JosepMoving from competition to collaboration In recent months, as the epicentre of the Covid-19 pandemic has shifted west from Asia to Europe and the Americas, manufacturers, exporters, buyers and suppliers across every industry have found themselves facing factory shutdowns, restrictions on activity and shipping delays.
The International Monetary Fund’s (IMF) World Economic Outlook, which was just released, predicts that the global economy will shrink by 3% this year, and the World Trade Organization (WTO) has predicted that international trade will fall by up to a third. This has had an immediate impact. Numerous players in the supply chain are looking for ways to adjust to the new normal despite the lack of clarity regarding when the situation will improve. Geoffrey Brady, Bank of America’s head of global trade and supply chain, says, “Let’s be realistic.” When we get out of this, what we face could be a completely new world. The way things are done, how we trade, and how economies are set up will be seriously rethought. Global supply chains are made up of numerous actors, often with competing interests: buyers seek the lowest price and longest payment terms; sellers seek the best possible margins and prompt settlement. But what happens when your supplier, or your supplier’s supplier, can no longer access the liquidity they need to manufacture? What happens when your invoices can’t be processed, or couriers can’t deliver documents?
“The coronavirus crisis has brought to the fore various problems of resilience in supply chains around the world,” says Fiona Deroo, head of global trade and supply chain finance sales for North America at Bank of America. “Everyone is finding themselves more vulnerable to the risks of supply chain disruption because this is new territory.” A push factor for digitisation
With vast swathes of the world’s workforce now working from home, the paper-based trade finance industry is struggling to cope. “A lot of our clients are out of the office and can’t submit documents because the originals need to be sent,” says Deroo. Even though parties can use electronic signatures as a workaround, not all businesses have these capabilities, and in many cases, physical documents are still required due to differing legal stances in various jurisdictions. According to Deroo, “this might be the push that the trade world needed to make day-to-day processes so much more efficient and effective.” “There are still elements that have to move by paper, and unless all parties are on the same level of automation, it doesn’t work, so this brings into focus the need for a broad adoption of automation and technology.”
“Remote capability was never high on the list of anybody’s wish list in trade. Brady adds, “Suddenly, it’s important.” “Many of our clients have made research and development (R&D) for new, innovative products their top priority in their budgets. Now, they are looking into ways to invest in stability and infrastructure. Banks, too, are reassessing their resource allocation to areas that will allow them to continue to process transactions in the environment that we are in.”
But it is not only banks and their clients that are coming up with quick fixes to the problem. “Tech companies like Microsoft and IBM have sought to provide capital or talent, while fintechs have long attempted to break into some of the larger flows and transactions. Brady says that governments are looking into ways to help the effort in the interim. “There are vast opportunities around collaboration and the inflow of capital, talent and resources from the private and the public sector.”
A good solution in good times, a great solution in bad times
Many suppliers’ working capital requirements are immediately being put under immediate pressure as a result of declining demand worldwide, which cannot be resolved through digitisation alone. As the coronavirus inflicts rising economic damage and liquidity pressures increase, businesses need to find new ways to keep going. This means the entire supply chain coming together to integrate financial flows with physical flows, spreading risks to enable both exporters and importers to improve cash flow.
Supply chain finance (SCF), which came of age in the wake of the 2008 global financial crisis as a means of unlocking liquidity during straitened times, has risen in popularity as a lower-cost source of funding for suppliers and a means of stabilising supply chains for buyers. According to Deroo, “SCF is a good solution in good times, but a great solution in bad times because it supports the continuous flow of goods that must be sustained.” “Before, it was a chance to add to the term extension. In the current environment, it is a vehicle to preserve capital, and to extend the opportunity for suppliers to obtain the financing that they urgently need.”
Brady adds, “Supply chain finance has been through a full economic cycle.” “We’re seeing its ability and power to create liquidity again today, and this is really important,” the statement reads. Collaboration between public and private sectors Governments around the world agree. Last month, incoming Bank of England governor Andrew Bailey pointed to emergency SCF as a likely solution for firms struggling with the impact of Covid-19. In the meantime, US Exim has temporarily expanded its SCF guarantee program, encouraging banks to underwrite weaker credits when all credits are being negatively impacted. Brady asserts, “In a good way, one of the things I see coming out of this situation will be greater public sector intervention.” We are accustomed to receiving this in the form of important and necessary regulation and oversight. Now, interestingly, a lot of the energy has been around governments saying: ‘How can we help? Can we mitigate risk? Can we provide funding? What can we do to create a buffer for some of the smaller suppliers? How can we make this more accessible?’”
This collaboration between the public sector and the financial sector will help alleviate some of the difficulties in obtaining funding for international trade caused by de-risking and reduced liquidity in the US dollar. According to Brady, “US Exim, UK Export Finance (UKEF), and the other ECAs have raised their hands and said that they will be this conduit from the government to banks, and then the banks can be the conduit to suppliers.” The banks can then be the conduit to suppliers.
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