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Presentation made at the EuroFinance Conference held in Monaco in september 2012
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EuroFinance Monaco
Practice of China as CFO
September 26th 2012
2
Experience with China
No experience in Asia before 2006
CFO in Regional Headquarters and SSCs in Europe
Sandvik Holding China Beijing: 5 years
Shared Service Center covering 13 subsidiaries
Management reporting, Tax and Treasury
Sandvik Joint Venture: 1 year
80-20 Joint Venture with Chinese State Owned Company
Staff: 1,000
Transnations and GESCO from May 2012
Consulting and Cross Cultural advice
3
China Legal & Regulatory context
Strict Exchange Control system in Mainland China
remittance of funds abroad subject to tax certificate
No tax consolidation between group companies
Domestic intercompany loans forbidden
Replaced by entrusted loans using a bank as intermediary
Separate rules for domestic and foreign loans
Banks acting as extended arm of authorities
For economic policy incentives
Regulations subject to different interpretations
Different level of competence between provinces
Important role of development zone authorities
The convergence fiction
Belief that China converges towards Western ways
No clear evidence
No proclaimed will of Chinese authorities and businessmen
Emphasis on transformation based on Chinese specifics
Consequences on organizations of MNCs
Regional Treasury Centers and SSCs
LT planning based on convergence idea might be dead ends
Parallels with other regions dangerous: EMEA, Americas etc…
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Chinese Cash Trap & others
Risk to overcapitalize new Greenfield plants
Development zone authorities incentives on inflow of capital
Inexperience of Project managers in Capital Efficiency
Very tempting incentives offered by authorities
Land refunds
Landscape improvement, fluid connection, transformers…
Fast expropriation
Difficulty to obtain deductibility of Fees and Royalties
Tax rebates
Corporation Tax
Personal Tax
6
Capital Structure and Investment in China
Investment projects requiring feasibility study
New company
New business scope of existing company
New environmental or business permits
Thresholds
Less than $ 3 Millions 70% of investment
$3-10 Millions 50% of investment
$ 10-30Millions 40% of investment
Over $ 30 millions 33% of investment
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Pitfalls of Treasury Management in China
Believe that local staff is obstructing, sandbagging….
It happens but there are true specificities
Think “ we have done EMEA is no different”
Accept what global consultants offer as standard solutions
Give up
Leave all of Asia out of the Treasury initiatives
Destroy group capital efficiency by timidity
Weight of Asian operations on the rise
Overlook integrity issues
Levels of approval
Diversion of funds
Curiosity for exotic tools offered by banks
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Regional Treasury HQ vs. Central
Most multinationals have regional HQs in Asia Hong Kong, Singapore, Shanghai, Manila
Operations or combined with support functions
Vast differences in practices and competencies HK, Singapore: high cost high skills good infrastructure
Shanghai: high cost, equipped for Chinese specificities
Corporate Treasurers Good systems, support of HQ for systems accounting
Understanding of Corporate goals
Certitude that Treasury is separate from other Finance Functions
People Issues
Recruitment
MNCs employers of choice in China; SOEs at the bottom
Cultural fit of Scandinavian companies in China
High level of exaggeration in CVs
References not easily obtained by HR or Head Hunters
Quick inflation of salaries
Competence level falls quickly outside of 1st tier cities
Retention
High turnover rate in some MNCs: up to 30%
Loyalty not only based on salary level
Attention to Tables on Best Employers in China
Very little interest to move to a different city
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Work Ethics
Upside
Young educated and flexible people: best staff ever seen
Change understood as progress for everybody
Implementation of decision without reneging
Keen to learn new techniques
Downside
Older staff have a different work experience
Conflicts of and Corruption issues require attention
Lack of creativity often mentioned as a drag
Insensitivity to cultural issues can lead to disaster
10
Expats
Should there be expats in China?
High quality people available in China
Relationship with HQ
How to select expats?
