FUNDING AND INVESTMENT
Emerging Markets and Financing the Lengthening Supply Chain
May 13, 2008
Elizabeth Johns, AFP

Dan Scanlan, Head of Transaction Banking Americas for Standard Chartered Bank, discusses business concerns associated with a lengthening supply chain.

Many of our U.S. readers have told us they have started to source product from emerging markets. What are some of the associated risks from your perspective?

It is an interesting thing. When companies start to procure from overseas there are many risks. The chief one we see is that the supply chain has now become a lot longer than it used to be. It used to be easy if you were ordering domestically, you could reorder very quickly. What happens now when ordering overseas is that you are required to think longer-term because you have this longer supply chain. You worry about things like whether you are going to get the right products, whether they will come at the right time, and whether they will be priced correctly.

What are some of the risks from the seller's perspective in addition to the buyer's perspective?

From the seller's side, there is a lot of concern around financing. As you can imagine in today's marketplace, liquidity is starting dry up a bit. If you are a small company ordering material from Bangladesh or India for your factory in China, then you worry about "Am I going to have enough cash flow to buy the raw material to meet my manufacturing cycle?" From the buyer's side, it is really about "How do I get the right product at the right time?" So, for example, if you are ordering some goods that you want to put on your store shelves for Christmas and they don't come before Dec. 15, you have a big problem.

I'll say. What are some techniques that are used to manage supply chain finance?

Supply chain finance is an interesting one because oftentimes what happens is that it is something that is off the buyer's radar screen. But today, it is becoming more of an interest to large buyers. They are asking how they can help their suppliers reduce their cost of capital, which they hope will result in a lower cost of goods sold for the buyer. Large buyers are looking at ways they can bring lower cost financing to their suppliers. Some banks are stepping into the breach, if you will, to provide financing, particularly pre-export financing. This is the toughest piece to do, based on the relationship between the buyer and the seller and not necessarily on the seller's ability to repay for their assets or cash flow. So we look at that relationship between the buyer and the seller, and we base our credit decisions on that relationship, rather than on the supplier's ability to repay. It's a unique twist that allows us to do a lot more than we used to, in terms of financing these small or medium-sized companies in Asia that are supplying buyers in the U.S.

You mentioned something I thought was interesting about liquidity drying up. What do you see on the short-term horizon?

As you look at the short-term horizon for financing, particularly trade financing, there are some issues out there. As the credit markets start to dry up, as interest rates are beginning to rise, not only in the U.S. but in other countries, what's happening is that the cost of financing is becoming somewhat onerous for suppliers. Some banks are stepping in and doing things to help reduce that cost. In the short-term, the situation is not going to get any better very soon. We certainly do have concerns around liquidity. Supply chain finance has become more and more important as we look ahead.

When you look out over the longer-term horizon, what do you see?

I wish I had a crystal ball. I see lots of opportunities for large companies to buy from the overseas markets. From a liquidity perspective, I do see liquidity becoming more scarce. The lines of credit that suppliers are going to need to have in place to make sure that they can meet the demands of their buyers will become critical. So I think it is very important for suppliers today to establish good relationships with their bankers so that they can get the finance and the liquidity that they need in order to drive their growth the way they want to.

The interview was conducted on camera at the 2007 AFP Annual Conference in Boston.

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