Expansion into new markets remains a key way for organisations of all sizes and industries to diversify and grow their business. Exploring this concept, Standard Chartered has released the second edition of its Borderless Business survey. Following the first edition of the survey some six months ago, the second instalment surveyed over 1,000 CFOs and senior treasury professionals from Europe and Americas to understand their companies’ international expansion ambitions.
"Businesses are beginning to pay greater attention to overseas growth and investing for the future," noted Torry Berntsen, CEO, Europe and Americas at Standard Chartered.
Business confidence extending across borders
Throughout the COVID-19 pandemic, multinational corporations (MNCs) continued to pursue international growth, but uncertainty was high. Today, the Standard Chartered report finds that companies are starting to look ahead - albeit tentatively - with greater confidence, to a post-COVID-19 world. Overall, for example, 42% of companies in the sample saw their best growth opportunities outside their home region (compared with 37% in June 2020). This is particularly apparent amongst US respondents, where this figure has risen from 35% to 49%.
"In today's global economy, overseas expansion is a necessity and US companies are looking to the rest of 2021 with increased confidence," commented Jeremy Amias, vice chair at Standard Chartered Americas.
The main exception was companies headquartered in Germany, where a higher proportion of respondents saw their home market as their primary growth focus. This may reflect the combination of Germany’s sophisticated sourcing and consumer markets, and large manufacturing base, compared with some other European markets.
European companies continue see the potential in their home region, but Europe has also become a more important growth target for US companies. 52% now identify as Europe as their most important region for outbound investment. In contrast, outward investment into North America has softened, with 8% fewer companies identifying North America as their growth target, falling from 32% to 21%.
Although business confidence is starting to increase, senior leaders are learning lessons from the pandemic in the way that they do business, such as diversifying risk, whether across supply chains, customer segments or geographies. For example, Asia continues to be a major growth region; we are starting to see US and European companies increasing their focus on Africa and Middle East. Looking across participating companies, 5% noted that Africa now represents their number one growth opportunity, while 20% placed Africa in their top three opportunities. Middle East is now a top three opportunity for 36% of companies, an increase of 4% in only 6 months.
A shift from financial to business priorities
During the early months of the pandemic, treasurers and CFOs of MNCs were tasked with dealing with significant volatility, across revenues, collections, financial risk exposures and supply chains. Today, the Standard Chartered report finds that the immediate financial stresses of the pandemic appear to be easing. While liquidity and FX risk management remain very high priorities, treasurers and CFOs have a little more scope to look ahead.
Although only six months have passed since the first edition of the Borderless Business study, the bank's research shows that there are already some incremental shifts in emphasis, albeit subtle at this stage, in the way that treasurers and CFOs approach their international growth strategies. Understanding regional regulation, and managing and adapting supply chains, remain key priorities, and have grown in importance over the past six months. Slightly fewer companies noted that sourcing liquidity or managing FX was their number one concern (these were both the top issue for 14% of treasurers six months ago, now both stand at 11%). Conversely, more companies are focused on adapting their processes and systems, increasing from 6% to 9%.
Within these figures, however, there are some significant variations across geographies. Understanding regulations in international markets remains the number one challenge for 35% of respondents. This has become an even more pertinent issue amongst US companies. Over one-third (36%) raised regulation as their number one challenge in mid-2020, but this had increased to 41% by December 2020. This is more than double the 19% of respondents who prioritised building and adapting supply chains, the second most common challenge. There are also differences across respondents according to their role: a higher proportion of CFOs (43%) are concerned by regulation than treasurers (33%), potentially reflecting the broader reach of their responsibilities.
Looking at liquidity
In general, liquidity management priorities remain broadly the same as in June 2020, including the focus on financial and supply chain resilience, and leveraging digital capabilities more fully.
The three liquidity challenges that were ranked number one in mid-2020 remain as such today: lower than anticipated revenues; delayed receivables collection, and managing the impact of supply chain failures or interruptions. However, delayed receivables collection has increased by 5% since June 2020 and has now inched ahead as the single most frequently noted challenge potentially hinting at working capital pressures and higher credit risk.
