Perspectives

Corporate View: Olivier Brissaud, Volkswagen

Published: Jul 2003

Olivier Brissaud is also President of ATEB (the Belgian Association of Corporate Treasurers), on the board of the Euro Association of Corporate Treasurers and presently Honorary Secretary Elect of IGTA (the International Group of Treasury Associations).

Olivier Brissaud

General Manager

Volkswagen is Europe’s largest car manufacturer, producing brands including Audi, Seat, Skoda, Bentley, Bugatti and Lamborghini besides VW of course. It employs over 320,000 people in 45 production plants in 11 European countries and 8 countries in the rest of the world. In 2002, it made sales worth €87 billion, which represented 12.1% of the global automotive market.

Why did Volkswagen establish a Coordination Centre?

I think it is important to put treasury in Volkswagen into context. A bad trading decision (when hedging the US exposures) in the 1980s resulted in the company losing a huge amount of money. This represented approximately all the operational profit of that year. Since then, treasury has been regarded by senior management within Volkswagen as a dangerous activity, which has to be controlled very tightly. This means that we face more controls than treasuries in those companies where the technical nature of the work of the treasury department is not that well understood.

The Coordination Centre was created in the late 1980s, just after the above mentioned event. Initially our role was to finance the export receivables for all the group’s factories in Europe. We have since expanded to offer this to companies across most of the rest of the world.

We have about 50 people working in the Coordination Centre in Brussels. Of these, about 35 work in finance. We also have some Group internal auditors (who sit in Brussels but audit different European VW Group companies), a group of people liaising mainly with the European Union, some call them lobbyists, and some other personnel.

We have two general managers in the Coordination Centre. I am in charge of business, security as well as compliance; my colleague is in charge of back office, controlling, accounting and information and communications technology. This is the ‘four eye’ principle – one validates the work of the other, and vice versa. He is in charge of the “housekeeping” and he signs for the financial business. I sign for the rest, but I do the financial business. I think it is a very good way of operating as it allows both of us to concentrate on what we are best at.

What role does the Coordination Centre play?

If, for example, a Seat factory in Spain exports Toledos to France, it will invoice the importer, in this case Volkswagen Group France. It would also send us, the Coordination Centre, a copy of the invoice. Our role is to finance that invoice. So we would pay Seat cash, minus a discount, and then get the monies from the importer at the end of the payment cycle. The payment term, which is determined by the exporter and importer, can be anything from one week to six months.

Importers are usually, but not always, Volkswagen Group companies. The Coordination Centre has grown gradually since the 1980s. The consolidated group turnover was €87 billion last year and we bought about 50% of the group turnover. In other words, we financed about €40 billion in ten currencies. Our main operating currency is euros – Volkswagen is the number one car manufacturer in Europe – with sterling and US dollar being quite important too, followed by yen and then other currencies.

As a company, we see a very high value of payments although the quantity of payments is relatively low. About €200 billion, in ten currencies, flowed through the balance sheet last year, although there were only about 18,000 payments. Invoices are therefore relatively large – anything from €50,000 upwards. For example, a boatful of cars to the US will give rise to an invoice of $50m. Each invoice is financed separately. This allows us to ensure that the maturities and the currencies match. We do not add any currency or interest rate risk to the business.

How do you manage the payments?

Three years ago, the Coordination Centre was allowed to access the SWIFT community through the Volkswagen Bank (a registered bank owned by VW), in order to manage the payment flows and the confirmations with the banks.

How difficult was it to set up to use SWIFT and what have been the benefits from doing so?

It has been an investment in terms of both knowledge and technology. We have had to adapt to banking standards and translate our data flow into a SWIFT format.

The value is enormous because it gives us access to the most efficient communications net among the banks. We do all our confirmations – bank borrowings, bank deposits, CP issues as well as FX-related deals, for instance – with our counterparties around the world through SWIFT. It gives a level of security which is otherwise unreachable. It also helps us to deal longer throughout the day – the confirmations flow quicker and the payment instructions go directly to the banks which have our nostro accounts.

On the other hand there is the cost of complying with a highly professional network. The balance between costs and security has to be made carefully. We are now in a test phase for the next stage of the SWIFT development – SWIFTNet FIN.

We aim at providing our Group with the best professional service in the payment area and access to SWIFT helps us to do this.

How do you arrange the funding?

We need to finance around €40 billion receivables annually. Because the banks are not very keen on lending short term monies anymore, we have to rely more and more on commercial paper.

We were the first non-resident company to issue French domestic commercial paper – Billets de Trésories – when we entered the market in the early 1990s. Initially this provided us with French francs, but since the introduction of the euro, we have been able to obtain euros from investors who already knew us. This market has been a very good and a very liquid source of funding for us.

Secondly, we can fund for all other major currencies in the Euro CP market, including €, of course.

