Although he has very recently returned to France for a consultancy position, Alain gives us an insight into Sandvik’s treasury since we last spoke to him in 2009. We also learn what the treasury and recruitment arena is like in China today.
Formerly CFO of a Sandvik China Joint Venture
Born and raised in France, Alain Bridoux holds an MBA from ESSEC and a Law degree from Sorbonne. He has spent most of his business life working abroad for multinationals (MNCs) which include Alcatel, John Brown, Sonoco, Ashland and more recently Sandvik. He has held regional positions in accounting, tax, treasury, IT and HR. In his latest overseas job he spent six years in China first as CFO Holding and then as CFO for a Joint Venture at Sandvik China. He has just joined TransNations, a cross cultural consultancy to advise clients and universities in France and China.
Sandvik provides materials, tools and training in the manufacturing, engineering, mining, construction, aviation, petrochemical and automotive sectors of China’s rapidly growing market. Despite the global economic situation, the demand for Sandvik’s products and services worldwide recorded an increase of 13% in 2011.
How is Sandvik’s treasury structured?
During my time as CFO Sandvik China Holding, the treasury department consisted of two full time staff for mainland China, one operative for the Taiwan entity and a part-time executive in Hong Kong. There were more junior treasury functions assumed locally by business units with all treasury decisions taken from the shared service centre (SSC) in Beijing. The treasury manager had overall responsibility for bank relationships, analysing funding needs, dividend declaration and repatriation, share capital increases and customer finance. The treasury manager directly reported to the CFO, Greater China.
Which are your main cash management banks? What are your relationships like with them?
Having a single foreign bank for a corporate operating in China is virtually impossible. On the flip side, it is also very impractical to use one Chinese bank because some cities demand payment of taxes through a specific institution, for example.
Based on some benchmarking I am convinced it is possible to obtain such sweep agreements between several banks and I would be curious to have feedback from readers on that topic.
HSBC was used as Sandvik’s only cash management bank and they have invested a lot of time and energy building a solid relationship with Sandvik China. HSBC realised that they did not have the most advanced system at the time of selection that their other competitors could have provided but it was the quality of their support and reporting system that I valued. Today, there is no foreign bank in China that has a competitive edge regarding cash management. Most large Chinese or foreign banks operating in China offer modern systems which are efficient and sufficient for the needs of corporates.
Chinese banks do not operate at country level like they do in the West, but at city or province level. Therefore, they just don’t co-operate with other banks to report balances. The choice to go with HSBC was based on an auction in 2007 that Sandvik conducted between BNP, Citi, HSBC and Deutsche Bank (DB).
Cash pooling can be challenging in China. How does Sandvik do this?
Cash pooling has been one of the main achievements of Sandvik China’s treasury department. It is limited to RMB due to compliance issues on foreign currencies. The HSBC platform offers a ‘through’ feature for accounts held with other banks which, in principle, enables you to see the balances of those accounts elsewhere. However, this feature has offered little value in practice as we were unable to obtain a sweep agreement from any Chinese bank during my entire sojourn as CFO Holding. Based on some benchmarking I am convinced it is possible to obtain such sweep agreements between several banks and I would be curious to have feedback from readers on that topic.
The cash pool put in place was of a zero balancing (ZBA) nature. I have explored the concept of a notional pool including Hong Kong and Taiwan and believe that some companies have achieved it. However, the SAFE regulations forbid such an arrangement and we decided that the route of an advance ruling was too cumbersome.
In actual fact, optimisation of the mainland cash pool had more value than notional pooling, including Taiwan and Hong Kong, which had relatively small operations. Accounting of the flows within the cash pool has been very simple thanks to the impeccable reporting system offered by HSBC. Interest rates applied were kept as low as possible to minimise business tax applied on non-trade items in China. The new reform introduced as an experiment this year for some cities should eliminate that obstacle if spread to all domestic cities.
Do you have debt? If so, what’s the breakdown?
In line with group policy we introduced debt in the various legal entities fully held by Sandvik. In China, thin capitalisation rules are not the main obstacle when introducing debt, like it is in the US for example. On the other hand, there is relative inflexibility with foreign debt; it is so impractical that the treasury usually restricts foreign quotas to certain one-off large settlements. You need to provide a lot of documentation to the bank, proving that the purpose of the loan is met and the payment is in line with the loan agreement. Two years ago, the hope was that when the RMB offshore market came to life, foreign debt in RMB for MNCs would be achieved more easily, but it is still treated as foreign debt.
