A global leader in innovative pharmaceuticals, vaccines and consumer health products, Novartis is headquartered in Basel, Switzerland and has approximately 100,000 employees in 140 countries worldwide. The company entered the Chinese market in 1987 and has since enjoyed rapid growth in the country. Novartis China reported sales of $515m in 2008.
Due to the rapid growth that Novartis China had been experiencing, the company’s treasury function was experiencing a number of challenges. The main challenge was how to manage the company’s capital more efficiently. Novartis China’s strategy was to keep as little cash as possible in bank accounts, relying mainly on its cash pool and temporary overdrafts to meet short-term financing needs. Bank loans were kept to a minimum.
“Some companies borrow more than necessary for their immediate needs, and keep the cash idle in their account, or make structured deposits, in case they need funding,” says Sherwin Zhang, Country Treasurer, Novartis China. “This is a practical solution if you think credit is going to be harder to obtain. However at Novartis, we won’t adopt such a strategy as it dramatically reduces cash efficiency and is against our treasury guidelines.”
So Novartis China was faced with the challenge of further reducing the company’s idle cash balance, lowering the company’s reliance on external borrowing, as well as negotiating more favourable overdraft terms. According to Zhang, overdrafts are much more efficient than loans because they can be paid off much more quickly, whereas loans can result in spare cash sitting in deposit accounts earning a lower interest rate than that being paid on the loan. While intercompany loans are a more cost-effective option, it was felt that these were more complicated to arrange and since they operate on fixed tenors, this makes it difficult to match them closely to funding needs.
After a highly competitive selection process, Novartis China decided to partner with Citi to help overcome these challenges.
The solution was to set up an integrated cash management system, based on a domestic zero-balancing cash pool, online banking and renegotiated overdraft facilities. The company’s spare cash is now swept into one account, where it can be deployed more efficiently. Knowing exactly how much cash is in the system, how much is forecast to be in the system, and when bank loans will be needed, has reduced the company’s external borrowing requirements and improved cash efficiency.
“We selected Citi as our main bank because it has the most mature and stable cash management system,” explains Zhang. “With the flexibility of cash pooling, we rely more on our forecasting, enabling us to keep cash balances low. We still use bank loans, though less so. Although they are less flexible than overdrafts, they are often cheaper. The key is to get the right balance between loans and overdrafts.”
While this solution was originally implemented in 2006, its introduction was well-timed as it helped the company to deal with the global financial crisis which hit China in 2008. The cash pool originally involved four subsidiary companies, but now includes all nine subsidiaries.
Although the credit environment is now not as tough as it was during 2008 and 2009, Novartis China is still reaping the benefits of low cash balances and overdrafts for temporary funding, as and when required.