Working Capital in China

As you know, here at sharedserviceslink, we keep a close eye on all the relevant topics in our industry today, and are always paying close attention to the industry's thought leaders.

Jordan Novak, Managing Director at C2FO, recently posted an article from the South China Morning Post on increasing pressures on working capital in China. What an interesting read! – and clearly a hot topic to stay informed about.

Economically speaking, China has been an enthralling subject of conversation over the last ten years. There’s been a lot of speculation and opinion, and analysts are studying the current economic situation and looking towards what’s next.

Looking at China’s 2014 GDP data, (published a few weeks ago), it’s clear why there’s a lot of attention focused on the economy’s “slowdown.” The fascination is understandable, as 7.4% is the weakest GDP China has seen in the last 24 years.

With an astute glance beyond the hysterical headlines, however, an argument can be made that China’s growth might actually be better balanced than ever before. Following the mammoth stimulus program begun in 2009, China’s economy has been characterized by aggressive investing and relatively sluggish consumption spending. And many analysts believe that the debt and credit woes are overstated, largely because of the political role the state plays in the economy.

Recently in China, mainland companies and local governments are facing a cash crunch as regulators tighten their grip on off-balance-sheet financing channels. The South China Morning Post reported, shockingly, that “the average number of days it takes companies to pay for goods and services bought on credit is also set to climb to 90 from 69 in 2011, demonstrating the increasingly long payment terms needed to finance working capital.”  

Thinking back to an article I wrote on SupplierPay, I recalled the US figure. “An average S&P Fortune 500 firm takes 46 days to pay suppliers, meaning many take far longer than that. Small businesses are hit hardest by companies taking months to pay invoices.”

46 seemed like a high number, but 69, or even 90? Imagine that conversation with your suppliers! 

At sharedserviceslink we’ve been gearing up for our Working Capital Optimization Summit, and talking with lots of people about the topic and digging in deep. I decided to go straight to Jordan Novak, an expert in the space, to learn more on his thoughts on working capital in China's economy:

KW: What about all this do you find most interesting, surprising or compelling (i.e. what struck you so much to post the article)?  

JN: “This article outlines a trend that our business has seen develop over the past 12-18 months.  In that time, suppliers in China have been gladly and consistently offering much higher rates for working capital in C2FO. They also represent one of the highest participating geographies in our network. This displays that behavior and the innate need for alternative funding sources onshore.”

KW: You posed the question, “Will this dynamic, along with rising labor costs in major manufacturing regions, create cost pressure for US/EMEA multinationals?”  Could you talk a bit more about that?

JN: Multinationals who manufacture and/or source in China have spent the last 4 years adjusting to steady cost increases from operations in China. The impact of wage increases - more than 120% since 2008 – has put a lot of pressure on organizations to control costs. At the same time, payment term extension initiatives have been pervasive, particularly in manufacturing provinces like Shenzhen, Fujian, and in and around Shanghai. With longer terms comes a heavier reliance on off-balance sheet accounts receivable financing.  This article outlines new regulation on these facilities which will increase financing costs for local companies and their customers.  With cost pressure already high and these new dynamics, multinationals are certain to see a material impact to their bottom lines.

KW: How does an organization like C2FO react to this?

JN: Our mission at C2FO is to create, operate and grow the largest working capital market in the world, providing the world’s suppliers accessible and cost-efficient cash while reducing costs for global multinationals. Our technology is not just helping corporations mitigate cost concerns and vendor financial health risks in China, but we are doing so all around the globe. The dynamics in this article mirror the behavior of suppliers in many geographies. Average payment terms are over 100 days in Italy and France and well over 60 days in Mexico, Brazil, and the UK. At the same time, regulatory pressure is causing banks to tighten lending for small, medium, and borderline credit companies. It is a perfect storm for alternative finance, and at C2FO we are at the forefront with our proprietary approach to accelerated payment and working capital optimization.

At sharedserviceslink, we make it our business to be up on all global issues that relate to our industry, like the economic situation in China, as well as the vital importance of working capital optimization.

Many thanks to Jordan at C2FO for his expert insights!

We hope to see you all in Scottsdale at the Summit!