It’s fair to say that the world’s supply chains have faced more than their share of difficulties over the last couple of years – and the challenging environment shows no signs of abating. Geopolitical tensions continue to affect conditions around the world, from the US-China trade war to the continuing Russia-Ukraine conflict. Inflation is increasingly impacting commodity prices, while logistics disruptions continue to challenge trade transactions.
“Geopolitical tensions, lockdown in China due to Covid restrictions, and recent weather events such as floods in Pakistan and South of China have all led to physical supply chain disruption. All these have been affecting companies’ ability to source or deliver goods on time,” says Cynthia Tchikoltsoff, Head of Supply Chain Management, Transaction Banking APAC at BNP Paribas. “Several industries, including tech and automotive, are experiencing production limitations due to structural shortages in critical components, such as semiconductors.” The reduced sales due to the macroeconomic situation in Europe, as well as compressed margins resulting from the rise in inflation, are adding to the challenges.
Extended payment cycles
Alongside these issues, many companies are also experiencing a lengthening of their working capital and payment cycles. “We are seeing clients that are no longer able to ship goods from Asia to Europe via rail because of the war in Ukraine, so they have to use sea freight,” says Tchikoltsoff. “This method of transportation takes much longer, meaning that our clients’ customers receive goods later than expected, and therefore tend to pay later.” Some clients, she says, are negotiating longer payment terms to address some of these logistics issues.
At the same time, some companies are deglobalising their operations in order to get closer to their suppliers or customers, and to leverage domestic supply chains. “Some Chinese suppliers, for example, are starting to move some of their production and manufacturing capacity to other countries in Southeast Asia, as well as India,” says Tchikoltsoff. Meanwhile, in the electric vehicle (EV) manufacturing space, some activities that were previously concentrated in countries like China, Korea and Thailand are now expanding to Vietnam and Indonesia. She adds that some global corporations in the apparel and retail sector are now looking more closely at non-Asian countries such as Turkey and Mexico.
“The general trend is to make sure that the supply chain is closer to the manufacturing process, closer to suppliers, and closer to customers,” Tchikoltsoff observes. “As such, corporations want to work with banks that have both global and local capabilities, to make sure they are not reinventing the wheel in every country.”
Nearshoring and localisation bring additional investment requirements, meaning that many corporations are working to secure lines for capex financing, thus impacting their balance sheet structure. On another note, companies that are switching to new suppliers may not be comfortable trading on open account terms, meaning there is a greater need for instruments such as letters of credit or guarantees.
Another option is the use of supply chain finance, which can play a role in helping to alleviate balance sheet concerns. With buyers requesting longer payment terms, there is a greater appetite for early payment solutions that can help suppliers receive payment sooner, rather than waiting for cash that is tied up in a longer working capital cycle.
“On the payables side, we’ve seen a significant uptake of supply chain finance, not only from buyers realising that supply chain finance is a very important instrument to create resilience, but also from suppliers who are more actively drawing on these alternative sources of funding,” says Tchikoltsoff. On the receivables financing side, she adds, sellers are increasingly turning to deferred payment solutions that can help their customers by enabling them to pay later.
Tchikoltsoff points out that these solutions represent a strong value proposition compared to a typical loan, because clients can benefit from off-balance sheet treatment and access cash immediately, while transferring credit risk to the bank. In addition, these solutions give clients a way of naturally hedging their FX exposures.
From inventory solutions to syndication
Another way that companies are adjusting to current challenges is by transitioning away from just-in-time inventory management in favour of a just-in-case approach.
“BNP Paribas is one of the few banks capable of offering off-balance inventory solutions,” comments Tchikoltsoff. “Historically we have been very experienced in just-in-time programmes, whereby we intermediate between supplier and buyer by holding inventory on our books. With the focus on just-in-case, we’re now seeing a lot of clients looking to build up safety stocks in case of adverse conditions in the physical supply chain.”
She explains that the bank is also supporting supply chains via its syndication capabilities. “Our strong platform enables us to lead and coordinate loans for our clients – so they don’t have to handle similar discussions with ten other banks,” says Tchikoltsoff. “That syndication element is increasingly important because we are facing bigger volumes now.”
Digitisation and sustainability
In this climate, Tchikoltsoff says there are two important things corporate clients are looking for in medium-to-long term supply chain finance solutions. For one thing, there is a greater focus how technology can speed up processes and reduce costs through automation. “When it comes to financing invoices, we have clients in the tech space where each drawdown is more than 50,000 invoices,” she notes. “And they are relying on very strong digital solutions from the bank to handle such volumes.”
With clients looking for more plug-and-play solutions, the bank is also developing its API capabilities and broadening its ecosystem of fintech partners. “At BNP Paribas, we try to understand how the client functions operationally so that we can offer the most appropriate technology out there to support their needs,” says Tchikoltsoff. “Supply chain finance is very efficient in terms of technology – a lot of the day-to-day flows are somewhat dematerialised, which has been extremely helpful during the pandemic, as there is no need to exchange physical papers that are signed.”
The second major focus is on sustainability. Many of the bank’s clients in the region are large corporations that are already engaged in pursuing environmental, sustainability and governance (ESG) goals – but as Tchikoltsoff observes, companies’ suppliers and customers also represent the source of significant ESG considerations. “This is where supply chain finance is extremely powerful, as it helps incentivise our clients’ value chain partners to embrace a similar trajectory of driving a positive impact,” she says.
In particular, the bank has launched several programmes on the payables and receivables side, in which the cost or availability of financing is indexed to certain ESG parameters. Different sectors will have different priorities: agricultural companies may focus on preserving natural capital, for example, whereas fast-moving consumer goods (FMCG) and food and beverage firms might target the circular economy and packaging. However, as Tchikoltsoff points out, climate change is the common denominator across industries today.
A lot of corporations are pledging to become net zero, and some of them realise that reducing their own carbon emissions is just the tip of the iceberg. More than 80% of carbon emissions sit in the companies’ value chains, rather than in their operations. As such, Tchikoltsoff explains, BNP Paribas has developed specific programmes focusing on carbon reduction. “We are partnering with companies like CDP, for instance, which are helping to quantify the emissions that suppliers’ factories are responsible for, and that information can then be used to deploy impactful programmes to encourage suppliers to reduce those emissions.”
As Tchikoltsoff points out, there is an opportunity for banks to harness precise data that can be integrated into financing schemes in order to drive concrete change. “Globally, trade finance is worth US$8trn per year,” she concludes. “So if we are to embed some sort of financial incentive in the way that we finance corporates, the impact in terms of outreach is actually huge.”