Transcript
Speaker: Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
Speaker: Make sure you're subscribed to stay up to date with new episodes.
Speaker: Thanks for listening, and now onto today's show.
Speaker: Welcome to TMI's TreasuryCast and HSBC's Cyboss Spotlight.
Speaker: I'm Eleanor Hill, Editor of TMI, and I'm delighted to be working with HSBC to bring you an in-depth look at the events from this year's Cyboss.
Speaker: Throughout this series, we will explore the critical topics on the Cyboss 2023 agenda that will shape our industry in the next decade, including sustainability, digital acceleration, and technological innovation.
Speaker: We'll examine the opportunities and the challenges in the areas of payments, securities, cash management and trade.
Speaker: For this episode coming direct from the conference here at Cybos in Toronto, I'm joined by Vivek Ramachandran, who is General Manager, Head of Global Trade and Receivables Finance at HSBC.
Speaker: I'm going to be discussing the changing reality facing international trade and supply chains.
Speaker: So Vivek, welcome.
Speaker: How are you?
Speaker: How have you found Cybos so far?
Speaker: It's been amazing, Cyboss.
Speaker: I always get tons of energy coming to Cyboss.
Speaker: And it does feel like Cyboss is back in full swing.
Speaker: So we've got banks from all over the world and it's been back-to-back meetings as you would expect.
Speaker: Yeah.
Speaker: But very, very exciting to be here.
Speaker: good stuff a proper buzz going on for sure so let's kick off having a little bit of maybe an overview of what's going on in global trade and trade finance at the moment what's the outlook what are the trends what's causing the change that's going on
Speaker: It feels like we've come through a few years of a lot of change, but the reality is we've come out of a few years of a lot of chaos and a lot of change is yet to come.
Speaker: So if we look out for the next three to five years, three things are going to change quite fundamentally in the world of global trade.
Speaker: The first is what companies buy and sell.
Speaker: Today, overwhelming majority, almost 80% of global trade is mercantile trade.
Speaker: It's buying and selling goods.
Speaker: As we look out for the next 5-10 years, almost half of all new trade will be trading services.
Speaker: And that's a huge shift.
Speaker: because it not just means new counterparties from who you're selling to, but it also means new services that you're building and new business opportunities.
Speaker: The second is how companies are buying and selling.
Speaker: So trade relationships have been built over decades based on trust.
Speaker: You meet people, you get to know them, it takes years to build deep relationships.
Speaker: platforms and data validation are allowing companies to trade with anonymous counterparties.
Speaker: So it expands the markets you interact with, a lot more trade happening over exchanges, over platforms.
Speaker: B2B e-commerce is five times B2C e-commerce, and that's going to grow exponentially.
Speaker: And the third is where companies are buying and selling from.
Speaker: Whether we like it or not, geopolitics is fragmenting supply chains.
Speaker: And I think one of the companies I spoke to in the last month described global trade becoming more local.
Speaker: Yeah.
Speaker: And I think we've seen a move towards that.
Speaker: So I think global trade is a tipping point.
Speaker: And the next three to five years will look very different from today.
Speaker: Financing.
Speaker: Financing.
Speaker: will follow suit.
Speaker: I describe trade finance as almost the last analog frontier in banking.
Speaker: That has to change.
Speaker: And I hope that will change in our watch because that will be an exciting journey to be part of.
Speaker: It would be indeed.
Speaker: And yeah, there's a lot of potential for change and efficiency and improvements there.
Speaker: But Vivek, it would be good to understand a little bit more about the
Speaker: the impact of all of this change, particularly the trading conditions on the participants and how it's shaping the way that they actually do business.
Speaker: So last week HSBC held a big client event in ASEAN and we had hundreds of companies from all over the world fly down to learn about opportunities in the subcontinent.
Speaker: And as part of that we polled the participants on what percentage of their buyers and sellers they expect to stay the same in the next decade.
Speaker: And I was actually genuinely surprised that the overwhelming majority of the companies expected the overwhelming majority of their counterparties to change in the next decade.
Speaker: We're talking about 75% new buyers and sellers.
Speaker: And I'm not sure that sample is going to be very different from what the world's going to look like.
Speaker: So companies need to prepare to deal with a completely new set of buyers and revise their supply chains quite fundamentally.
