Corporate View: Markus Sablatnig & Magnus Svensson, Flextronics

Published: Feb 2006

Flextronics has headquarters in Singapore and facilities in over 30 countries throughout the world. As a leading electronic manufacturing services provider, Flextronics employs over 70,000 people throughout Asia, with over half of these based in China. This quarter we speak to Flextronics’ treasury team to find out how Flextronics approaches treasury in Asia and specifically in China.

Markus Johann Sablatnig

Assistant Treasurer of Flextronics International and Director of Flextronics Treasury Centre

Markus Sablatnig is the Assistant Treasurer for Flextronics International as well as the Director of the Flextronics Treasury Centre. He is responsible for treasury activities including group FX, bank financing, cash management and pooling, group financing and systems. With more than eight years’ experience in treasury, he built up the Treasury Centre to the complex and substantial ‘in-house bank’ for Flextronics, encompassing all ancillary areas like tax, legal, IT, procurement and sales as pertains treasury.

Magnus Svensson

Cash Manager – Asia Flextronics International

Magnus Svensson is an experienced and multilingual treasury manager who had worked for Flextronics in various locations within Europe before he was sent for an 18 month assignment to Asia. He currently assumes responsibility for the cash management and trade finance for the Asian region as well as the management of Flextronics’ Asset Backed Securitisation program.

Can you tell me what your company does in Asia?

MJS: Flextronics is absolutely committed to the Asia region – more than half of our production comes from here. The turnover in the region is roughly $7.5 billion and around $4 billion of this comes from China.

Our product range includes gaming consoles, printers, keyboards, cameras and cell phones for global leading OEMs. So anything that has an electronic component inside could be produced by us, including the plastic moulding, the metal stamping and the design of all these products. I think there are now 18 design centres across Asia.

MS: The design centres in Asia are set up in India, Singapore, Taiwan, Japan, South Korea and of course China – in Zhuhai and in Beijing.

MJS: We are not focused on just production – the design element is the key to our success. This is not just industrial design – we also do software design, for example. And this magnifies in importance if you develop software for cell phones or other applications. We can offer an all-in solution for our clients.

What do you do in the company?

MJS: We are essentially the treasury centre within Flextronics, so the in-house bank. We take care of all the foreign currency dealing, cash management, trade finance, bank relationships, account management, funding and financing for the company. We are highly automated – so we are responsible for treasury systems, for web-dealing portals, cash management systems, internet banking, etc. Anything that relates to cash is our concern.

MS: My specific role is to try and set up a workable cash management solution for Asia; and of course like everyone else, we are trying to focus on China more due to the fact that this is where our main business is. For Malaysia it is already set up so it is a case of maintenance and efficiency improvement. Now we are focusing on getting a good structure in China, due to the jurisdictional challenges it presents.

Flextronics’ structure had caused problems due to the fact that we could not effectively cash pool or do those structures that would be the norm in other countries around the globe. But with the recent relaxation from the government, we have had banks telling us that you can actually do cash pooling without utilising a holding company. You can appoint one of your companies to be a pool header. So that is what I am trying to do at the moment – to minimise the number of banks that we have to utilise in China. At the moment, we do business with multiple local banks.

How is treasury structured?

MJS: Globally, we have three locations: so there is one in Europe, one in the Americas and one in Asia. The Asian treasury is centralised in Singapore, covering the whole region.

How have you gone about setting up treasury operations in Asia?

MS: The four people in Singapore are part of the global organisation of treasury – not on a stand-alone basis, but as part of an integrated team. They take care of the needs of the region, as firstly, they are on the same time zone and secondly, they have knowledge about the specific requirements for each jurisdiction. In Asia, there are a lot of country specifics to be considered if you move cash around, if you think about risk management. You have to build up that knowledge constantly as the regulations change – in India, in China, in Malaysia.

So how do you keep up-to-date with these regulatory changes?

MJS: We have a very close relationship with our core banks in that region. Our domestic bank portfolio is already well established in Asia and most of the top tier names are already servicing us. Then of course we are in touch with organisations like SAFE and other local government offices. We talk to them as often as possible to keep updated about the latest developments.

