Underneath the shocking news headlines concerning the Covid-19 epidemic, shortages of PPE, shutdowns of non-essential businesses, and countless job losses across the world, there is a spark in the complex “financial supply chain” that fuels global trade, which if not controlled could turn into a wildfire. We urge three strategies to mitigate this threat.
Impact of Covid-19 Pandemic
Around the planet, Covid-19 has produced unprecedented demand volatility. As a result of prolonged closures of stores internationally throughout April and unprecedented job losses, consumers have curtailed their spending, and some could go into default on their debt.
At the time of writing, Deutsche Bank has downgraded brands like GM which has just 15 weeks of money until it hits the minimum requirement of cash to operate. In addition to massive layoffs by airlines and hotels such as British Airway and Marriott, and furloughs by automobile manufacturers like Honda, Jaguar, and Volkswagen, retailers such as Neiman Marcus Group Inc. and Debenhams are the verge of filing for bankruptcy, and will be likely to suspend or postpone paying their providers.
This abrupt disruption significantly increases risk in the financial supply chain. As buyers hurry to cancel their orders with suppliers to lower costs, they’ll also delay or default on existing bills. This will play havoc with their upstream suppliers who are stuck with substances or parts that are no longer needed. These upstream suppliers have no funds to pay their suppliers, developing a hazardous cascade.
As buyers’ creditworthiness deteriorates, banks can withdraw buyers’ lines of charge, upon which receivables funding relies. The withdrawal of buyers’ lines of credit can render many providers afflicted by longer credit terms and no option for early payments of the invoices. Similarly, as credit insurance contracts, providers will be less willing to extend credit to their transaction partners.
At precisely the same time, Covid-19 has also induced a demand surge in many sectors, such as PPE and health care equipment. While the worldwide supply chain offers the better possibility for companies to work together to design and create new products like ventilators and sprays, suppliers may fall short of capital necessary to ramp up manufacturing, like purchasing raw materials or procuring new equipment, and also be forced to forego value-generating, and in this case life-saving opportunities.
Looking forward, as nations are planning their strategies to loosen or leave the current lockdown, many businesses will be entering a restoration or rebound stage. Without financial support, liquidity-drained suppliers might be unable to rapidly ramp up manufacturing, slowing the market’s recovery from the crisis.
How to Mitigate Risk in the Financial Supply Chain
Unless the whole supply chain is owned and handled by a single firm, the financial supply chain is essential for facilitating international trade. Different supply chain financing schemes should serve as enablers for facilitating smooth physical flows among supply chain partners, rather than an accounting match. For this use, accounting rules and regulations need to demand enhanced transparency of such schemes. More importantly, the financial supply chain has to be better integrated with the supply chain data flow and emerging technologies.
1. Better Visibility of Supply Chain
Our research, collectively with Jing Wu of the Chinese University of Hong Kong, indicates that supply chain leaders need to better understand the data leaks in supply chains, not just the fiscal health of isolated manhood in the distribution chain. Such advice includes visibility to the supply chain and real-time tracking of bodily transactions.
Certainly, obtaining this information can be hard, but the creditor can form a partnership with a few of the major supply chain players to gain information access so as to evaluate the financial health of the borrower.
For instance, HSBC linked up with Cainiao (Alibaba’s logistics arm) in March 2020 to allow retailers in Hong Kong who sell their merchandise on Tmall (Alibaba’s e-marketplace) to apply for financing of up to US$500,000 without the need for collateral or financial documents. With superior visibility of retailers’ history and end-to-end trade information, Alibaba supplies HSBC with timely and detailed information to perform credit assessments. By means of this kind of venture, banks can better manage risk exposure in the financial supply chain, and Alibaba can help creditworthiness merchants to access loans to sustain their operations, which assists Alibaba to sustain its growth also. It is a win-win-win alternative.
2. Go Deeper in the Supply Chain
It is crucial that lenders gain visibility not only of a purchaser’s direct provider but also its indirect suppliers. Technology advancement enables this.
For instance, Chinese fintech startup JDH leveraged cellular technology and blockchain to allow creditors to fund providers several tiers deep into different complicated electronics manufacturing supply chains based on the buyer’s creditworthiness. This approach alleviates potential supply disruption brought on by suppliers concealed further afield in the world supply chain.
3. Frequent Lending with Smaller Amounts
The increased lending frequency with smaller sums and shorter delays can enable supply chain leaders to reduce risk while better functioning supply chain partners with just-in-time funding.
Leveraging artificial intelligence, fintech lenders such as Ant Financial (previously known as Alipay, affiliated with Alibaba) and Kabbage (a US-based online financial technology firm ) may overcome this challenge by devoting business loans in minutes.
Further, technologies such as IoT and smart contracts will help better link loan amount and timing to physical supply chain transactions. By way of example, distributing funds in purchase order finance could be directly connected to the quantity of raw material secured.
Fuel or wildfire?
As we weather the current disruption caused by Covid-19, we could better manage risk in the financial supply chain by leveraging information technologies to make data-driven lending decisions based on real-time and trusted information about physical transactions within the supply chain.
In doing this, supply chain fund can keep on fuelling global trade without the risk of it turning into a devastating wildfire.