Corporate View: Alain Bridoux, Sandvik China

Published: Nov 2009

Headquartered in Sweden, Sandvik is a high-technology engineering group that conducts business in 130 countries worldwide. Sandvik’s Chinese operations consist of 13 legal entities, which employ approximately 2,000 staff and have an annual turnover in the region of RMB 5 billion. In this issue Alain Bridoux talks about the challenges and opportunities he faces as CFO of Sandvik China.

Alain Bridoux


Born and raised in France, Alain Bridoux has an MBA from ESSEC and a Law Degree from the Sorbonne. He is married with two children: one daughter working in Singapore and a son working in Paris.

Alain has spent the majority of his business life outside of France working in Madagascar, the UK, Belgium, the Netherlands and now China.

Former employers include Alcatel, Sonoco, Ashland and now Sandvik. Expertise includes most facets of Finance and Administration in Operations, Regional Headquarters and Shared Services. Titles have varied from Branch Controller to Treasury Manager, European Credit Controller and CFO. Industries served include Automotive OEMs, packaging, chemicals and mechanical engineering.

Alain’s hobbies include tennis and bridge.

Please could you give me an overview of Sandvik’s history in China and your role at the company?

Like many multinationals, we started off with a representative office in 1985 – at that time, our base was in Hong Kong. As China’s economy began to take off, we decided we wanted to grow the business in mainland China, which is today one of the company’s most rapidly expanding markets.

I am CFO of Sandvik China Holding Co., Ltd. According to the Sandvik governance, the finance function has three roles: business, service and owner roles. Sandvik itself has three different business areas: tooling, mining and construction and materials technology. Operational decisions for these three areas are managed globally from Sweden, and my role in Sandvik China is to offer them support and shared services for finance and administration. Business control reports directly into the business areas, so my focus is mainly on financial reporting, tax and treasury. I act as a sort of extended arm of the ultimate parent company, enforcing and applying group policies in China.

What are the main challenges facing multinationals in China today?

Given that most of our managers are in their mid-30s and were not in management positions during the 1997 Asian crisis, they have no experience in dealing with the downturn which started at the end of 2008. Cost control and structure adjustments are skills expats can offer in the current environment. Retention of key staff for the expected economic rebound is equally important. Sandvik has had quite a lot of success in retaining people.

Last year we had a staff turnover of around 7%, which is extremely low – I’ve heard figures of around 20% for other multinationals. In my opinion there is a fairly good blend of culture and business traditions between Swedish businesses and China. Sandvik has been able to offer good treatment and good long-term career plans to employees, which is very well perceived in China.

Apart from staff retention, what other challenges are you facing?

The Chinese government’s economic rescue package has raised some interesting questions. All businesses, particularly multinationals, are extremely eager to get information from financial analysts, as there are still some diverging opinions on both sides. What the full premium package will be, and how it will be spent, remains to be seen, and different people are of course saying different things. At Sandvik China, we certainly believe we will see some benefit from the spending on infrastructure for our mining and construction business.

Probably the main source of frustration I have today is the new tax law on the reorganisation of companies. It is effective retroactively and it’s creating absolute havoc among multinationals as it negates some of the benefits of having a holding company in China. This is because it makes the restructuring of a company, whether by merger, acquisition or changing its legal status, subject to tax.

Until the beginning of this year, reorganisation of groups was essentially tax free, which meant that a subsidiary could be transferred to a Chinese holding company or to another operating company in a tax free transaction. Nobody really expected that this would change. Moreover, the new regulations are so unclear that tax consultants have been unable to give practical advice, and some interpretation is left to the local authorities.

There are indications that there will be some amendments. The tax consultants that we have used so far have told us that the Chinese authorities recognise that the new regulations reflect the different perspectives of several regulatory bodies, which explains why there is no consistency. This has created a very complicated situation because it makes the acquisition of new companies by multinationals operating already in China more complicated. The sellers would have to bear some tax consequences that obviously they would try either to hide or pass on in the purchase cost of the acquisition. We have to integrate these new factors into any acquisition discussions we might have.

What have been the most notable impacts of the financial crisis on the wider business environment in China?

Export-orientated companies have suffered the most. The pace of inflation, which accelerated during the Olympics last year, has reversed. At the beginning of January I was in Guangzhou, and on the streets I could see discounts of up to 70% for textile and fashion items. Any export-orientated company was either closed for a month or was in great difficulty. Sandvik China has not suffered in the same way because our businesses are serving mainly domestic markets, though obviously some of our customers are also export-orientated companies.

