NEWS BRIEF
Asian  Suppliers Feel the Crunch: Risk management in the supply chain is essential
April 20, 2009
Denise Bedell

As 2009 moves into its second quarter trade between Asia and its western trading partners is expected to continue to decline. As a result, companies at both ends of the trade relationship are changing the way they manage their physical and financial supply chains.

Last year at this time, the Asian markets had felt little effect from the global slowdown, and many hoped that there would be a decoupling and limited correlation between Asia and the rest of the world. The reasoning behind this was simple: Since consumption within Asia had increased, this would limit the impact of the crisis as part of the previously exported production could be taken up in home markets. However, the reality was somewhat different.

As the global slowdown increased, and global trade diminished over the course of 2008, Asian consumption was not enough to offset the slowdown in exports. In addition, as demand from North America and Europe decreased, Asian suppliers began to reduce their profit and revenue expectations and began to cut costs to make up shortfalls. In particular, the hard-hit SME sector saw large amounts of lay-offs, and many small firms have already closed their doors as a result of the slowdown. This has led to declining consumer confidence and reduced consumption within Asian domestic markets, which is adding to the cycle of economic deceleration.

In the last quarter, the impact on the real economy in Asia has been clearly seen. As Gerard Lyons, chief economist and global head of Research at Standard Chartered, explains in a recent report: "The region’s economies are likely to get worse before they get better, but it is unlikely to be the worst-hit among the different regions, nor will this be the worst crisis Asia has ever seen."

In the run-up to Christmas and to the Chinese New Year, many Asian manufacturers had extended shutdowns of facilities or production as demand dried up in order to decrease inventory build-up. Orders continue to be cancelled as people work to reduce stock, and the slowdown cycle looks set to continue in the coming months. Wai Ho Leong, economist at Barclays Capital, explains: "Slumping global demand will weigh heavily on Asian exports. Collapsing global manufacturing demand will see a deep, export-led recession, exacerbated by credit market weakness." He believes, however, that slumping import requirements will offset much of the fall in exports and that net exports will provide a minimal drag on GDP growth in Asia.

As a result of falling demand, China, for one, has started to slow industrial production and capacity-utilization rates. Electronics firms, especially in the lower-end semiconductor chip products, integrated circuits and consumer electronics, are being particularly hard hit by this. Adds Leong: "This can be seen in the collapse in trade flows between China and its North Asian trading partners of Korea and Taiwan, where most of its electronics value chains straddle." In India, however, the impact will not be felt as deeply, as it is a more service-oriented economy.

TRADE MANAGEMENT, SUPPLY CHAIN IMPACT

As a result of slowing Asian and global consumption, companies throughout the procure-to-pay value chain—both within Asia and between Asian suppliers and large multinational corporate buyers—are changing the way they interact. Effective supply chain management and risk management in the supply chain has never been more critical.

Tightening access to credit is a key theme in the region right now. Leong notes: "Banks are also more wary of extending credit to companies that are deemed to be in vulnerable industries. Access to trade finance was another issue which affected exporters in November, following the Lehman collapse. The result was a sharp drop in export orders across the regions, simply because customers or importers were unable to access credit."

Another big effect of the credit crisis—now almost as prevalent in Asia as in other markets—is that firms are re-examining financial risk in the supply chain—focusing on receivables collection and more traditional trade finance solutions. As credit becomes less readily available, people become more cautious. As one banker notes: "To some extent, it is a self-fulfilling prophecy. At times like this, when people want credit the most, it is hardest to get, so people are looking for liquidity. Buyers want to extend payment terms, but suppliers want to accelerate payment terms. There is pressure all along the supply chain."

Multinational corporations are looking at their own suppliers and are evaluating how they are managing the financial crisis. Roger Packham, Asia Pacific head of Trade Finance, Global Transaction Banking, Deutsche Bank, explains: "If the MNC relies on key suppliers, and potentially they are unable to meet their requirements, one will need to have a back-up plan because the MNC would not want production to be impacted if materials are suddenly unavailable from a certain source or supplier. This is a risk that many MNCs are currently assessing."

Risk management in the supply chain is not just a matter of collecting cash on the receivables side, it also depends on whether the suppliers are equipped to ride out the financial crisis, what is the action plan if there are delays from suppliers, and whether there are alternative sources of supply, Packham adds: "In today’s environment, monitoring the health of suppliers is just as important as monitoring credit performance of receivables."

At a time when even some of the biggest global corporates seem to be faltering, suppliers are also taking a closer look at their trading partners. Desmond Wee, head of sales at HSBC, explains: "There is a greater focus on managing payment terms between buyers and suppliers and mitigating risk. Also, there has been a fair bit of consolidation of Asian suppliers as they establish strategic relationships with their buyers." He says that there has been a shift away from buyer-centric control and that suppliers in Asia are starting to want to have more say in their terms of trade. "Suppliers here are looking at managing their sales processes more effectively to control cash coming in. Also, they are focused on managing input costs and labor. Input cost has gone down some as commodity prices have gone down."

In order to see Asian trade once again pick up, it will take both increased global consumer confidence—and thus more consumption—and more liquidity provided by banks to fuel it. The real economies of Asia are likely to continue suffering alongside their global brethren this year.

However, one big question is how Asia will evolve around the crisis. Asian corporates have not yet managed to turn to their own markets successfully to pick up the slack when trade falls off, but if the crisis continues, that may be exactly what will start to happen.

Lyons notes: "In the longer run, Asia could even gain more than it suffers, coming out with more solid fundamentals and a heavier weight in the global economy."

One big fear for global trading partners, however, is the possibility that this turning inward may lead to renewed barriers to entry for trade with some Asian countries. Whether that is a real possibility remains to be seen and may depend on how deep and how long the slowdown is. Regardless, both Asian and global buyers and suppliers will be watching each other over the coming months and managing their relationships quite closely.

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