In this environment, corporate treasuries are being impacted profoundly, needing to adapt accordingly.
An example of this successful approach can be seen in Xiaomi. Founded in 2010 as an internet company with smartphones and smart hardware connected by an internet of things (IoT) platform at its core, it became the youngest company on this year’s Fortune Global 500 list.
Xiaomi’s business model comprises of three pillars. The first is hardware. It is the fourth largest smartphone maker in the world and has established the world’s largest consumer IoT platform, connecting 196 million devices (excluding smartphones and laptops). The second pillar is retail, with a significant portion of revenue coming from its online platform. Pillar three is internet services, with Xiaomi leveraging the user-base it acquired through sales of smartphones and IoT devices. The three synergistic pillars form what Xiaomi refers to as its ‘triathlon business model’.
Efficiency underpins all business-model decisions made by Xiaomi. With the company having built its own retail platform, the cost to acquire customers is a lot lower than channelling sales through layers of distribution. Xiaomi also requires robust solutions for C2B payments and for the integration of its business/finance systems. This helps achieve straight through transaction processing, ensuring speed, scalability and cost efficiency.
Xiaomi makes only its core products itself. For the remaining products, it provides a hardware incubation platform through which it has encouraged and invested in over 200 ecosystem companies. With efficiency in mind, Xiaomi provides these companies with incubation services, including design, product management, supply chain and funding.
Xiaomi believes that supply chain financing (SCF) enables its partners to access more efficient funding, leveraging Xiaomi’s own credit strength. Xiaomi aims to rebuild a comprehensive risk-control model, similar to that of the credit rating companies.
This model enables evaluation of business scenarios under which its partners can access SCF and factoring programmes. But Xiaomi sees these as more than financing tools, deeply integrating them into what it wants to achieve as a company.
Xiaomi is one of the few Chinese corporates that is learning how to be a global consumer company. Last year, 40% of its revenue came from international markets, growing more than 100% year-on-year by the end of 2018.
Today, Xiaomi is present in over 80 markets. Throughout its journey to internationalisation, it has faced many new treasury challenges. Currently, FX risk tops the agenda. Some countries it has entered have more rigid currency controls and exchange rate volatility. While acknowledging that companies with FX exposures could mitigate FX risk through effective hedging schemes, Xiaomi believes that companies should first ask some fundamental questions. These include the probing of key drivers behind each new market, and asking what are the key factors in the long-run that will decide the value of each currency to which they have exposure.
Only in this way is a company able to formulate strategic and long-term solutions. In addition to a long-term FX management perspective, Xiaomi also chooses to be very cautious when adding new billing/settlement currencies, making sure the embedded dynamics and risks are well understood before proceeding.
As part of its overall strategy, Xiaomi is building its global treasury centre in Hong Kong. This initiative has been in planning for a couple of years. Currently, Xiaomi operates most of its treasury operations out of headquarters in Beijing. Setting up a global treasury centre would enable it to be more efficient in handling various treasury requests from international markets, including activities such as global liquidity management, FX trading and hedging.
In the long run, as business models and regulations evolve, Xiaomi believes it might need to combine its global treasury centre, regional and, in some cases, even local treasury teams, as it seeks a balance between efficiency and business needs.
However, the most critical and challenging issue for treasury at the moment is to manage information flow, to have robust and integrated systems, to ensure processes are in place and to clearly define roles and responsibilities.
Of course, there are other initiatives that may be taken by corporate treasuries to adapt to business model changes. These include setting up reinvoicing centres to streamline trade flows and aggregate FX exposure, the adoption of different hedging approaches for G10 and emerging market currencies, and the optimisation of global liquidity structures to best support international expansion.
While the initiatives taken by each company may vary from case to case, the key to enable treasury to excel is always found in staying adaptive, agile and innovative.