The China Syndrome: scouting for quality and currency
- 19 March, 2010 10:07
Post GFC, the CFO role has been cast with the word ‘risk’ assuming greater importance than hitherto. The management of corporate budgets and gross margin erosions remain of paramount importance but emerging nations which present companies with trade, outsourcing and manufacturing opportunities come with heightened risk. Risks in currency, banking protocols as well as sovereign risk are just of the factors emerging for the CFO. Any of these can alter the risk profile.
Companies frequently consider the lower unit costs in choosing global suppliers and fail to consider the uncertainties inherent in managing business relationships, including the costs of goods manufactured in the partner’s country. Consider as a case in point the decision by the Chinese economic authorities to revalue there exchange rate – known as the Yuan. Of course there is nothing new about needing to take some defensive action to mitigate against currency movements and exchange rate alterations by (in the case of China) central authorities. CFOs are well versed in the need to undertake hedging. Or not. In other words, some companies and their CFOs take no action despite being significant importers or exporters. Indeed anecdotal evidence indicates that about one third of medium to large companies do hedging.
Hedging is an expensive exercise requiring a combination of futures contracts , currency related bank accounts and, of course, time invested in setting up bank facilities and managing them. Times however are dictating a need for more (time) investment in currency hedging.
The action by the Chinese is a sign of the increasing weight of Chinese trade on the world stage. At any time a large percentage of Australian business is either importing goods (raw as well as outsourced manufactured or bespoke items) or exporting mainly raw materials such as minerals as well professional services (architects, civil engineers and the like).
The Australian dollar, already a relatively volatile currency has every chance of being increasingly volatile against the Chinese currency as well as the US dollar (on which most commodity prices and manufacturing contracts are pegged.). Increased volatility does represent an expansion in the risk profile of a company’s balance sheet, just as volatility in commercial property prices represents an increased risk on a bank’s balance sheet.
On “back-to-basics” terms, managing uncertain international lead times and their impact on the cash cycle is looming as a real and present risk. A CFO’s role can assist in minimize growing cash cycle time. By basing invoicing on proof of delivery and making payments to suppliers at the last possible moment, CFOs can maximize the cash assets in the company.
The interest remains as China’s attractiveness as a low-cost option for serving Asian markets is firm.