But this seems to be improving – all the indications are that retail is still booming and people, especially the young middle class, are spending more and are not even convinced that there is a crisis, which is very different from what you see in the UK and anywhere else in Europe. Many intelligence units, including the Economist Intelligence Unit and the Boston Consulting Group, agree that the most likely figure for GDP growth in 2009 for China is going to be 7%, or maybe a little bit more.

In terms of capital employed, how has Sandvik responded to the crisis?

More emphasis has been placed on capital employed worldwide, and all levels of management have personal targets on the reduction of working capital. Several production plants, including one in China, have been working four days a week in order to reduce inventory levels and generate cash. However, the plans for three new plants coming to production stage in the third quarter of 2009 remain unchanged for Sandvik China.

We are also working on supply chain financing to extend payment to our suppliers – it’s not very sophisticated, and something which has been done in the west for many years, but it’s somewhat new in China.

What cash management structures does the company currently have in place?

Sandvik China has a cash pooling system with one single foreign bank – HSBC – which allows us to pool all RMB cash balances into a pool header account at the end of each day. This has been in place since 2008 and has proved to be very efficient. Cash pooling has achieved two things: savings on interest and also better control over subsidiaries, which in the past would often consume cash beyond their plans or keep idle cash while other units were in a cash short position.

Given the increase in US dollar transactions, we are considering foreign currency cash pooling, which would also provide additional flexibility for hedging foreign transactions. We’re doing a feasibility study which will be finished by the end of September. If we go ahead, the project will start on 1st January 2010.

How difficult is it to repatriate cash from China and what solutions are there?

A distinct risk factor of operating in China is overcapitalising new projects, which require investment in land and buildings. The local authorities are very supportive of new investment, but of course, they have personal targets, measured on the amounts of foreign cash they attract to their province or region. This has resulted in a few cases where project leaders have made commitments to local authorities which exceeded the real needs of the business in terms of capitalisation. What could be done to repatriate capital quickly if such a project were aborted, and how much time it would take, is not totally clear.

The new withholding tax of 10% on dividends repatriated to our parent in Sweden is another reason why we should be careful not to overcapitalise our legal entities. Regulations on foreign payment and tax deductibility of service agreements are also causing us concern, and we would like more relaxed regulations or better access to advance rulings.

When it comes to payment of non-trade invoices (ie for services), the amount of documentation requested and the practicalities are absolutely enormous. We are still struggling to pay some invoices for consultants going back to 2005.

In summary, the situation for cash repatriation is complicated but manageable, provided we do not inject too much capital into new projects.

What are the options available for customer financing in China?

The best solution is to ask the customer to pay in advance – Chinese customers are still used to paying in advance for imported goods. As companies make the transition from imported goods to locally produced goods there is certainly a risk that some multinationals will degrade their working capital by granting open terms to customers who previously paid in advance for imported goods.

The best instrument of payment in China is a bank transfer – cheques are not really a valid payment method. There is no widely accepted draft system as in Italy, Spain or France, but there is a system called BAD – which stands for Banker’s Acceptance Draft. BADs are endorsed from one commercial partner to the other in principle without recourse, except in the case of forgery. It has very complicated protocols and it accounts for a small fraction of the payments we receive, but it’s something that we use for customers who are not very strong financially.

Leasing is a new option, but it is only possible for capital goods, so it only applies to machinery and construction. There are many players, but it’s still new territory. We have high hopes for the development of leasing for our machinery and construction division.

Are there any other areas which are particularly of interest in treasury in China at the moment?

The role of the RMB in international transactions might change as a result of the recent crisis. If it becomes a fully convertible currency then limiting cash management to the borders of China would probably disappear – we could move to a more global management of treasury. If this happens I think it will lead to major changes in the way multinationals manage their cash.

What about foreign company bond issuance – is that something that Sandvik would be interested in?

Maybe – it would only be of value with a very large acquisition that could justify bond issuance. This is only hypothetical and would have to be approved and discussed by Sandvik Group of course, but what we hear is that it is now a real possibility in China. For instance, I heard that Siemens has done it, but then again Siemens employs 120,000 people in China so we are not really playing in the same league.

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