Experienced and flexible
Dogmatic and arrogant recipe for disaster
One third of expat contracts do not come to a normal end
Effect on local staff
Can turn off local talents
Should boost local talents
Watch turnover rate of local talents
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Relationships with authorities
Regulations subject to interpretation by local authorities
Maintain good contacts at city or province levels
SAFE
Key for inbound and outbound transfers of money
Banks are the extended arm of SAFE
Development zone authorities
Key for new
Tax Bureau
Variable competencies
Key for deductibility of management fees
Rule applicable to all
Be close and friendly
Beware of collusion
12
Other operational issues in China
IP Rights Protection
Many infringements
Weaknesses of judiciary system
Sourcing and Purchasing
Conflicts of interests
Integrity of purchasing departments
Compliance
Non US companies
Sarbanes Oxley
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Be opportunistic
Capitalize on Group relationships with a global bank
But do not believe you will get exact group conditions
Use at least one local Bank if operating in Mainland China
True impossibility to do everything with only a Foreign Bank
Tricky Chinese conditions with potential for bad surprises
standard call on demand: potential for cross default
obscure recourse of draft discounting: accounting issue
Get the cash back to HQ as soon as possible
Rely on benchmarking more than on consultants
15
Be aware of your regional politics
HK and Singapore dream of controlling ops in China HK used to do it but cost of ops usually too high
Singapore offer cozy living conditions to expats
For many Businesses Mainland China is where business is
Beijing, Shanghai, second tier cities? Not one single answer
Talent pool, integrity and infrastructure are key
Manila and other low cost places Value for labor intensive transactions
Savings often offset by difficulty to get good management
Can be an excuse to protect a regional HQ
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Easy wins in China
Control closely formation of LE and Share Capital increases
Do not let project managers be charmed by officials
Everything is negotiable with local authorities
RMB Cash Pool China
Better control over subs and tax planning opportunities
Intermediate Holding
Possibility to refinance local expansion with local dividends
SSC and Management cost recharges
Financing part of Economic Policy incentives
City or province level
Maximize ST loans at best regulated conditions
PBOC less 10% in Mainland China
Can be withdrawn anytime without any reason
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Not so easy wins but worth a try
Third party entrusted loans
If close relationship with another MNC operating in China
Customer Finance
Captive Leasing (no cross border)
Other Customer financing
Parent Foreign Loans from HK, SGP or other
Cumbersome but part of financing cocktail
Hedging
Well oiled mechanism from HK, SGP messy from China
Requires good systems and Business Unit understanding
Notional pooling beyond borders
Strictly forbidden in China but…
18
The RMB offshore market
Very publicized by Banks, Consultants since 2010
Still limited impact for Treasury Management
But consequences on currency of invoicing
Dim Sun Bonds
PR exercise for Mc Donald plus another one
No Chinese company can issue a Bond and repatriate funds
Parent companies can issue a Bond to refinance Chinese subs
Offshore market could be a dead end
Permanent structures to be avoided
Watch developments and benchmark permanently
19
Regional SSCs
Forget about global SSCs to serve Mainland China
Regional SSCs
Where is your main Business in Asia?
What is the Business model?
SSCs justification on low labor cost only is inadequate
High annual growth
Low cost of support services
Plenty of productivity gains possible
20
Asian Treasury borders are broad
For the time being local CFOs have value
Corporate Treasurers have to be adaptable and inquisitive
Connections between Finance, Admin, IT and Business Units
Be careful with long term planning
No LT money in China: commitment fees are wasted
Tax/Treasury planning: money for consultants
Regulations are interpreted locally and sometimes retroactive
Surveys on comparables are worth the money
Royalty rates
Management & Technical fee structure
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Current inefficiencies
FOREX regulations solidly in place in China
Convergence towards Western practices unlikely
Euro crisis has reinforced pride in existing system
No global netting including China
No global payments and collection including China
But possibility to run them globally from China
No global relationship with Chinese Banks
Only city or province level
No true global relationship with Foreign Banks
Fear to lose their Banking license
Extended arm of SAFE like other Banks
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Conclusion
Be permanently benchmarking with other businesses
Be more opportunistic than dogmatic
Many opportunities to improve efficiency
Concentrate on big quick wins
Accept some pockets of inefficiencies
Big risks
Fraud and corruption schemes beyond Western imagination
Local staff with limited skills to be protected from sharks
Think global, act local
Very appropriate rule for operations in China
Thank you for your attention
Please ask questions
www.transnations.fr
wwww.gesco-sa.fr