All domestic loans have been taken as short-term revolving loans with the view that confirmed credits attract commitment fees with little value. The reason for this is that banks are essentially the extended arm of the economic policy of the government and may not honour their commitment in the case of severe credit tightening. Moreover, a standard clause in Chinese loans gives the option to the bank to call back a loan without having to give any other reason than the situation has changed. Potentially, this clause could lead to a dramatic cross default effect for companies not having carved out China from their cross default clauses in other countries. This is something that is relatively unknown by companies who do not have large operations within China.
What are your thoughts on the sovereign debt crisis in Europe?
The sovereign debt crisis has probably re-enforced the Chinese authorities in the belief that their system is at least as good as the Western system. On the other hand, it has also given them a valid reason to claim a more prominent role for the RMB and for the Chinese to assume a higher ranking in the world order. For MNCs, this basically equates to no further relaxation of exchange controls plus some possibilities to investigate the commercial reputation of executives on criteria which would be unacceptable in the West.
An example of this is something that occurred two years ago. I was called by one of my Swedish banks who had a request from the Chinese regulators to prepare a file on the CFO/CEO of companies they are lending to – rather than the companies. Westerners can feel this negative sentiment and pressure in MNCs within China. The financial crisis that has taken place has compounded this drive as the Westerners have proved their incompetence to some extent in the eyes of China.
How do you think recent global shocks have impacted the recruitment arena in China?
Treasury functions are still very new in China. Employees that have come from financial institutions are very much in demand. However, the smaller sized MNCs have specific talent requirements, such a good understanding of the company reporting and accounting standards. Importing more treasury staff from Europe or the US might be a way to recycle some excess staff from Chinese corporates. Considering the control of cash is more important than ever, treasury functions have been ‘revalued’ by HR in China.
Are you having difficulty with staff (and talent) retention at present? If so, how are you managing this?
Talent retention remains an issue in China and salaries have reached very high levels for top professionals especially in Shanghai and Beijing. Second tier cities show usually a 20% difference but the scarcity of real talent does not make recruitment easier.
However, recruitment and retention are also swayed by the reputation of the company. China is a huge market but the business community has many networking events where people communicate and the reputations of employers are well established. Job loyalty does exist in China. Companies offering good career paths and opportunities are usually recognised by candidates and, in this way, can avoid the high turnover rate which is usually considered as a plague in China.
Talent retention remains an issue in China and salaries have reached very high levels for top professionals especially in Shanghai and Beijing.
The HR people do not do the extensive research that the US or Europe would do – it is very difficult to get an in-depth reference for potential employees. This means you have to make a judgement at face value upon meeting a candidate and then test them after the fact. In my own experience, I tended to recruit internally instead as I then had some background of the person I was hiring.
There has been a subtle but significant shift of power to the East. Should this encourage Western treasurers to migrate to corporates in this side of the world?
It is understandable that Western treasurers would think that there is a good opening in China but, in a way, the crisis has affected the credibility of Western management in China. Regulated companies like lawyers and accountants are permanently subject to some more or less direct pressures from authorities to localise their management. The same pressures seem to spread throughout many functions traditionally occupied by expats in MNCs – treasury is one of them.
One common obstacle I see is that, in US companies, the treasury department is separate from the rest of the other departments while the distinctions between functions in China are blurred.
Furthermore, for a global treasurer to come to China and believe that they are going to make a big impact is not always correct. They must be really flexible and not assume they will be able to replicate the success they’ve made in their home country as there are many things that are not possible in China. Many cultural trends and legislative rules need to be learned.
One common obstacle I see is that, in US companies, the treasury department is separate from the rest of the other departments while the distinctions between functions in China are blurred. This can cause problems for those dogmatic Western treasurers that do not enjoy liaising with accountants, for example. The refined tools which are being used in large headquarters are not of much use in mainland China. To succeed here is to tap into the ‘low hanging fruit’, achieving small wins with more simple instruments such as cash pooling.
What does the future hold for treasury in China?
So far, the RMB offshore market has been quite disappointing compared with the expectations raised last year. Its effects can really change the approach of the treasury function in China. Notional pooling and inter-company netting remain high on the agenda of many MNCs but are still illegal. From a systems standpoint most MNCs operating in China are still working at reducing inefficiencies due to the inevitability of dealing with several banks.
The cash drought has also worsened the collection situation. While the infamous BAD system seemed condemned to disappear like the draft system in Europe it has been revived by the difficulty of small clients to obtain funding. As a result, the number of companies endorsing low quality bank acceptance drafts to suppliers seems to be on the rise. This has created new inefficiencies in paper handling which can only be addressed by electronic drafts.