Magnus Velander is Head of Treasury Asia in Group Treasury at Scania CV AB. He joined Scania’s cash management department directly after studying finance at university. Based at head office just outside Stockholm, Sweden, he oversaw the company’s pooling structures and specific projects relating to cash management. In 2010 Velander was promoted to his current position and relocated to Hong Kong where the regional treasury centre (RTC) for Asia Pacific is based. He currently oversees a broad range of operations, including funding and working capital management, as well as “ad hoc questions that are finance-related” in a region with 17 Scania subsidiaries.

Scania is one of the world’s leading manufacturers of trucks and buses for heavy transport applications, and of industrial and marine engines. Service-related products account for a growing proportion of the company’s operations, assuring Scania customers of cost-effective transport solutions and maximum uptime. Scania also offers financial services. The company operates in about 100 countries and employs around 38,600 people, of these some 16,000 work with sales and services in Scania’s own subsidiaries worldwide. About 12,400 people work at production units in seven countries and regional product centres in six emerging markets (EMs).

Research and development (R&D) activities are concentrated in Sweden, while production takes place in Europe and South America, with facilities for global interchange of both components and complete vehicles. Scania’s central purchasing department in Södertälje, Sweden is supplemented by local procurement offices in Poland, the Czech Republic, the US, China and Russia. In 2012, net sales totalled SEK 79.6 billion ($11.9 billion) and net income amounted to SEK 6.6 billion ($990m).

Scania’s largest markets today are Europe and Latin America, with Asia in third place. However, its Asian operations have begun to expand in recent years and hold great promise for the future. The growth potential and challenging complexity of the region is what spurred Magnus Velander to leave his parka behind in Sweden and join the company’s regional treasury centre (RTC) in Hong Kong.

The company has “delivery centres” in a number of Asian countries, such as Korea, Malaysia and Taiwan, as well as one recently opened in India. “We don’t call them factories – a factory builds a truck or a bus. The factories in Latin America or Europe dismantle the vehicle and ship it to South Korea, for example, where it is reassembled in the delivery centre,” explains Velander.

In terms of operational flows, the Asian subsidiaries buy goods from Scania’s factories in Europe (Sweden, France, Poland and the Netherlands) and Latin America (Argentina and Brazil). In many cases the subsidiaries then export to other countries in the region – for example, through its subsidiary in Singapore Scania may export to Vietnam. From a treasury perspective, this added complexity is something that Velander keeps a watch over, tracking any impact it might have on the group.

Treasury structure

Scania’s treasury operations in Asia cover numerous markets where the company’s delivery centres are located, including Kazakhstan, India, Singapore, Malaysia, Thailand, China, South Korea, Japan, Taiwan and Australia. Its Asia Pacific RTC looks after funding, cash management and working capital, and also steering treasury-related projects. It works together with two other RTCs, one in Brazil and the other in Luxembourg, as well as the group treasury headquarters in Sweden. Luxembourg’s RTC acts as an in-house bank (IHB) and covers most of the funding requirements for Europe, Africa and parts of Latin America, but not Asia – this is done out of the Hong Kong office.

The RTC was set up in 1999, before Velander joined the Asia Pacific treasury team. The company chose Hong Kong over Singapore, another popular RTC location site, mainly because Hong Kong is a better location geographically for Scania’s business in the region – Beijing, Singapore, Kuala Lumpur, Seoul and Bangkok are all reachable by plane in less than four hours.

Hence, when Velander arrived in Hong Kong in 2010 the treasury structure was already in place, but the team continues to modify it accordingly as and when the company enters new markets. For example, since he joined, a new subsidiary has been established in India and the company is in the process of setting up a cash pooling structure in Australia. Currently the Hong Kong office has one person running the in-house bank (IHB), covering the funding issues of subsidiaries in the region.

Scania is divided into three functional units: production, or locations where the company produces its goods; sales and service, which are local companies that sell the product and are responsible for the aftercare business, servicing products, etc; and financial services, which are local companies that provide customer financing. Many customers buy a fleet of trucks at a time, so Scania’s finance companies help to fund its end customers.

Treasury provides Scania’s finance companies with funding, which then pass on the funding to the end customers. To do this, treasury employs a central funding portfolio in Sweden to raise capital used in the group.

The RTCs have looked at raising money locally through instruments such as income bonds, but to date this has not made sense from a cost perspective. Scania has access to very cheap funding when it funds itself centrally. However, as the business grows, local fundraising might become a more viable option in the future.

Asian challenges

Many countries in the Asia region are heavily regulated and the regulations change fairly quickly, which means that it can be possible to do something one day and not the next. This is something that keeps treasury busy because it is responsible for keeping abreast of regulatory changes and finding the best solutions for each country.

There are some countries that have fewer regulations and are much easier to operate in, such as Hong Kong, Singapore and Japan. However, other countries – for example China, Korea, Taiwan and India – are much more difficult to navigate. “We can provide internal funding in most countries,” says Velander, “but some are trickier than others due to currency restrictions, for example.”

China is the cause of many treasurers’ headaches. As a fairly new company in China, established in 2008, Scania is investing most of its excess cash back into its in-country operations, so it does not have to deal with repatriation challenges. Funding has been achieved mainly through equity injections but also working capital credit lines. “This is through external credit lines from local banks because we are not able to fully fund our Chinese subsidiary internally due to regulations,” he explains.

