The supply chain of modern risk: an interview with Carlos Casanova

Supply Change

How unstable is global trade right now? Is it the most tumultuous it's ever been?

We’ve experienced a very long cycle of growth since the global financial crisis. In fact, if you look at the statistics, it's one of the longest periods of continuous expansion in history.

Now, all of that isn’t going to last forever and it’s starting to unwind. we saw a peak in growth and now we're starting to see a synchronized decline in activity.

So it's easy to assume that a lot of the Asian countries will feel the squeeze a little bit more than they did in the past. And whenever things are going down, all of the negative aspects of the economy, of fragilities, all of the political vulnerabilities tend to show as well. This expression of volatility and vulnerability is a bit more pronounced in Asia than in other parts of the world, because the region has become a lot more exposed to global trading supply chains.

Did this all start with Trump, or is there something larger afoot? Is this a pattern that you’ve seen over time?

Trump epitomizes this trend very clearly, but it's something that started before him. So even under the Obama administration, we did see an increase in the number of protectionist measures that were put in place. The Obama administration was maybe not so vocal about advertising these measures, but the US Department of Commerce was definitely very active in China at the time. It's just that instead of tariffs, they tended to prefer other tools. Tariffs are a little bit convenient because the President can utilize them or deploy them right away. But they're a little bit out of the 70s or 80s trade book.

But we also see similar things taking place in other parts of the region, like the disputes between Japan and Korea, Indonesia and the Philippines, India and Kashmir, and even Brexit in Europe. And it reflects a global trend of higher protectionism and higher uncertainty following a very long period of unprecedented expansion.

Do you have winners and losers in that space in a global trade environment like we're in today?

I think there are no winners in any trade war. But there are companies that are better positioned to react than others. The true losers in this entire debacle are the intermediaries. So, typically, any company that is involved in the distribution of either components upstream or sort of electronic products downstream, between the manufacturer and the retailer, their profit margins tend to be a little bit narrower than the manufacturers themselves. So if you are a distributor that is focusing on the Chinese market and a lot of your demand shifts to Vietnam, you are going to experience significant pressure on an already very tight profit margin. Anyone that is exposed to disruption in terms of distribution and supply would have to be very worried at this juncture.

Do the protests in Hong Kong pose any unique finance problems for businesses operating in the region?

So it does pose a set of problems. We were amongst the first to highlight the possibility that Hong Kong might enter a technical recession in Q3, and that was a result of predominantly some downside pressure on the external front. Meaning that exports contracted quite steeply in the first half of the year. Hong Kong is not a big manufacturing hub, but it's a big sort of offshore center and re-exporting center for a lot of companies that are based out of China.

We did see a very steep downturn in activity as a result of the global trade war. And that downturn activity did not factor in the impact of protests because they started in about July, that's where the situation really deteriorated. So for Hong Kong, we were witnessing a decline in activity and then going forward. Protests impacting the main commercial arteries of the city, were for sure going to have negative spillovers of domestic demand, which is another big part of the GDP in Hong Kong.

We currently expect GDP to contract in the third quarter following a contraction in sequential terms in the second quarter which, of course, is the definition of a technical recession and going forward into the fourth quarter and into 2020.

If you're a CEO or a CFO right now what are the things they should be thinking about to “disruption-proof,” their supply chain to withstand some of the trade pressure that's underway today?

Surprisingly, a lot of CEOs in Asia do not actively manage risk. When we ask them whether they purchase any sort of trade credit insurance or other type of credit risk tools, their overwhelming response is no. So more than 50% of respondents throughout the Asian supply chain do not currently have any sort of tool in place to protect themselves against the risk of non-payment.

Asia is a very special market in the sense that relationships have been traditionally very important but it’s just not enough going forward to protect themselves. Moving away from that mindset where you're assuming a lot of things based on the nature of the transaction and towards a more professionally focused view of the supply chain is vital for companies to pursue. And moving towards a more market-based approach, where you have tools at your disposal to manage your cash flow risks, will definitely help companies in this coming period of higher uncertainty, because in the worst-case scenario, they are covered. And they will be able to have access to working capital while they figure out what to do with their supply chain.

So the most important thing is to shift gears on traditional views of risk in Asia. The old way of thinking about things is no longer applicable to a modern market integrated into the global supply chain. They will have to be more professional in managing risks in the region. I think that's what's going to help CEOs navigate risks the best.

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