How do you approach CP issuance?

Our issuance is driven by the volumes we have to finance. Typically we have about €150m to finance every day and sometimes we find that the CP markets can fund a significant part of it. Billets de Trésories are issued in the name of the Coordination Centre, which is rated F1 by Fitch. We issue Euro CP as one of the issuers on a multi-issuer, multi-currency programme in the name of the parent company. We issue different maturities from one week up to six months.

Because Volkswagen has invested heavily in Poland, we applied to become the first non-resident company to issue CP in Poland. It has been a long and tedious process to access the market and communicating with the market participants has been quite difficult in the beginning. The market is still not mature and the investor base is quite limited, however, I am confident that the Polish CP market will continue to develop.

We have been very happy with the amount of liquidity the CP markets have been able to provide generally. We have benefited from the fact that most of the other major automotive manufacturers are typically rated A2/P2 at the moment. Investors do not have much choice if they want to have A1/P1 rated automotive paper in their portfolios.

The only time when there is a difficulty is refinancing at a month-end or a year-end. At the end of every month, there tends to be a technical shortage of liquidity in the money markets. It is sometimes difficult because invoices are raised in the group every day regardless of the availability or the price of monies in the markets.

As a treasurer I am concerned about the intrinsic volatility of the CP markets. Credit is a factor. The basic job of a treasurer is to ensure that the company has access to liquidity. The current environment makes this the greatest single challenge to the treasurer around. The link between the credit rating and access to liquidity is getting increasingly more obvious. Some companies experienced that one bad word from an executive or misinterpreted information can trigger a negative outlook or negative watch to which the market will react quite swiftly. This is why we benefit from a very solid back-up line structure, in order to hedge that risk.

Are there any barriers to issuing CP?

I would like to see the processes for cross-border clearing and settlement become more efficient. The French market allows for same day settlement, even cross-border. Although there is some flexibility for T+1, the Euro CP market only really works on T+2. In addition, the documentation associated with Euro CP is much more tedious in comparison with French domestic CP.

The Euro Association of Corporate Treasurers as well as Volkswagen and other market participants are involved in an initiative run by ACI Forex and supported by the European Central Bank, which is aiming to unify some of the markets around a certain number of minimum requirements. If an instrument (whether CP, CD or a short-term government bond) meets a certain number of requirements, it could be labeled as STEP (short-term European paper).

We have established working groups in three areas:

  • The first is examining ways of harmonising the level of documentation.
  • The second is trying to develop an index, similar to Euribor or Eonia, for short-term paper in euros as well as a set of statistics.
  • The third, which I am heading, is trying to develop common rules for the cross-border clearing and settlement. In theory, it is possible to issue CP and use the cash on same-day value all over Europe. The infrastructure exists. The problem is that because market participants tend to view the markets from a national perspective, the interfaces between these market participants do not always work efficiently. Fragmentation is still the main characteristic of the European clearing and settlement market infrastructure.
What is the next challenge on the horizon?

On the funding side, it is difficult to think of a way in which it can be improved further without assuming additional risks. Short term market prices are increasingly homogeneous in Europe. Liquid niches are thus disappearing and the Basel II process will significantly impact the ability for corporates to access the markets.

So the challenge is on the technological side – how can we make the €200 billion euros circulate safely, cost efficiently and in a timely manner? The amount of errors is very close to zero, but there is still scope to increase straight-through processing in order to reduce the risks of error and fraud further. We suffer from the fact that most banks have not invested sufficiently in their back offices over the last few years. This means that the corporate customers have to deal with a sub-optimal level of quality delivered by most banks back-offices, due mainly to a high level of manual interventions. A very close monitoring of the processes is essential. This is why we have to continue to invest in a strong and professional back office within the Coordination Centre.

You are currently President of the Belgian Association of Corporate Treasurers (ATEB). Why did you establish it?

What has become ATEB began thirteen years ago. Four of us working in corporate treasury recognised that we had nobody to turn to if we needed support. Within our own organisations, nobody else understood the challenges and issues we, as treasurers, face. Outside the organisation, only counterparts like banks, service providers and consultants understand, but they have their own interests. We felt that there was a need to have an association of people who could share common experiences. Initially this was an informal club of forty treasurers of multinational companies present in Belgium, typically European treasurers, which met and discussed technical issues.

After the introduction of the Euro, there was a necessity to communicate with other associations around the world, so we decided to create a real association with statutes and a board. We now have around 90 members, exclusively working for corporate treasuries, and are liaising actively with the Euro Association of Corporate Treasurers and the IGTA on international oriented issues.

Participation in these initiatives also enables me to add value to Volkswagen as it allows me to learn from other companies and other countries about the opportunities that exist and about the next challenges. One has to think ahead to add value to the company in the long run.

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