Headquartered in Fort Smith, Arkansas, America, Baldor is one of the global leaders in the production of electric motors, power transmission equipment, drives and generators. The company has two production facilities in China as well as two branch offices. We speak to Chip Keller, Asia Pacific Controller, about the treasury-related challenges he faces as well as the innovative working capital-related profit scheme that Baldor has in place in China.

Could you briefly describe Baldor’s operations and your role at the company?

I was originally working with Rockwell Automation in China, and then Baldor purchased the division of Rockwell that I was working for in January 2007. That acquisition brought Baldor their first facility in China, as the company previously had only a representative office. In 2008 we acquired another facility – which is in Changzhou, about two hours from Shanghai – and that one’s more in the start up phase still – the facility in Shanghai is more mature and has been in operation since 2000 primarily manufacturing power transmission equipment used in long conveyors. So, we are heavily involved in the mining industry in China. We also have branch offices in Xi’an and in Beijing and we have service engineers on site at many of our customer locations.

I have financial oversight for Asia – our Asian business is still growing, but we don’t have dedicated treasury people in Asia – I therefore have to wear different hats. In fact, I have responsibility for Australia, China, Singapore, Japan and India, and everything in between. The total number of employees in the region is over 300 and the total finance employees is eleven, located in the different countries.

How is the company’s treasury structured?

There is a central treasury function at the company headquarters in Fort Smith, Arkansas. Baldor has tended to let the European and the Asian operations remain more decentralised and it’s been handled locally. That’s one of the challenges because as we grow we have to be a little more conscious of some of the things that we’re doing in each of the countries, and manage it a little bit more centrally than we have in the past.

We’re trying to ‘earn’ a dedicated treasury function in China through the growth of the company, at the moment treasury is run from the controllership function. There are some advantages to this approach, but there are a lot of disadvantages as well. The controller is very in touch with what’s happening with the business on a day-to-day basis, so that brings a lot of value, but on the other hand, it can take a lot of homework when trying to make decisions about what we’re doing, because we don’t necessarily see the things every day that fully dedicated treasurers would see.

We take a much broader approach: a typical plant controller is mainly focused on what is happening in their plant and can often depend on support from other professionals within the company for execution of certain functions such as cash management and tax. The job of a controller in one of our international locations is to be responsible for all of the issues in the country related to tax, cash management, financial reporting, interfacing and completing the annual audit as well as dealing with legal issues. So they effectively have to be mini CFOs.

What are the major challenges you face operating in China?

The first challenge is that cash is building up in China more than anywhere else, and there are limited options for what you can do with your cash in China. We have bank deposits, but the interest rates are extremely low right now; there are some money market funds – but not to the extent that you could find in other countries – though in some cases you can get some yield improvement going into a money market fund. So, what we’re doing now with our excess cash is funding our sister company in Changzhou, via an entrusted loan, as they are still in the start-up phase.

The other thing we’re doing, since we can’t get great yield on our cash, is reinvesting in the business and investing in new product lines that we can sell to our customers. For instance we’ve started building a new motor production line in China using internal funds.

In terms of cash management, I think one of the challenges that a lot of companies face in China is the payment method of the customers – in many cases, they don’t pay you in cash, they pay you in bank accepted drafts, so there’s an intermediate lag between when you actually collect the draft from them and when that draft comes due. This could be anywhere from one month to six months. When looking at your cash management you have to schedule out all these drafts and when they’re coming due – it’s really something I never saw in the United States, it’s a common problem in China though.

We particularly see a lot of drafts as we deal heavily with state-owned companies. The effect of this is it extends your cash gap because in most countries where you’re not using the bank draft, the day you collect the cheque, or the money hits your account, you’re finished! Now at this point we’ve just added three, four, five months to our cash gap.

How do you overcome this?

You really only have three choices – in many cases we’re dealing with large customers and we receive terms on a take it or leave it basis, and once you’ve received a draft you can do one of three things – you can wait until the draft comes to term, pass it along to your own vendors, or if you have cash needs you can take them to the bank and discount them, which brings an additional cost to doing business. Generally speaking the banks in China are agreeable to discounting.

What are the main risks the company is facing on a daily basis?

The risk that we face from losing cash on a daily basis is that we’re operating in a different legal environment in China, and we’re going out and purchasing assets and inventory for final sale for the customer, and in many cases on project work we can face delays, payment problems from the customer. That’s one of our biggest risks. We have the standard risk of having financial assets in a country that’s not our home country. In our particular industry we face the risk of accidents in the mine, which can delay projects.

