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 ongoing Russia-Ukraine conflict. Inflation is increasingly impacting commodity prices, while logistics disruptions continue to challenge trade transactions.
At this juncture, some of these disruptions are due to the geopolitical context, while others are due to Covid restrictions, which are still very much present in large countries like China. The lockdown in China has of course led to physical supply chain disruption – and so have recent weather events, including the floods in Pakistan and the South of China.
All of this is affecting companies’ ability to source or deliver goods on time. Structural shortages in critical components, such as semiconductors, are causing production limitations affecting a number of industries, including tech and automotive. Other challenges include compressed margins resulting from the rise in inflation, as well as reduced sales due to the macroeconomic situation in Europe.
Extended payment cycles
Alongside these issues, many companies are also experiencing longer payment and working capital 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, thus switching to sea freight. This method of transportation takes much longer, meaning that our clients’ customers receive goods later, and therefore tend to pay later themselves. Some clients 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. And 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. Some global corporations in the apparel and retail sector are now looking to establish manufacturing facilities in 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. As such, clients 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 companies are working to secure lines for capex financing – and of course, that has an impact on 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 have seen a huge 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. On the receivables financing side, sellers are increasingly turning to deferred payment solutions that can help their customers by enabling them to pay later.
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. Historically we have been very strong 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 are now seeing a lot of clients looking to build up safety stocks in case of adverse conditions in the physical supply chain.
Historically we have been very strong 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 are now seeing a lot of clients looking to build up safety stocks in case of adverse conditions in the physical supply chain.Cynthia Tchikoltsoff, Head of Supply Chain Management, Transaction Banking APAC, BNP Paribas
BNP Paribas is also supporting supply chains via its syndication capabilities. The Bank has developed very strong capabilities to lead and coordinate such loans – so that our clients don’t have to handle similar discussions with ten other banks. That syndication element is increasingly important given bigger volumes.
Digitisation and sustainability
In this climate, there are two important things corporate clients are looking for from supply chain finance solutions in the medium to long term. For one thing, there is a greater focus on the role technology can play in speeding up processes and reducing costs through automation. When it comes to financing invoices, BNP Paribas has clients in the tech space where each drawdown is more than 50,000 invoices. They are relying on strong digital capabilities from the Bank to support the large volumes.
With companies 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 existing technology to support their needs. Supply chain finance is very efficient in terms of technology – a lot of the day-to-day flows are dematerialised. This has been extremely helpful during the pandemic, as there is no need to exchange physical papers that are signed.
At BNP Paribas, we try to understand how the client functions operationally so that we can offer the most appropriate existing technology to support their needs.
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 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.
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. Nevertheless, in today’s environment the common denominator across industries is climate change.
A lot of companies 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 our clients’ value chains, rather than in their operations. As such, the Bank 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.
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. So if we are to embed some sort of financial incentive in the way that we finance corporates, the impact in terms of outreach can be huge.