A more structured way to finance corporate supply chains

Companies globally are looking to make the most of the post-pandemic economic recovery by addressing the uncertainty and pressure they face in managing their supply chains. Amid growing geopolitical tensions, greater counterparty risk and a new norm of higher inflation and interest rates, treasurers are focusing on being as efficient, flexible and transparent as they can.

In Asia, organisations are exploring multiple options to achieve such resilience, including working with suppliers and other partners they know and trust, favouring those who are geographically closer. Treasury teams are playing a key role, too, by looking for more agile financing solutions.

The results of HSBC’s 3rd annual report, entitled “Global Supply Chains - Networks of Tomorrow”, highlights that corporates in Asia will base more than half (53%) of their supply network in the region, up by nearly 6 percentage points from 2020.

Released in March 2023 and based on the views of 870 corporates across Asia, the Middle East, Europe and the Americas, the research also shows a clear desire in Asia for quality rather than quantity as two in every three corporates want to reduce the overall number of suppliers they work with. In addition, payment and financing terms, ease of digital integration and ESG integration are among the top factors influencing which suppliers corporates want to work with.

The study also shows the growing appeal of trade financing solutions, as a way to make supply chains robust enough to tackle various risks relating to counterparties, regulations and border restrictions.

This impact on funding strategies also reflects the need to adjust to new inventory management models. According to HSBC’s research, the proportion of corporates headquartered in Asia which are using working capital to fund their supply chains has fallen to 62%, about 23 percentage points less than in 2020. By contrast, 44% are using inventory financing and 32% receivables financing – about 7 percentage points higher than in 2020 for both solutions.

To some extent this is expected, given higher interest rates and inflation have made working capital loans more expensive to come by. However, dedicated supply chain financing solutions can enable corporates to benefit from a more targeted use of – and greater access to – funds than via general purpose lending. Accelerated cash flows with more control via receivables finance can be an effective tool to manage both interest rate and currency risks.

“While cost is always a factor, it is no longer the focus if there is any potential to compromise on resilience or agility,” added Chopra.

Alongside their funding needs, corporates have a larger appetite to visualise transactions, reflected by 46% of respondents to the HSBC research. Further, 39% of them want to seamlessly connect with banking solutions through online platforms. These align with the digital ambitions of corporates to simplify their banking operations by enhancing how they reconcile their supplier relationships and use FX.

In response, HSBC Trade Solutions (HTS), a new digital platform, was launched in October 2022. It is part of the bank’s aim to make all its trade finance products accessible in a digital format – now over 90% of its trade transactions are already initiated digitally.

“Over the last four or five years, HSBC has invested in our trade transformation,” explained Chopra. “HTS allows our products and services to be enabled for more customers than ever before with APIs and connectivity options.”

It provides new capabilities to trade digitally. More specifically for supply chain finance, for example, he said it also offers transaction dashboards, which help customers to view supply chain portfolios across different markets and geographies.

This plays to HSBC’s strengths as a leading facilitator of global commerce, leveraging its network and reach, to bank both large anchor buyers and their suppliers, which also need financing support for procurement and manufacturing in addition to shipments. “That is a big differentiator,” added Gahlaut. “Our international connectivity is our calling card… across markets, industries and sectors.”

The evolution in how corporates are managing and financing supply chains creates three key opportunities:

1. A bigger role for platforms, paving the way for embedded financing
2. The integration of sustainability within processes and outcomes
3. New opportunities from stronger and closer intra-regional trade ties

Firstly, as corporates buy and sell more using different platforms, banks are well-placed to support given their payments infrastructure and financing expertise. “This will unleash a wave of data-driven lending, embedded on platforms in real-time, and earlier in the cycle,” said Gahlaut.

Secondly, environmental, social and governance (ESG) considerations are becoming integrated more deeply in supply chains as sustainability continues to rise up the corporate agenda. There are also financing incentives as businesses receive more attractive terms as part of sustainable supply chain financing programmes. HSBC is working with leading global firms such as Walmart, Puma and PVH, among others, to embed sustainability objectives in their respective supply chains.

Thirdly, trade offers significant growth potential. A case in point is the Regional Comprehensive Economic Partnership (RCEP), which has brought together 15 economies in Asia Pacific. “Companies have started to realign their supply chains to capitalise on the advantages offered by RCEP, which harmonises the rules of origin across much of the region, lowering the cost of inputs for manufacturers and making their goods more price-competitive,” added Gahlaut. “It also provides greater access to larger markets for exporters, spurring investment within the RCEP and from beyond.”

More recently, in early 2023, the UK joined the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP). This allows businesses in Southeast Asia to gain greater access to – and preferential treatment in – a market of nearly 70 million people.

“Continued progress on the execution of free trade agreements will allow for a more transparent and predictive trading and investment environment which will lead to economic growth,” said Gahlaut.