advanced foreign exchange risk management and currency conversion strategy was needed.

The solution

In partnership with Deutsche Bank, Medtronic had three separate challenges that needed to be addressed for the solution to be implemented.

First, Medtronic needed to change the intercompany invoicing currency from USD to CNY. Medtronic could have maintained the status quo of USD invoicing for all cross-border China transactions, like many other multinational corporations with operations in China. This would have led to a sub-optimal FX risk management strategy. Also, it would have prevented the company from taking full advantage of transactional efficiencies that can be gained through CNY invoicing. This change required working across several teams at Medtronic requiring careful coordination.

Second, the treasury team needed to establish a better currency conversion strategy. A process was created that allowed Medtronic to competitively bid out the conversion of RMB to USD using CNH. Several relationship banks were onboarded to this process, reducing the company’s reliance on a single cash management bank. Another process was established to leverage Deutsche Bank’s capability to convert RMB to USD using CNY. The treasury team was now able to convert RMB to USD using the more favourable rate at execution time.

Lastly, Medtronic needed to establish a new cash flow hedging programme to ensure that the future value of CNY cash flows was more predictable. Treasury, in partnership with accounting, established a GAAP cash flow hedge accounting programme. Due to how the first two challenges were resolved, the resulting hedge execution strategy was also dynamic. At hedge execution time, Medtronic can now choose from any of the three markets (CNY onshore forward, CNY non-deliverable forward, and CNH forward).

Best practice and innovation

No one knows what the future will bring, so it is important to have dynamic and flexible solutions. There are two ways to convert Chinese currency to USD (onshore and offshore rate) and three ways to establish new Chinese cash flow hedges (CNY onshore forward, CNY non-deliverable forward, and CNH forward). With these new processes in place, Medtronic now has the flexibility to execute FX transactions using any of the five methods – depending on which method is the most advantageous at time of execution.

Key benefits

• Generated annual transactional savings of US$2m per year.
• Increased predictability of Chinese earnings and earnings per share (EPS) volatility.
• Reduced dependency on a single cash management bank for FX transactions.

“Medtronic now converts Chinese renminbi to USD at the best possible rate. This results in us having US$2m more cash in the bank per year. Also, the future value of our Chinese earnings is now much more predictable,” says Tim Husnik, Treasury Director.

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