What challenges have you encountered in China?

MS: One thing that I have seen in China is that it does not matter how many emails you write, it does not matter how many telephone calls you make – everything is face-to-face. If you have a face-to-face meeting, people gain respect for you, for explaining to them what your goals are and what the company expects. And by company, I mean the global company – not only the Chinese legal entity where the people are working.

MJS: We are very committed as a company to the region – especially to China. But purely from a treasury point of view we definitely struggle with the immobility of cash. You cannot freely transfer funds from A to B within China, and definitely not outside of China. We, like everybody else, struggle with the restrictions imposed on doing business in China, and as such, bureaucracy and paper are part of everyday life. Especially when you want to transfer funds from China into another sister company in another jurisdiction – it is definitely an issue.

So how have you overcome these challenges?

MJS: All the companies are trying to address this. What you can definitely do under the current regulations are entrust loan structures which provide a more sophisticated cash pool structure based on cash pool loan agreements together with backto- back facilities and dividend payments.

What is the structure of your bank accounts in China?

MS: In the region, we have far too many bank accounts. I would like to see this decreased by 70%. We do understand that in some countries like India and China there are regulations about what kind of accounts you have to have. For instance, in China there is no regulation stating that you have to have an account with a certain bank. So in theory many large companies bank with two banks – one international bank and one Chinese bank. We would like one international bank to take care of the cash pooling and one local bank to address the local cash management needs.

To be honest at the moment we are trying to build up a structure in the sense of having two cash pools in place – one for renminbi and one for USD. We are still in talks with the bank trying to get these pools finalised. There is a lot of documentation involved in this, and many regulations you have to work to. And of course you need to have SAFE approval when you want a cash pool.

For renminbi it is fairly simple – it is just that you need to go through an entrust loan structure as Markus told you before. This means that you need to deal with just one bank. So at the moment, this is what Flextronics is planning to do in China – to set up two different cash pools in China to have a cash management structure which is very easy to manage with the help of internet banking and so on. With this you can have all the authorisation requirements that corporate governance necessitates. You can have full visibility and control with the internet.

MJS: Historically, China was a very paper-based system in terms of all the payment releases. And now with a few international banks coming into the market, we also have the possibility of having an internet-based system up and running there. That is a big step forward.

What sort of timescale are you looking at for developing the cash pools?

MS: I would say it should definitely be done within the next three to six months. There is a lot to do – as a treasury we need to have tax clearance as well, as Flextronics is a very tax driven company. So before setting up a cash pool and a cash structure like this, we need to have tax approval from corporate tax. We are not just setting up accounts and then linking them together – there are other things to think about and look at. And of course it takes time to go through the documents and all the legal requirements. So the structure is there – it is just that we need to finalise the execution.

MJS: We have to go through the approval processes – there are agreements to be signed with all the various counterparts. And we have a significant amount of individual entities within China. That is why we are assuming this to be a three to six month project. You might note that to set up a new legal entity in China does bring certain tax incentives with it. We have to check every individual entity before we can decide whether this is the best solution for it.

What are your plans after that?

MJS: We have talked about the challenges facing us in China. One of these is the immobility of cash and another is the transparency in terms of foreign exchange pricing – especially on renminbi deals. So if it is foreign currency to foreign currency that is more or less priced at international standards. But in terms of renminbi to dollar, renminbi to euro and so on, it is very hard to track how the prices are calculated. You do see improvements, but from our point of view these could happen quicker.

Our future plans are definitely now to complete the cash pool, because the project is not completed yet. You might have heard that recently a company got special approval from SAFE to extract dividends for the upcoming years and this is something that is of interest for every multinational corporation having excess cash in China – so that would be worthwhile exploring. We still invest a lot of money and nowadays you do not have to do this – you can try to find ways to utilise cash within the country instead of pumping in additional funds. If investment has paid off and they are profitable, this seems to be the best approach.

We hope that the banking environment in China will move more quickly to international standards and that sooner or later the government will allow you to utilise your funds amongst sister companies, as well as permitting a more liberalised foreign currency trading environment which is accountable to market forces. We might be a few years away from this, but this is definitely our big wish from a treasury point of view.

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