Continuing our popular series of interviews with senior figures in the world of treasury and finance, this month talking to Steve Harper, European Treasurer, Flextronics.
Steve Harper
European Treasurer
Flextronics employs 70,000 people in 100 manufacturing locations in 27 countries on 4 continents. It is headquartered in Singapore and is operated from San José, California. As the world’s 2nd largest Electronics Manufacturing Services provider, Flextronics makes almost anything that contains a chip (such as printers, washing machines CD and DVD players) for big customers such as Philips, Ericsson, Alcatel, Microsoft and Hewlett-Packard. As an outsourced manufacturing company, Flextronics offers everything from design, manufacture, assembly and delivery through its own logistics tracking system.
In an effort to keep the costs of manufacturing as low as possible, the company tends to produce in low-cost production countries – typically Mexico, China, Poland and Hungary.
How is the company’s treasury structured?
As a company, Flextronics has grown very fast, from a turnover of $93m in 1993, to $12.1 billion in 2001. This growth has come been created both internally (about 60%) and by acquisition (about 40%). When making acquisitions, you take on the expertise, the people and the culture of the companies you acquire, meaning that Flextronics is a very diverse group. It also makes Flextronics a challenging company to draw together.
To achieve this growth, Flextronics likes decentralisation and flexibility, with everybody empowered to take quick decisions to meet customers’ needs. But it has realised that its core functions such as tax and treasury really need to be centralised.
The treasury function is split. There is a head office treasury function based in San José, California. There is a very small concern in Asia. My remit is to build up the European treasury centre, which is what I am undertaking to do right now.
How have you designed the European treasury centre?
In terms of the vehicle for that, we have identified a structure that’s not been explored particularly by other companies. We are using a Swiss branch structure for the treasury centre, but rather than use the typical Dutch or Luxembourg holding, we are using an Austrian holding company. To achieve this, we have a Swiss branch in Solothurn that’s owned by the Vienna-based holding company. We can have most of our staff in Vienna (which is already the location of one of the two European regional head offices, the other being in Karlskrona in Sweden) and we just need minimal representation in Switzerland to satisfy the authorities concerning the seat of business.
There are a number of reasons for choosing Vienna. Firstly, we like to keep our treasury centres and our service functions as close to the core manufacturing businesses as possible. We have major operating units in Hungary, the Czech Republic and Poland and are examining possibilities in the Ukraine. From Vienna we can get to any of the sites within two hours and get into direct contact with all the people who are actually producing, assembling or providing the forecasts, data or cashflow. Although we can operate on the telephone, sometimes visibility is required from treasury personnel.
Secondly, we have negotiated a tax rate inclusive of both the Swiss ruling and the Austrian ruling [the respective tax authorities issue a ruling which states what is acceptable business for the treasury centre to conduct] that amounts to something in the low single digit numbers. Our business incorporates some low margin business elements, so costs and tax are major issues. We have a very low corporate tax rate for a company of our size, something in the region of 12%.
Thirdly, just because we are in Vienna, it doesn’t mean that we exclusively use Austrian banks – we maintain our core banking relationships in most of the major financial centres with large banking institutions.
For what is the treasury centre responsible?
Which specific tasks are assigned to the treasury centre depends very much on the ruling and what it allows to be performed. Under very loose terms, described by us as short-term liquidity – ie any money less than three years – our treasury centre is responsible for all the foreign exchange, the short-term money flows, cash planning and cash pooling. The longer term strategic funding is outside the remit of the treasury centre and will still come from outside sources, often the parent. Treasury is also responsible for all the leasing throughout the company, which is fairly substantial given the type of machinery we use to manufacture our products. We act as the in-house bank and the external point of contact. As the treasury centre, we are allowed under FAS 133 to net foreign exchange exposures, using forecasts submitted by every subsidiary. We will then offer internal trade tickets to subsidiaries. Finally we net off our exposures and lay off to the outside world to core banks in the major money centres. This ensures that we are getting the best pricing.
From the subsidiary’s view point we are taking away something from them – liquidity management – that (a) they didn’t really want, (b) they weren’t very good at and (c) something that wasn’t very cost efficient. What we left them with was purely the responsibility of submitting their forecast, which they have to do – in a business as diverse as ours, we can assist and we can check and we can inquire, but this information has to come from the production units themselves.
We also undertake, within the wider group treasury, to do a fair amount of training – on the FAS issues, on the forecasting issues. In such a decentralised business, somebody has to take on the mantle of selling the best practices. We also answer a lot of rather generic enquiries. At the moment, we are just as much an educational as a treasury centre, although I think that will change moving forward.
When did you start thinking about the centralised treasury centre?
We started at the beginning of this year. The longest time has been in getting the rulings, a process which has taken close on eight months.
You needed to get rulings from both Austria and Switzerland?
Correct. In the interim, whilst that was going on, we were able to go ahead because we got a verbal clarification that the ruling was going to be accepted. This meant that we could start building our team, reviewing the systems so that we could ensure the connectivity and planning what we are going to transfer at what time. But whilst the process of moving the degree of control to the treasury centre started once we got the verbal clarification, we couldn’t deal in the name of the treasury centre until we got the ruling, because no bank would accept dealing in an unregistered name. This means that currently the treasury centre is having to deal in the names of the entities for and on their behalf.
How easy is it to set up a European cash management structure?
When looking at cash management and cash pooling, it would be wrong for us and for any bank to say that one bank can cater for all of our European needs, given our diversity. We have looked at in-country or regional cross-country solutions, with a view of ultimately moving towards a pan-European overlay. However with some of the central and Eastern European countries, we couldn’t start at that level, rather we have got to build it up gradually.