We work with state-owned companies and we work with private companies, like OEM (constructing conveyors), and we have to be a lot more careful with the OEMs in our payment terms. It’s been my experience that we can get very slow pay from the state-owned companies, but with a lot of private businesses in China we work to get as much of an advance payment and reduce our risk up front.

Focusing on our China business, we’re primarily selling to domestic companies – so we’re doing 80% of our business in RMB. So I would say FX risk, when looking in terms of our Chinese operations, is not great. We’re importing some equipment and components from the US and so from an FX risk standpoint that’s been all gain as the RMB has only appreciated recently against the dollar.

We’re not facing a lot of regulatory problems right now but I remember in 2007 when we were not cash rich and we needed funding from the bank, the bank quotas had been exceeded and wouldn’t lend money any more. We then found ourselves in a position where we had to go into the entrusted loan market and borrow from another company. So we were scrambling at the end of the year to get the money to satisfy our obligations. But those quotas have been more accommodating recently so that’s not been a problem.

How successful is the company’s working capital management strategy and what makes it work?

I think a lot of treasurers would like to pool working capital management and have it in their bonuses and central plans, and being a bit less centralised in our approach, we were able, in China, to install this as part of our bonus plan. We started that at the beginning of 2008 – so we’ve been through two cycles with this in the plan. There’s been a noticeable improvement – last year we reduced our working capital days by another 19%.

There were a couple of things that had to happen to make it a successful initiative: the first thing was to explain it to people, because if you say, ‘We’re measuring you on working capital days’, to a non-finance person, they don’t know what you mean. Communication is key and the first thing you have to do is make the initiative relevant to their job. Minimising the amount of inventory on the shelves and re-looking at our order points, making that additional visit to the customer, making sure he’s got the invoice in his hand in time. So I think it really starts with the production and inventory planning and goes all the way to the sales guy, knocking on the door to make the collection call.

We also had a successful SAP implementation that happened in 2008, so we brought our inventory management into SAP, and we were able to look through all of our re-order points, our safety stock levels and our material planning has improved – because when we talk about working capital base we’re talking about our inventory plus our accounts receivable in relation to our sales.

You have to manage your accounts receivable as a pot of risk, and what we found at the end of 2009 was we still had great pressure to improve our numbers, and the US was looking to the international businesses to support them as the US business was not performing as well during the crisis last year. So because we had reduced our accounts receivable days so much, we were able to look at those tier two credit customers, and we were able to extend credit terms to a greater array of customers at that point.

We had a phenomenal fourth quarter which helped us end the year with double digit revenue percentage growth in a year where the total company suffered a decline. So, our business in Asia last year remained a very strong point for our company.

Does the bonus strategy apply across the company as a whole?

No, we’ve only done it in China. We’re going to roll it out to the rest of Asia; that is the plan. In China we faced the biggest problems and we faced the largest collection challenges, so we started there. At the time I was just telling people, ‘We’ll have more money’, and at the time I wouldn’t have imagined that we would have been in a position to offer better credit terms to our customers. I guess there are things that you look back on and say, ‘We would not have been in a position to do that had we not cleaned up our house.’

There’s definitely room for improvement and I think the challenge is communicating and continuing to communicate. That’s just the way we look at it in terms of continuous improvement. We’ll keep moving the goalposts until we feel we can’t squeeze anything else out of the other areas.There’s definitely room for improvement and I think the challenge is communicating and continuing to communicate. That’s just the way we look at it in terms of continuous improvement. We’ll keep moving the goalposts until we feel we can’t squeeze anything else out of the other areas.

Have you experienced any ill effects from the financial crisis?

We’ve had some customers where business has completely dried up – they found themselves with excess inventory. We deal outside of the mining industry also, we have a big range of products from the US that we sell, and we found that part of our business more impacted – we had a significant decline in that business, but we more than made up for it with the growth of our mining business.

We’ve seen less effect from the crisis in China and Australia and some Asian countries than we certainly felt in Europe and in the US, so I think from an internal company perspective, for most companies it was an extremely difficult year, even where you had highly performing units. Overall business was off, and that’s the case with Baldor too, they had a difficult year in the United States, and listening to the latest company conference call, the CEO of Baldor said ‘Good riddance!’ to 2009, he was glad to see it go, as were most companies.