Speaker: Supply chains have evolved over many, many decades with one objective, cost minimization.
Speaker: And you could argue we've done that incredibly effectively.
Speaker: But that objective has been met at the expense of transparency.
Speaker: It's been met at the expense of resilience.
Speaker: So I think companies need to prepare for a very different world, both in terms of their business models, but who is going to help them fulfill their business models.
Speaker: Yeah, yeah.
Speaker: Interesting stuff.
Speaker: And one of the other new dynamics, or it's gained a lot of momentum in the last few years, is the...
Speaker: sustainability, ESG piece, particularly within the supply chain.
Speaker: So tell us a little bit about that, what you're seeing happening, how does it affect the work of our listeners, our corporate treasurers, whether directly or indirectly?
Speaker: Supply chain transparency is nowhere near where it needs to be.
Speaker: I think I wouldn't be unfair to say the average company does not know who is in their supply chain.
Speaker: You might know the manufacturer you contract with, of course you do.
Speaker: You might nominate their suppliers, but beyond that, getting down to the raw materials, the average company has no idea.
Speaker: So you've got regulations now coming into effect.
Speaker: So Germany a few years ago passed something called the Supply Chain Due Diligence Act that requires every company with over 3,000 employees in Germany to attest to the absence of human trafficking in their supply chain.
Speaker: US Customs and Border Protection requires import of any garments to prove the absence of cotton from Xinjiang.
Speaker: So supply chain transparency is the first prerequisite to changing the sustainability credentials.
Speaker: Because if we are going to materially move the needle on sustainability, you're going to have to influence what supply chains do.
Speaker: So I see an explosion of technology and data platforms solving these issues.
Speaker: If you can't measure it, you can't manage it.
Speaker: And companies either do it on their terms or they're going to be following instructions set by someone else.
Speaker: And the message for banks is to be there with their clients to help them through these transitions.
Speaker: Because not every company is ready to deal with it.
Speaker: And not every supply chain has the information to deal with it.
Speaker: But banks are quite uniquely placed.
Speaker: So at HSBC, being on both sides of a transaction gives us a huge advantage to help the buyer and the seller.
Speaker: Because that helps us support suppliers pre-shipment and help their suppliers too.
Speaker: So I think this is going to be...
Speaker: It's not a short-term theme and it needs to be viewed as not distinct from the co-business.
Speaker: It needs to be embedded in everything that our clients do and what we do.
Speaker: Yeah, that makes complete sense.
Speaker: Okay, so you mentioned there that not every company is ready to be dealing with ESG sustainability and
Speaker: Treasurers aren't necessarily equipped to deal with all of the kind of change that we've spoken about going on within trade, trade finance, supply chains.
Speaker: What other challenges do you see from the Treasury perspective and opportunities emerging from everything that's been happening in recent times?
Speaker: The practical issue right now is cost of funds have gone up with interest rates going up.
Speaker: Demand is weak in most markets.
Speaker: So China demand hasn't bounced back.
Speaker: The US economy and Western economies have been slow.
Speaker: So demand is weak.
Speaker: And there's been a huge amount of inventory that's been built up over the last few years.
Speaker: So companies are destocking and the order cycles have become a lot tighter.
Speaker: So the economic realities that our clients are facing are quite harsh.
Speaker: In that environment, not surprisingly, supply chain transparency or sustainability is being led by the market leaders as opposed to everyone through the supply chain.
Speaker: So our advice is how do you use sustainability as an incentive to negotiate working capital changes
Speaker: or to incentivize your suppliers to change their behaviors.
Speaker: And if you can link the two, you're a lot more likely to succeed and prioritize it.
Speaker: Yeah, understood.
Speaker: Vivek, one of the trends that would help treasurers to manage all of this change is the digitalization piece that we said that we'd love to see all of this happening.
Speaker: What do you think are the fundamentals that need to be in place for this to make the most positive impact?
Speaker: So it does feel like two steps forward, a step back when we talk about trade digitalization.
Speaker: I think
Speaker: A few years ago, if we were sitting here, we'd be pinning our hopes on blockchain consortium solving the digitalization challenge.
Speaker: And the reality is they haven't.
Speaker: And I think we as a bank invested a lot of effort to drive the industry forward.
Speaker: And what we found is the absence of a first mover advantage with digitalization and the absence of network economies have been a severe impediment.