You talked about the diversity of the countries for which you are setting up. Which ones have you found to be the easy ones and which ones the hard ones?
It is very quick and easy to set up pooling arrangements in the Nordics, primarily because it is quite common and quite well understood. Secondly the choice of banks that operate effectively in the Nordics is very limited – there is a choice basically of about three banks, and two of those are every other banks’ common partner in that part of the world. Ireland was also a very easy country in which to set up. In central and Eastern Europe, we are working for cash-pooling arrangements for the Czech Republic, Hungary and Austria at the moment. There are a lot of questions about getting Poland into a cash pool – some say it is easy, some say it is not. Israel is very difficult, because it is a very different country with a very different banking environment.
In general terms, I don’t think it is particularly difficult. A key factor is identifying what is and is not legally permissible. Also, it is best to have cash pool arrangements with countries that have the same functional currency – otherwise you create more hedging problems for yourself by creating the wrong group. The other issue is withholding tax on the cross-border flows, which makes Italy a particularly difficult country to integrate.
How do you select the banks in all these places?
Since the creation of the European treasury, we have acted to reduce the numbers of banks considerably. We want to have ten to twelve main banking relationships in Europe. Although this sounds quite a lot, given our geographical spread it is necessary. We wish those banks to make a lending commitment to Flextronics and, in return, we feel we have enough business to offer to satisfy this number of banks. We don’t want dormant sleeper relationships or relationships that are not fulfilled on both sides.
When selecting banks, we look for regional capability and then at the bank’s own strategic interests. For example, it wouldn’t be worthwhile asking an Austrian bank to help us in the Nordics as it wouldn’t fit their strategic remit. Initially we look for local expertise, but we don’t typically look at very local banks – we still look at major money centre banks that can offer a more pan-European solution.
We always listen to the local business function, but in our business local requirements are very minimal – usually not much more than salary runs and a few local payments. As long as the central group is getting the pricing and the servicing it wants and the local entity is getting the few local services it requires, it is much more of a pan-European choice.
What about the relationship between you and the HQ in San José, how much freedom do you have?
The establishment of the European treasury centre is really a European objective, so we have a fair amount of freedom. We still take long-term strategic money from the parent, typically because the senior lines have been previously established in the United States, and we keep the US advised on what is happening. Although they will comment from time to time on different pricing strategies and structures, the US has a fairly large remit to cover with our Brazilian and Mexican operations and so we have been left fairly much to our own devices in terms of establishing the treasury centre.
The banks have been making big statements about moving into central and Eastern Europe. As someone who is involved in the area, how do you see it?
I think it is a mixture. Big banks are buying up small local banks, but I am not currently convinced that they can currently offer the types of services that big companies want, especially outside Poland, Hungary and the Czech Republic. For example, I think that linking Romania through their connections to a Western European bank is still going to be very difficult. Throughout central and Eastern Europe, there are still significant tax, regulatory and governmental issues for a treasurer to overcome.
Ask your bank about the detail of their presence in central and Eastern European countries. If they tell you that they have a partner bank or they have just purchased a local bank, look very carefully at the degree of control that your bank has over that local presence to make sure that it is really a part of their bank rather than simply a result of their effort to make an acquisition in that country before a competitor.
As these countries want to become members of the European Union, they will lose some of the competitive advantage as labour costs will increase (which is one of the reasons that we are there). At the same time, they will have to change their governmental law structure and their civil code structure to adequately reflect the EU’s requirements, reducing the tax, regulatory and governmental barriers that I referred to above.
The banks sometimes give the impression that Europe can be treated as a single entity. Is it true to say that what you can get in Western Europe, you can get in Eastern Europe?
Not yet, not at the moment. At the moment, the big banks that are in central and Eastern Europe can provide a lot of good advice, however they still tend to sell a concept of a larger, expanded Europe being a lot simpler than it actually is. It is also a mistake to treat Western Europe as a single entity.
In Flextronics, we team up one of our developing countries with one of our existing countries – for example, Austria is in partnership with Hungary, the Czech Republic with Ireland, and Poland is with Sweden. We use the existing country expertise to develop on a more individual, mentoring basis. To seek one solution for Poland, Hungary and the Czech Republic, would be to forget that these countries are very different, with three different cultures and at very different stages of development over a range of subjects. I think it is a much safer to treat each country individually – our system of country partnerships helps to facilitate that.
In Western Europe, there is an increasing focus on the benefits of technology for the treasurer. What are the important technology issues in Eastern Europe?
One of the things that people are focussing on first is cash management and cash pooling. When you include one of the old eastern European countries in a cash pool, you do need to know that (a) you can get the money out, that (b) it can be pooled at either a notional or zero balanced level and that (c) you are not going to be penalised for moving payments across borders. Security and the movement of money flows are your two prime objectives. Beyond that, some of the technological enhancements that some of the banks claim are an advantage are not that important at this stage.
What other advice do you have for businesses moving into Eastern Europe?
Depending on your industry, you need to be very aware that when you are expanding into countries that are not typically western European (from a banking or financial perspective), you do have to rely on a lot of local expertise and a lot of local flexibility. Recognise that it is very difficult to impose centralised control on units in these countries. Concentrate on the key concepts, such as getting control of the cash, and don’t make any unnecessarily cumbersome procedures. Where it makes sense to keep things handled locally, leave them because they can be performed much better there.
