Employing over 20,000 people in China, Friwo is the world leader in producing power supplies and chargers for mobile phones. We talk to Vivian Peng, Treasurer of Far East Region, about invoice factoring and the latest trends in treasury in China.

Can we begin with an overview of your company?

Friwo is the world’s leading manufacturer of mobile phone chargers, having been in the market since the 1970s and entered China in the 1990s. As a leading manufacturer, we have the number one market share. The company, listed in Germany, has a presence in China, Hong Kong, Germany – and it has also expanded into Brazil and India.

What can you tell us about your role?

I am Treasurer of Far East Region, so my major role is developing treasury strategy and executive treasury management. The main purpose of the role is to secure the funding needed for business development at a lower cost, as well as improving the company cash flow. My role is actively involved in activities such as cash and funding management, working capital management, investment and dividend distribution. So, where cash is concerned, my role involves strategy and management.

Another function of my role is risk management, including FX and interest rate risk management, insurance, business operation risk evaluation, and legal and compliance risk management.

Do you manage commodity risk at all?

Copper is one of our major materials, so commodity risk is also considered, particularly when the price is in a very upward trend. We use basic instruments to manage this, like hedging with forward contracts. Basically it’s quite a conservative strategy.

What other activities is the treasury involved in?

The main activity the treasury is involved in is improving the company’s cash flow. The treasury has undergone significant development over recent years, and this development has taken place in three stages:

1. The initial stage, beginning with the establishment of the treasury in 2004, involved the more traditional treasury functions covering the Hong Kong and China region, such as securing the company’s funding needs. As such we were responsible for setting up cash flow forecast models according to our business. So this enabled us to better forecast our future cash needs. Then we arranged funding, such as the setting up of invoice factoring to finance our trading.
2. The second stage was the development stage and this came in late 2005, when we began to focus on managing cash flow. We built up the renminbi cash pool in China based on the entrust loan structure, centralising the cash and reducing our funding cost substantially.After concentrating the cash, the next step was to focus on improving the cash inflow. Starting with cash inflow, we initiated our credit management policy, setting up our credit management system, including evaluating the customers’ credibility, setting up credit limits and controlling overdue account receivables. Investigating the collection process also enabled us to look at how tax regulations were affecting our cash collection. For example, the local tax bureau has certain procedures and restrictions on purchasing VAT invoices, which could lead to delays in issuing invoices to the customers if there are not enough VAT invoices in stock. We studied this topic to find a way to remove this constraint, ultimately smoothing the collections process.We also began loan restructuring in order to reduce the debt financing costs. Previously, we were using a short-term revolving loan or fixed long-term loan, but this did not match our cash flow patterns. One of the ways to alleviate this problem was the introduction of the overdraft loan. This was tied up with the cash pool header account. This overdraft loan is very convenient and flexible, while the loan is refunded automatically, which reduced the funding costs further. We also use invoice factoring as another major type of loan to manage cash and funding.
3. The third stage is our continued expansion. In looking to implement supply chain management, we worked with the sourcing department to review and suggest supplier strategies, such as the setting of targets for the supplier payment terms and how to ensure a good relationship. Invoice factoring is developing in the China market and in Asia. By extending longer payment terms, our suppliers have funding needs, and we are also introducing our bank to finance them via a factoring loan. That also helps us in overall cash flow improvement.Risk management is another area we are involved in. We have also studied our insurance and started credit insurance. This is combined with invoice factoring, so overall we reduce both the credit risk and funding cost.

Do you use a treasury management system?

No, not at the moment, but I hope that in the future we could use a treasury management system. I think this will be a hot topic in China in the coming years but it’s still in the initial stages at the moment. In some parts of China they’re using treasury management systems offered by the Chinese banks, which could offer so-called bank and enterprise direct link. This type of system could offer links to different banks and provide real-time payment and balance information. It could greatly fit into the features of China cash management.

On the other hand, some overseas treasury management systems have well developed tools for covering more areas in treasury management including cash forecasting and managing FX exposures and credit management. However, there are advantages and disadvantages in each case. I am looking forward to a type of treasury system, which could combine the advantages of both.

Returning to invoice factoring – would you be able to provide more information on how this works in China?

To put it simply, invoice factoring is a type of financing provided by banks against the trade receivables of a business. A major function is that it turns an invoice with credit terms into immediate cash. Sometimes it’s called invoice factoring, other times invoice discounting.

This type of financing can be offered both with and without recourse. It also depends on the volume of invoices presented to the bank, so as your business grows and you have more sales, you can have more funding from the bank. For us, we are using with-recourse invoice factoring plus credit insurance. This means that if the customer defaults, we are still liable for the payment. However, as we use credit insurance for the second tier customers, the overall risk is reduced. By this, we get the balance between lower funding costs and lower credit risk.

The service is provided by HSBC. Since we have a long-term good co-operation with them, they understand our business well and could provide this tailor-made solution for us.

What are the other benefits?

We are using invoice factoring as a major loan type because I believe it is a useful tool for overall cash management. It’s like a semi-overdraft loan, as when you present the invoice to the bank you build up a pool from which you can withdraw money as and when you need it.

To give you an example of how it operates, every week on payment day we factor the exact amount we need from the pool to cover the outgoing payments. Then when we receive payment, the collection automatically goes back into the pool and refunds the loan. You don’t need to worry about when to repay any loan when surplus cash is available. I think it’s a good tool for liquidity management. On the other hand, because it is based on your Accounts Receivable (A/R), you have to monitor your A/R very closely. The overdue A/R will reduce the amount available for loan withdrawal.

Of course, by invoice factoring without recourse, you can actually get the A/R off the balance sheet, which some companies have done. But you have to consider the cost of doing this.

What other projects are you working on?

Our current project is continuously focused on improving cash flow. Investment strategy and controlling is the topic I am currently working on, in order to make sure the investment is aligned with the company’s development strategy, and also that the company has enough cash to satisfy the development. Involvement in inventory management is also being considered since this is another major part of our business, which occupies the cash.

Looking at China more generally, what sort of trends are you seeing in treasury?

Many companies, state-owned and multinational alike, are still more focused on concentration, centralised treasury management, cash centralising and FX regulation. As a speaker at the cash, treasury and risk management conferences held in both Beijing and Shanghai by EuroFinance recently, it is very interesting to observe the different focuses and topics of the two events: at the Shanghai conference the focus is on multinational corporations, in Beijing on domestic companies.

MNCs are facing the challenge of understanding Chinese regulation and Chinese culture and how to work with the government in order to achieve cash concentration and make better use of cash. For the state-owned companies meanwhile, there is more focus on how treasury can play an active role in the business as a whole, such as risk and credit management. While Chinese companies move forward internationally, MNCs are getting more and more familiar with the Chinese business environment. From my perspective, there are still a number of companies working on cash concentration and treasury function concentration because of the current Chinese regulations and banking system.

In terms of other trends, I know some companies already manage FX concentration in China, but it depends on whether they can get the SAFE approval. I think that with the appreciation of the renminbi, FX concentration will become a hot topic in the coming one or two years, especially the question of how to manage FX risk.

Another hot topic in China is how to better use excess cash. A lot of MNCs generate surplus cash and distributing dividends is one of the methods. According to the new Tax Law, dividend distribution to overseas will incur withholding tax, which is accelerating the dividend payment before the final deadline. Beside dividend distribution, an important issue is determining what are the other tools to make better use of that cash in China.