Speaker: But that said...
Speaker: I'm still sitting here quite optimistic when I look forward and I'm optimistic for a few different reasons.
Speaker: We've got a universal electronic bill of lading likely to come out and with freight forwarders driving adoption.
Speaker: The UK recently passed the Electronic Trade Documentation Act and adoption in common law countries will make a huge, huge step forward.
Speaker: We see a lot more digital data decisioning tools.
Speaker: And what you need is not necessarily one distributed ledger, but what you need multiple ledgers that are interoperable.
Speaker: And I think we've all evolved into building our API gateways and building API connectivity.
Speaker: So hopefully it's not one reliable system, but multiple reliable systems.
Speaker: I think to misquote Hemingway, how does the world change slowly and then suddenly?
Speaker: So I feel that's the point we're at.
Speaker: Yes, okay.
Speaker: Well, fingers crossed.
Speaker: We'll see how quickly it goes.
Speaker: I'm an undying optimist in believing the world will tackle these problems because we're seeing that in markets like India.
Speaker: Yeah.
Speaker: The Indian digital stack is a clear example of an economy that has lagged on digital adoption leapfrogging.
Speaker: Yeah.
Speaker: So now you have digital data validation on the company identification.
Speaker: You have transaction validation and counterparty authentication.
Speaker: that's a clear path to making the world more efficient.
Speaker: So I think digitalization or digitization will happen, but just not the way we envisage it.
Speaker: Yes.
Speaker: And it won't necessarily happen by a coordinated design either.
Speaker: I think we will have a chaotic path to getting there.
Speaker: Oh, it's always a bit of fun, isn't it?
Speaker: Indeed.
Speaker: Good stuff.
Speaker: So just to wrap up then, Vivek, tell us a little bit about how banks like HSBC can assist client progress across the trade ecosystem, supply chain ecosystem,
Speaker: and sort of shifting towards this new reality.
Speaker: I mean, I dug up an image of the very first minutes from HSBC's very first board meeting in 1864.
Speaker: Wow.
Speaker: And it's a beautifully calligraphed script which says, HSBC was set up to facilitate trade and connect east and west.
Speaker: And I think that purpose stays very true for us.
Speaker: So we're very client-led and all of these changes happening in the ecosystem, our remit is to make sure that we're close to them and we support our clients through those changes.
Speaker: But in practice, I think there's also an obligation on us to lead some of these changes.
Speaker: So specifically, we've been investing in new trade platform that helps us digitize and automate all documentary trade.
Speaker: So over the next 12 months, we should be able to issue a letter of credit with no human interaction from start to finish.
Speaker: And that is a game changer.
Speaker: because then all of a sudden you can disassociate revenues and costs and we can actually start help driving adoption of that instrument.
Speaker: We're also investing a lot of intellectual capital to build structured trade solutions.
Speaker: As companies move into platforms, whether it's contract monetization,
Speaker: inventory cycles changing, helping them monetize the inventories or finance the inventory cycles, lease financing.
Speaker: So there are a lot of new structures coming.
Speaker: And finally, we are expanding the markets we serve by embedding financing.
Speaker: So recently we announced an increased equity holding in TradeShift, which is about embedding financing and procurement platforms.
Speaker: So it is an exciting time to be in the trade finance business.
Speaker: And I couldn't think of a better place to be than in HSBC.
Speaker: Well, there we go.
Speaker: That says it all, I think.
Speaker: Vivek, thank you so much for this great download session on all things trade and supply chain finance and the Hemingway quote, of course, that really topped it off.
Speaker: So it's much appreciated.
Speaker: And I know our audience will have joined it as well.
Speaker: My pleasure.
Speaker: Thank you.
Speaker: Thank you for joining us today.
Speaker: This has been HSBC's Cyboss Spotlight, a podcast mini-series produced especially by TMI for HSBC Global Viewpoint.
Speaker: To discover other episodes in this series, search for HSBC Global Viewpoint or TMI's Treasurycast on Apple Podcasts and Spotify.
Speaker: And to find out more about HSBC's presence at Cyboss, visit gbm.hsbc.com forward slash Cyboss.
Speaker: Thank you for joining us at HSBC Global Viewpoint.
Speaker: We hope you enjoyed the discussion.
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