When looking from the top priority to the top three priorities, the report from Standard Chartered finds greater nuance. These suggest that MNCs are starting – slowly - to extend their focus towards longer term concerns, particularly around working capital optimisation.
In addition to the growing importance of collection of delayed receivables, which is crucial for working capital management and cash flow forecasting, a notable variation from the first edition is the emphasis on trapped cash. Half of the respondents are focused on unlocking trapped cash, a 5% increase on edition 1, and another reflection of the importance of working capital optimisation. This applies particularly to UK firms. Over half (54%) placed trapped cash in their top three liquidity challenges, compared with 38% in the first edition. Some 14% of German companies marked this issue as their number 1 liquidity challenge, compared with 9% in mid- 2020.
Diversifying suppliers was a key priority throughout much of 2020, as companies sought to increase resilience and flexibility in their supply chains. For many companies, this challenge has become less immediate as international supply chains become more predictable. In the first edition of Standard Chartered's Borderless Business survey, for example, this was the number one priority for 32% of respondents, but this has since reduced to 26%. Likewise, 62% previously noted this as a top three priority, compared with 57% today. The exception to this incremental shift is French companies, for whom diversifying suppliers outside their home region remains the single biggest supply chain challenge, emphasised by 31% compared with 26% overall.
"The emphasis is shifting from shoring up supply chains and liquidity to investing in other areas, such as essential digital technologies, and delivering sustainable longer-term outcomes," noted Karin Flinspach, managing director and regional head, Transaction Banking Europe at Standard Chartered.
The value of digitisation became abundantly clear when home-working protocols were adopted in 2020. Consequently, increasing the use of digital tools for enhanced supply chain efficiency has become a focus for two-thirds (66%) of participating MNCs. US firms in particular have increased their focus on supply chain digitisation. This issue is now the single biggest priority for 31% of US companies, whereas this was secondary to diversifying suppliers in mid-2020. This same trend is apparent among German and UK companies. However, UK companies are now also prioritising re-negotiation of supplier contracts (an issue that was more of a phenomenon relating to German firms in mid-2020). One in every five (20%) of UK firms now rate this as their single biggest supply chain challenge, compared with 7% six months earlier, becoming a top three issue for three in five companies.
Spotlight on ESG
The focus on digitisation and longer-term supplier relationships is an illustration of the small, but important shift as companies anticipate, and prepare for, a post-COVID world. Another figure that reflects this forward-looking perspective is the uptick, albeit small, in the priority that MNCs give to environmental, social and governance (ESG) issues in relation to trade and supply chains.
Just under one-quarter (23%) of CFOs and treasurers now place ESG in their top three priorities as they support their firms’ international expansion plans, an increase of 5% since mid-2020. This particularly applies to industries such as services consulting, consumer services, healthcare, consumer packaged goods and transportation, which are most likely to prioritise ESG. In Germany, this shift is even more apparent, with an increase from 14% to 29% in only six months.
ESG is a key element of many companies’ overall business strategy, but it has not necessarily been part of CFOs’ and treasurers’ specific mandate as they seek to support the company’s international growth strategy. However, this is likely to change as investors, financiers and the wider stakeholder community prioritise ESG in their decision-making.
Ideas and Action, a London-based client engagement consultancy firm, was commissioned to conduct the research from 23 November to 11 December 2020. Some 1,008 CFOs and senior treasury professionals of companies with a turnover exceeding US$500m located in the US, UK, Germany and France were surveyed. Each country was equally represented with 25% of respondents. Half (50%) of respondents represented companies with a turnover of US$500m-US$1bn; the remaining 50% represented companies with a turnover exceeding US$1bn. The technology sector comprised 16% of responses. Thereafter, other industry sectors representation varied between 6-8%. Financial services were excluded from the survey.
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