STRATEGY
Surveying China's Financial Landscape

Companies find challenges but opportunities as well

The Association for Financial Professionals (AFP), in conjunction with PricewaterhouseCoopers, collected data from 100 organizations doing business in China across a variety of industries, and with revenues ranging from under $50 million to over $20 billion. Conducted in October 2007 and underwritten by Standard Chartered Bank, the survey addresses the ways in which participating organizations conduct business in China; the business models they use; their past and present challenges and those they anticipate as they move forward.

The bottom line: Despite significant ongoing challenges and complexities, the majority of participating organizations expect the growth of their business activities in China to significantly increase over the next three years.

Key findings
Of the responding organizations:

• 54% sell products or services to Chinese customers
• 56% anticipate a significant business expansion in three years
• Over 50% have more than one site in China
• 51% cited financing the business in China as their most significant challenge.

Doing business in China-the big picture

Business activities.
Over the years, organizations have typically manufactured products or services in China for use outside the country. Now, however, we are seeing a shift. Survey results show that the majority of participating organizations (54%) sell products or services to Chinese customers, 31% produce goods only for export outside China, while the remaining 15% purchase products from Chinese producers. Of those that produce goods, over half have more than one production site in China, and almost one third have as many as six to 10 sites, with 7% having more than 10 sites.

Challenges - past, present and future.
When asked how they would compare the challenges of doing business in China compared to those they face in other countries where they operate, 46% responded that the challenges experienced in China are unlike those in any other country where they operate, while 45 percent stated that their experience in China is comparable to the rest of Asia, Latin America or Russia, and 16% said they do not see a difference.

When asked about past challenges, the majority of respondents cited financing the business in China as having been their most significant issue at the time of their China business start-up, with controlling operational risk a close second. Repatriating cash tops the list of current challenges, followed by financing the business in China. It is interesting to note that only 16% of participating organizations cited financing the business in China as a present-day concern, whereas 51% viewed it as a former challenge. Although this is a positive sign, some respondents still see financing the business as a key future challenge.

Among the other leading hurdles that participants foresee having to face going forward are building financial staff, streamlining processes and procedures across business units, controlling operational risk, repatriating cash, managing currency and commodities risk, establishing adequate systems support, and achieving better integration with corporate finance.

A positive outlook nonetheless.

Despite the complexities and challenges inherent in doing business in China, 56% of respondents expect that the size of their business will significantly increase in the next three years, while 33% expect moderate growth. Only 11% anticipate that growth of their business in China will be insignificant.

Banking and finance in China

When asked how they open bank accounts for their Chinese entities, 67% of respondents said they empower local managers to do this, while 24% reported using express mail, fax or email from the U.S. Only 8% said they send a representative to China from the U.S. corporate office, and 5% contract with a third-party consultant. Only 3% use the US branch of a Chinese bank.

As of October 2007, 54% of participating organizations said their treasury structure in China is stable but ready for reengineering when banking becomes more sophisticated, while 24% said they are taking a wait-and-see approachÑmaintaining the status quo until they have time to explore their options. Others (15%) said their business is stable but requires some attention from the U.S. corporate office.

Making and receiving payments

• Paying local employees in China. TT (electronic) remittance is the primary way that organizations pay their local employees in China; 48% reported using TT same-day funds and 36% said they use 1-day and 2-day TT funds for that purpose. Only 5% reported using cash to pay their local employees.

• Paying suppliers in China. Of participating organizations, 59% reported using TT same-day funds to pay their suppliers, while 51% said they use TT 1-day or 2-day funds, 43% said they use checks and 30% reported using pay cards. Only 4% said they pay suppliers using cash.

• Receiving payments from customers in China.
  Participants primarily receive payments from Chinese customers via TT; 64% use this method, 44% use checks, 32% use pay cards and 18% rely on cash.

Given the vast number of monetary exchanges taking place daily, it is surprising that 49% of respondents still do not have a currency exchange rate risk interest or program in place. Further, while 37% of respondents say they currently use, or plan to use, domestic sources of investment capital, 63% do notÑnor do they plan to do so in the future.

Treasury management decision-making in China
When it comes to the 'where' of treasury management decision-making, 55% of participating organizations said decisions are made through the U.S. corporate office, while about 35% said it is done through a regional office in Asia or through local offices in China. But regardless of where the decisions are made, 53% of participating organizations empower local managers to make treasury management decisions, 34% rely on banks for market intelligence, 27% use treasury managers from the U.S. corporate office, and 8% rely on consultants.

Using consultants in the treasury management arena
Of the responding organizations, 35% reported that they do use consultants for treasury management, largely to help build the business in China by implementing systems, reviewing controls, developing policies and streamlining procedures. They also rely on consultants to prepare RFPs and review bank proposals, to review currency risk and develop strategies, and to restructure both domestic and international bank relationships.

The 65% that do not yet use consultants cited the following reasons: 62% said they already had knowledgeable staff, 44% said they rely on banks to provide necessary information and 22% said they are reluctant to absorb the expense of a third-party consultant.

Using shared services
Of the participating organizations, 36% say they plan to use shared services going forward.

Using an international holding company
Only 42% of participating organizations said they had established or had explored the possibility of establishingÑan international holding company for the purpose of improving cash management strategies and processes.

Most significant treasury management challenges - past, present and future

• Looking back. When asked what their most significant treasury management challenge was when they first began doing business in China, 51% of respondents identified financing the business in China as their overall most significant challenge. At 41%, controlling operational risk was a close second, while 38% cited negotiating with government regulators as a key challenge. Selecting banks (37%) and forecasting cash requirements (35%) were also high on the list of past challenges.

• As of October 2007. The most important treasury management challenge today is repatriating cash, with 20% of responding organizations citing that as their key hurdle, while 16% cited financing the business in China as their single most important issue. Controlling operational risk, forecasting cash requirements, managing currency and commodities risks, concentrating and pooling cash, and negotiating with government regulators are other top-of-mind challenges organizations doing business in China are currently facing.

• Going forward. When asked to select the most significant challenges they expected to face as they move into the future, these are the most pressing concerns that emerged:

  • 58% Building finance staff
  • 52% Controlling operational risk
  • 44% Repatriating cash
  • 43% Concentrating and pooling cash
  • 41% Managing currency and commodities risks
  • 40% Streamlining processes and procedures across business units
  • 38% Financing the business in China
  • 38% Forecasting cash requirements

Other future challenges mentioned include Managing A/R collecting customer payments, negotiating with government regulators, managing A/P and paying suppliers, staffing local finance positions, selecting banks, opening bank accounts and paying employees.

Conclusion
Just as rules and regulations have changed in China, so too have approaches to establishing a business in that country and to banking there. While the outlook for business growth is positive, the majority of responding organizations still have a great deal of work to do on their treasury management organizations, particularly in the areas of people, processes and systems. Since 58% of organizations surveyed anticipate future challenges in building financial staff, it is not surprising that many of their key issues are centered on attracting and retaining qualified talent and building the necessary IT resources to implement adequate systems.

To stay ahead of the rapid pace of change and meet future goals, it is imperative that organizations take an integrated approach streamlining treasury management processes and procedures across business units, implementing the right systems, developing the right IT resources, and improving integration with corporate finance in the U.S. On the all-important people front, they must not only find ways to attract and retain high-potential financial talent today, but must develop and train those valued people, thereby building the bench strength necessary to seize tomorrow's opportunities.

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