In India, Scania uses external commercial borrowing (ECB), which are internal funds that can be used as long as the company adheres to certain rules. Scania’s India subsidiary is still a fairly new company, registered in 2010, and so the parent company is investing in the Indian operations.

The company has also recently established a finance company in Malaysia and will soon set one up in Taiwan as well. “The domestic regulatory environments create implications as to how to fund these newly-established finance companies. This alone keeps us quite busy.”

In order to understand each country’s regulatory environment, Velander says his first port of call is the company’s relationship banks. He receives direction from its accountants and consultancy firms such as Ernst & Young (E&Y). He also speaks with a country’s central bank representatives. “When regulations change, the implications for my company are not always clear. Sometimes it helps to approach the central bank in order to get 100% correct information as to how this will affect the company,” he explains.

When regulations change in a positive way, as is currently happening with the greater opening up of China, they can present opportunities for treasury improvement. For example, since 1^st January 2013 Scania started invoicing its China-based subsidiary in local currency, renminbi (RMB), something that was not possible even a few years ago. Previously the subsidiary, which buys trucks and buses from Scania’s European factories, was invoiced in US dollars.

Effects of the financial crisis

When Lehman Brothers crashed in September 2008, Scania’s business suffered due to the ensuing market conditions. Despite 2008 being a good year as a whole, 2009 was the hardest year in a long time for the company. Established over 120 years ago, Scania is a company focused on profitability and hasn’t had negative figures for more than seven decades. Although it generated profits in 2009, the company suffered drops in both margins and revenues, mainly because the majority of its business is Europe-based.

Unfortunately, Scania’s business model was dependent on the banking system providing credit to its customers, as it doesn’t have finance companies in every location where its products are sold and can’t provide funding to 100% of its customers. “When the financial system crashed, we had a systematic problem – our customers weren’t able to buy trucks because they couldn’t access credit.”

The global market has recovered somewhat since then, but many countries are still at very low economic levels – especially southern Europe. Asia, on the other hand, hasn’t experienced long-term drops; there have been short downturns but it reverts within a few months.

Scania treasury keeps a close eye on the financial positions of subsidiaries in order to have a daily overview of the group’s cash flow position and understand what funds it can dispose of or not. The past few years have seen treasury also focus on working capital, improving efficiency in both accounts receivable (AR) and payable (AP), as well as keeping the group’s balance sheet healthy.

Since the onset of the crisis, Velander has perceived a greater acceptance of treasury within the Scania group due to its ability to provide the essential information needed in tough economic times. “People are also more open to treasury’s involvement in other departments and subsidiaries. I wouldn’t say that the treasury’s role has expanded, but it has used the opportunity to work closer with other business units, which I view as positive and will create value for the group.” He tries to view treasury not solely as a control function, but more as a service provider within the group. “We are responsible for controlling, but we also provide business services to the organisation.”

Infrastructure

Scania treasury uses a SunGard treasury management system (TMS) called AvantGard Quantum. As there are many subsidiaries, the group also has many systems – for example the production unit uses the Oracle enterprise resource planning (ERP) system. The systems used by the finance companies vary country-to-country, depending on size.

The central service organisation has been working to rationalise the company’s systems and has managed to get most of the subsidiaries using one system, excluding the finance companies.

Velander travels around the region to visit each subsidiary, but also relies on telephone and email to communicate on a regular basis. Each company produces a cash position report on a monthly basis and Velander receives daily account information to ascertain available funds. Treasury receives balance information in MT 940 format directly into the Quantum system, which then creates a report on all companies and their positions by the closing date.

Scania works with more than ten large international banks, many of them used on a global basis. These banks are committed centrally to the company, which ensures close ties. Scania treasury tries to limit what it does with other banks outside the core banking group, but in some countries it is forced to use a local bank for tax payments, for example. In these countries, the company will use an international bank for everything possible and will only use a local bank for what it needs to do under specific regulations.

The company recently set up its first cash pooling structure in Asia (in Australia) because transaction volumes had reached a level where the company would be able to realise process efficiencies through cash pooling. “We have a cash pool in almost every country in Europe, so we are used to working with cash pools there,” says Velander. “We don’t have the same experience in Asia because we haven’t had the volumes or the complexity before – but now we have reached a level where a cash pool creates efficiencies for the group.” Scania’s Australian subsidiaries record the largest revenues in the region, but it’s not the most complex market.

The Hong Kong office is setting up the cash pool, but once it’s in place it will be supported by the headquarters in Sweden and directly connected to the TMS. “The TMS works as the brain for the group, connected to the cash pools. Each company inputs its daily future cash flows into the TMS, the brain works out the daily positions and then calculates how to handle the cash pools the next day,” explains Velander.

The future

With substantial growth in Asia, Velander’s main focus is establishing a financial infrastructure that can cope with the group’s future growth. He is currently working on four treasury projects, including regional pooling structures and supply chain finance (SCF).

His main objective is to gain full control – or as much control as possible – over funds in the region. “Pooling is one way to have greater control but it is not possible to create cash pools in all countries. Therefore, I am exploring different ways of achieving much greater visibility over our cash positions and also defining the types of risk we face in each country.”

Velander is optimistic about the company’s growth prospects in a number of countries. “Business volumes have picked up in the region and certain countries look quite promising for the future as well, so there is a lot of investment going into Asia. The region is interesting to work in because many countries are developing very quickly, so there is a lot of positive energy about the future – it is a privilege to work here.”