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The pandemic has underlined the importance of managing supply chains and liquidity. Banks can help – but how should companies think about the future?
Assembly lines for cars and aircraft have been closed. Shipments of smartphone components are delayed. Garment orders to Bangladeshi factories worth at least $3 billion have been cancelled or put on hold. And with global commercial flights reduced by 55 percent year-on-year in March, the Australian government is having to charter planes to deliver beef and other fresh foods to key export markets in Asia and the Middle East.
The Covid-19 pandemic has provided a powerful reminder of how much producers and consumers alike depend on the seamless operation of supply chains that stretch across the globe – as well as illustrating the world's reliance on one or two economies for some vital products. China and India, for example, dominate the production of active ingredients for pharmaceuticals and the manufacturing of generic drugs.
With countries accounting for 50 percent of global gross domestic product now restricting people's movement, important parts of the hyper-connected global economy have been paralysed. And when supply chains are frozen, the cash that flows through them is trapped. This creates a sudden and unexpected challenge for companies accustomed to being able to operate with enough inventory to last days and enough cash to last weeks or perhaps months.
"Managing liquidity is about improving financial efficiency," explains Pierre de Corta, Head of Factoring and Supply Chain Financing at BNP Paribas. "The gains from doing it well are relative and incremental. Under these extreme conditions, though, managing liquidity has become a matter of critical importance. For some companies, it's a question of survival."
As companies adapt to the disruption of the Covid-19 economy, they are looking to their banks to help them manage liquidity and make the most of their working capital. Many are also seeking to establish more versatile supply chains that will allow them to better manage future disruption, de Corta explains.
Waini Chan, Head of Corporate Sales for Taiwan, Global Markets at BNP Paribas, says that with unprecedented volatility in financial markets, companies' access to external liquidity has become less certain. Funding costs have also been unpredictable even as central banks cut policy rates. "Support from core banking partners has never been more important," she says.
Chan adds that BNP Paribas can support corporate clients that have suffered disruption to their supply chains by offering our services in respective local markets where hedging will be required. "Banks can also assist with setting up currency facilities and rates risk management."
The dash to secure cashAccording to de Corta, more clients have been using receivables financing to ensure they have sufficient working capital. This converts invoices that may not be paid for one or two months into immediate liquidity. "In a situation where a company wants to reduce its exposure to foreign currencies or repatriate cash to its headquarters, receivables financing can be particularly useful because it monetises assets," de Corta explains. It also provides direct funding to specific entities without the potential complications of inter-company financing and allows companies to avoid the cost of foreign exchange hedging.
While it is vital for a company to manage its own working capital, says de Corta, many of BNP Paribas' clients are also focused on ensuring that their key suppliers have the liquidity they need to continue their operations. "Most large companies are acutely aware of how much they depend on partners in their supply chains. They want to support the most critical suppliers as we go through the storm – and we want to help them secure their supply chains."
With this in mind, BNP Paribas provides financing to certain suppliers against receivables from clients who are also clients of the bank. "We know their clients because they're also our clients and we're comfortable with them," de Corta said. "This means our clients can help provide liquidity directly to their strategic suppliers. In turn, that should strengthen the relationship between our client and their supplier, bringing benefits over the long term."
Debate continues over how supply chains will be changed by the Covid-19 crisis. Some have argued that companies should concentrate production in their home markets in order to reduce the risk from restrictions being imposed in other countries. Others counter that this would make such supply chains unnecessarily vulnerable to a shock in a company's own country.
De Corta says many companies are already conducting comprehensive reviews of their supply chains that encompass their suppliers' suppliers and the firms that sell to them directly. One consequence of this could be more distributed networks of suppliers that prevent companies from being too vulnerable to disruption in any single economy.
More diversified supply chains could help corporates manage risk in a more agile way, says Chan, but this would also change their financial needs. "As clients start to source from new markets, that can mean new currency and interest rate risks in their portfolios. We're here to help clients expand into new markets with insights from our economists and strategists as well as on-the-ground treasury solutions around the world."