Employing 37,000 staff worldwide, Voith Group reported sales of over €4 billion in 2007. Voith consists of four key divisions: Voith Paper, Voith Turbo, Voith Siemens Hydro Power Generation and Voith Industrial Services. This issue we talk to Jason Hua, CFO of Voith Paper in China, about cash pooling in China.

Firstly please could you give me an overview of Voith’s operations in China?

Voith is a family owned German company which is around 140 years old. We specialise in four industry areas. These are: Voith Paper, Voith Siemens Hydro Power Generation, Voith Turbo and Voith Industrial Services. These are our main businesses group-wide.

Each of these four divisions has a presence in China. This dates back to 1996, which is when we set up our first paper machine company in China as a joint venture. So far we have 13 legal entities in China, most of which are wholly owned. Two are joint ventures, but Voith has the major share in each.

At the moment we do not have a holding company in China. This is because we are quite division oriented and not centralised. Within our headquarters in Germany, Voith AG, we have central group functions such as treasury, tax, legal and corporate affairs. But when it comes to the operational business we are quite decentralised, with each division taking care of its own business.

Since we do not have a holding company, Voith Paper China acts as the treasury function’s leading company for all four divisions in China. Maybe at some point we will look into setting up a holding company if we determine there are significant benefits to be gained by doing so.

What are your areas of responsibility?

I am the CFO of Voith Paper China. There are also CFOs for each of the other divisions – the hydro business, turbo business and industrial services – but I am responsible for the treasury centre, which we set up in China to take care of all the treasury functions for all the companies here. I’m leading this team to manage all the tasks here, such as treasury planning, foreign exchange risk management and bank relationship management, according to our group guidelines and in close, bi-directional co-operation with our HQ treasury.

In terms of bank relationship management, it is Voith´s policy to have a defined number of global relationship core banks to whom we allocate the majority of our business in order to compensate for credit lines granted. However, we also work together with some of the local banks.

As Voith Paper China operates the treasury centre here, we take care of all banking relationships – especially with the global relationship banks but also with the local banks. However, it is clear that there are also bilateral contacts between our divisions and some of the local banks where appropriate and where co-ordinated in advance.

What are the advantages of working with the foreign banks?

The service quality offered by the global banks really helps us, as do their networks. On the group-wide level, our colleagues in Germany can access our data using their online banking system and check everything in detail, even though the currency is RMB.

I understand you recently introduced a new cash pooling structure. Why did you set this up and how does it work?

We set up the RMB cash pool a year ago and it really helps us a lot. The pool is based on the entrust loan structure and cash is swept to the header account at the end of each day to leave a zero balance in each participant’s account. All 13 of our entities in China are included.

Some of our companies have a cash surplus but most of them have a cash deficit. Before we set up the cash pool, we had lots of external commercial loans, mostly from the local banks, and also some group loans from foreign sister companies. But now there is no need for any of these arrangements – we are able to share resources within the cash pool instead.

Usually in a cash pooling arrangement the holding company will operate the header account and provide the service to all the other entities. As we don’t have a holding company, Voith Paper has taken on this role. This does present some challenges for us – for example, we don’t have any authorisation to manage the other companies, so we have to sit together and discuss everything with them on an equal basis. This requires a lot of co-ordination.

How did you ensure the co-operation of the other legal entities?

Firstly you have to make sure that everybody understands the reason for having a cash pool, how it works and how they can benefit from it. It is important to satisfy everybody’s requirements, whether they are cash rich or cash poor. Those with a cash surplus are looking for an increase in interest return. Those that are short of cash need a saving in their interest costs. You have to balance these requirements.

For the companies with a cash deficit, the advantages of cash pooling are clear. When you take out a normal commercial loan, you have to pay interest for a fixed term and a fixed amount. But for a cash pool, you just pay interest on the daily balance. This benefits the cash short companies. In addition, they receive a discount on the PBoC’s public rate for debit balances.

For those companies that have a cash surplus, it is even more important to satisfy them because they could potentially earn more if they were to invest their surplus on their own. Because of our company structure everyone is interested in their own division and what return they are getting in their own company account.

If you just reduce interest costs, which is of benefit to the cash short companies, the cash rich companies will not be very happy. As the header account we therefore search for investment tools to enhance the yield of the cash pool. Based on the cash flow forecast from participants, we use several investment tools, such as third-party entrustment loans, structured deposits, time deposits, money market funds etc depending on liquidity.

Do you have any plans to develop the pooling arrangement further?

Although we are interested in setting up a euro or US dollar currency cash pool, it is not so easy to achieve cross-border pooling due to the strict foreign exchange policy in China. Overall we have a cash surplus in China, but other than making dividend payments it is difficult to repatriate the cash. This is actually getting more and more difficult because of hot money issues. China SAFE (State Administration of Foreign Exchange) has set up several new regulations to monitor and control the flow of foreign currency recently.

What challenges do treasurers in China face in terms of cash management?

Cash pooling is a helpful tool for any company that has the willingness and the resources to set it up, especially during the credit crunch period. Although interest rates have been lowered, and although the foreign banks and local banks are being encouraged to provide loans to companies, financing is still very strictly controlled.

Banks are worried about the risk and are paying more attention to the types of customers they provide loans to. You can foresee that for the next two years at least, the situation will not be significantly improved. Everybody is seeking liquidity. So it is very important to set up a cash pool if you have enough resources to share in the group.

How does the impact of the credit crunch in China compare to the impact elsewhere?

The impact in China may be a little less than in some other countries. We are still not so integrated into the world economy yet, so most of China’s consumption demands are met domestically. Also the central government is looking to stimulate the market by raising domestic demand and by making huge investments in order to get the cycle running again. However, of course some impact from the turbulence in the global market is unavoidable.

What challenges will you be facing in 2009?

The liquidity from banks is getting tighter, therefore customers’ financial capacity will get more important in our evaluation. We are in the capital equipment business, and the market won’t be as aggressive as before – a lot of companies are just not willing to invest in capital expenditure. So our business may see an impact and the cash flow may be affected. Besides the capital equipment business we are therefore looking into developing business areas such as the aftermarket business which requires lower capital input.

We are also looking into areas where we may be able to save costs in order to make the business more streamlined. However, we have been aware for the past year that a recession period was likely to start this year or next year – it just came a little earlier than expected. We have been prepared for recession for some time, so there are not too many areas where we need to improve.

In terms of Voith’s other businesses – the hydro business for example – most of the projects are government projects so we will continue as usual and will not see so much of an impact.