Intel entered the Chinese market in 1985 and now has over 6,000 employees and operations in 16 cities across China. We speak to Lily Chen, Intel’s China Treasury Manager, about the process of setting up an RHQ (Regional Headquarters) structure and the advantages associated with this approach.
Lily Chen
PRC Treasury Manager
Lily Chen joined Intel in early 2005. Her team, comprised of four analysts, takes care of the daily treasury operations as well as project associated needs for the China region. Prior to Intel, Lily used to work on the banking side. Her seven-year journey in foreign banks built her strong cash management expertise. Lily graduated from Fudan University, one of the most elite universities China. She is a happy mother, with a 10-year-old daughter.
Please will you give me an overview of Intel’s operations in China?
Intel has 10 wholly owned legal entities in China. We have one fabrication factory based in Dalian, which is in construction now. We also have two assembly testing sites in Shanghai and Chengdu. Then we have another three R&D entities providing local, regional and global services.
In addition we have a holding company, which functions as sales and marketing as well. And then we have some trading companies. In total, Intel’s investment in China is currently around $4 billion.
What are your responsibilities?
My main responsibility is to lead the PRC team, to support the 10 legal entities’ cash management, exposure management, risk management, and project management.
How is the China treasury structured?
Currently we have four analysts reporting to me, the PRC Treasury Manager. There is also another individual treasury manager who reports to the treasury director of PRC and Japan. The treasury director reports to the Assistant Treasurer for APAC (Asia Pacific), who reports to the corporate treasurer based in Santa Clara.
What sort of challenges do you face in terms of cash management?
In terms of cash management there are mainly two challenges. One is efficiency and one is yield.
The challenge relating to efficiency resides in the local regulatory requirements. Intel is quite unique in its China operation model. Most of our cash transactions are in foreign currency. Although we are observing the deregulation trend of SAFE policies, we are still required as of today to prepare certain underlying documents for transaction execution. So this brings efficiency problems for us.
The challenge in terms of yield lies in the nature of the developing financial market. Currently we have very few products in the on-shore foreign currency market and we have limited and regulated access to the offshore market. You may also be aware of the local government’s QDII products, which are being promoted by the regulators and might work well for the financial institutions. (For more information on QDII see this issue’s Finance A-Z.) However, from the corporate side, the market observation so far is that the QDII product does not clarify the associated risks, which prevents corporates like Intel from considering it for investment. From the yield point of view, it will continue to be a big challenge to Intel in the future when we foresee a much higher cash portfolio being accumulated.
How will you address this?
We have been engaging in SAFE lobbying efforts on a regular basis, communicating what our business requirements are. Hopefully SAFE will look into the financial market investment products more attentively.
Can you give me an overview of the RHQ (Regional Headquarters) structure?
The RHQ concept means having one holding company in the China region to perform the investment function. It becomes the parent company for all other legal entities in that region.
What are the advantages of this structure?
From a treasury perspective, by adopting an RHQ structure we can leverage the RHQ debt-to-equity ratio for Intel’s investments in China. That avoids the need to keep the registered capital at a much higher level. Registered capital in China can only be repatriated if you can get a local entity to be deregistered (closed). Therefore it is regarded as trapped cash.
In addition, with the RHQ structure you can enjoy some preferential treatment from government policies, such as foreign currency pooling. Cash pooling helps us to utilise the local idle cash more effectively, improving cash yield in the PRC region. This is done using the entrusted loans structure, as allowed by SAFE.
There are some other benefits of having an RHQ in China. For example, our entity has expanded its business scope by having the distribution rights etc. So Intel is able to better consolidate its PRC legal entity business model and to be more cost effective in terms of structure.
What steps did you take to set up the RHQ structure?
It took Intel quite a long time to complete the due diligence and the ROI investment analysis for the RHQ. We formed a dedicated project team to map out the project milestones and to get the milestones executed one by one. What was remarkable here was that we got very strong support by the local government authorities in this project.
To start with we upgraded one of our entities, the SMG (Sales and Marketing Group) function, into a holding company, and we have been working on moving the existing PRC entities under the holding company. This is actually a very large-scale and complicated project. It was approved internally in late 2005 and we are at the final stage needed to bring it to a close. We estimate that we can bring it to an end later in 2008.
Did you encounter any obstacles?
Yes, lots of them! The RHQ project involved a large -scale restructuring of our entities and there were many offshore entities impacted. The changes in the new rulings relating to accounting and tax in related jurisdictions made the project much more complicated for execution.
These obstacles were overcome by the project team based on their collective wisdom. Whenever we need to move one step further, we make sure that we plan well ahead and pay extra attention to the accounting and tax implications. We managed to make use of internal and external expertise, so with all the implications verified we were able to move forward step by step.
The other obstacle was that we had never done this before so there was nothing to compare it to. We couldn’t even compare it to other companies in the market, because different companies have different business models. If you benchmark against another company, it may not give you the best example for you to follow. So this was something new for us to explore.
Have many other companies done this?
Actually several big companies have embarked on an RHQ project. But usually they have their holding company set up before they establish the RHQ. Under that holding company they can invest into another entity.
In our case, Intel already had 10 legal entities, so we upgraded one of them to a holding company. We therefore needed to move all the existing entities under that upgraded holding company. The challenges are quite different for other companies.
More generally, what trends are coming up in treasury this year?
According to my observations of China, the first trend is a greater focus on currency exposure management. Although the exposure management is nothing new to Intel Corporate Treasury, with the RMB accelerating its appreciation pace, we are actually getting more and more business enquiries regarding a choice of bidding currencies with vendors.
The second trend relates to the question of how to obtain financing in a tighter liquidity market. This is not a concern that Intel is facing, but quite a few companies need financing and they are facing a financing cost that is becoming too high. In terms of the local currency, the central bank has been raising the reserve rate and tightening our local currency liquidity to keep a healthy economy. The same goes for the foreign currency – we are also seeing less dollar liquidity in the market. Companies that are running on loans are really facing some financing cost issues.
Focusing on Intel, what projects do you have planned for the rest of this year?
We need to complete the RHQ legal entities restructuring. Then we need to decide upon the timing for setting up the USD pooling. Exposure management will also remain as an ongoing focus with the RMB appreciation pace accelerating.
