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How Going ‘Local-for-Local’ Helps to Hedge Against Trade Wars
Mustafa Kilic, CFO at Groupe SEB, Turkey sat down with TXF’s Katharine Morton in Istanbul and talked about how a strategy of maximising local inputs can help manage currency risk through natural hedges, and even help guard against the burgeoning trade wars.
TXF: How is Groupe SEB structured?
Mustafa Kilic (MK): Groupe SEB is a €6.5 billion-sized small domestic home appliances and kitchenware company that operates in 150 countries, employing 33,000 people worldwide. It’s headquartered in France, in Lyons. It recently took over another long standing company, WMF, in Germany and has brands such Tefal, Rowenta, Moulinex and Krups that you probably have in your house.
TXF: What about in treasury, how is that structured at group level and in Turkey?
MK: At group level it’s a pretty centralised treasury but the group is operating from Japan to Argentina, so it’s pretty wide-ranging. There are some independent/regional treasuries. Here we are pretty decentralised. Most of collections and payments and funding at certain levels are local, independent and decentralised. But there are areas we are trying to centralise. So I would say we’re a hybrid between centralised and decentralised. In western and central Europe, it’s pretty centralised. They might have some contact in each country, but usually collections, payments and funding are managed by group treasury.
Because Turkey is one of the largest markets in this region, we try to do what we call ‘local-for-local’. That means for 25% of our operations in Turkey we outsource production locally, so it’s not in our own facility. We also manage to import in local currency.
The company wanted to eliminate currency risk. We manage import operations in local currency so as not to have external exposures. But at group level, we are importing from our own facilities – say in China, France, Germany. And at group level, Turkish Lira (TRY) is not a functional currency for them, but group treasury manages currency and hedging without creating additional exposures locally, which is the beautiful part. We are making our own revenues here in local currency.
TXF: So you have a kind of natural hedge?
MK: Emerging market FX risk is not a calm area. The TRY has devalued around 27% since the beginning of January, maybe it’s been an extreme year with the elections etc, but there is always fluctuation.
Importing in local currency and paying in in local currency means we can focus on our own business without having to manage that FX risk on a daily basis. We are also trying to avoid creating exposures in other currencies – and the group has a facility and platform to balance these issues for all countries.
TXF: What kind of trade finance instruments, if any, do you use?
MK: The group doesn’t constantly use these instruments. Only really in times where they’re needed, in specific instances. But what we do have is we offer supplier finance solutions which allows our suppliers to get payments on early terms if they want to with good terms and conditions. As a group we negotiate worldwide with a framework for suppliers to use the trade and supplier finance facility without using their own credit lines.
TXF: Is that SCF platform run by Groupe SEB or by banks?
MK: There are two banks in our area – Citi and BNP Paribas – which are our group banks offering these solutions. As long as our suppliers need these kind of solutions, they can use it.
TXF: Do you have much uptake, or any problems onboarding smaller suppliers on these?
MK: There’s no size threshold, so it depends on their needs. In terms of payment here in this country, it can be different to western European countries. Payments tend to be not less than 90 days, and 60-90 days can be considered long term for some SMEs if they need financing. Sometimes suppliers are discounting invoices in the market through factoring companies and this reduces their operational profits.
To build up a more sustainable perspective Groupe SEB has these programmes at a worldwide level as we believe sustainability is linked with the sustainability of suppliers and customers. So we are helping to contribute to their sustainability by reducing their terms and allowing them to benefit for certain periods when they need it.
TXF: Turkey is very advanced globally in terms of e-invoicing and payments at a corporate level. Has that had a major impact on your SCF programmes?
MK: Actually, that’s one of the beautiful parts. It was painful moving to e-invoicing and, e-delivery and e-ledgers at the beginning but now, more than five years on, the country pretty much manages and settles on these platforms. Not all companies are on these e-platforms, but many are. It helps because all invoicing is electronically on one platform, so the data is up and ready and it really speeds things up and improves efficiency.
TXF: I remember when it was all cheques not that long ago. Are there still cheques in the system?
MK: Yes, there still are, and back when I was at Indesit we pioneered cheque collections and collateralisation of the security to replace the cheques on one platform more than 10 years ago. Now this product is one of the industry practices. We use the same solution implemented with a few banks nationwide here at Groupe SEB.
Commercial credit cards are still heavily used, particularly by medium sized companies who prefer to use credit cards, even though it may be more expensive because they can use instalments allowing them to manage their cashflow.
Over the past 10 years the usage of cheques has fallen dramatically and it’s been replaced by nice products such as direct collections, on credit cards, more electronic ways and more secure, easier to track down and to manage collections more effectively and more cheaply than cheques.
Collateralisation in the market was a hot topic, particularly for companies our size, as companies had difficulty to put security or collateralisation behind the receivable as there was open exposure. At that time, 10 years ago, credit insurers didn’t really cover the largest part of the credit risk and the term was long and companies suffered.
TXF: Have credit insurance companies stepped up?
MK: Yes, since the global financial crisis in 2008, credit insurance companies have learned the market better and understand Turkish credit risk better. I lived in Switzerland for seven years, came back and there have been big changes. Coface [which Groupe SEB uses at a worldwide level], Euler Hermes and Atradius are the biggest.
It’s difficult for credit insurers to manage credit risk here because the Turkish market has some peculiarities. Medium and small sized companies are not always in the correct shape for credit insurers to be able to work with and clearly understand. Financial communication has been a barrier and the emerging market status was an issue.
However, over time, the county has improved with its new Commercial Code [established in 2012, replacing the 1956 Code and regulates companies in Turkey], financial stability and the government over the past three to four years has improved and updated rules and regulations so they are more aligned with international risk management practice and companies and credit insurers have benefited from that. It is more transparent, there are standards to read the financials and it’s closer to IFRS [international financial reporting standards].
The Turkish government has put in helpful rules to oblige certain companies to report and announce their financials. It helps us also to ‘read’ our customers and suppliers in a better way too, particularly as we are sometimes financing these companies.
TXF: I’m asking this of a lot of companies but how are you viewing the escalation of so-called Trade Wars and are you likely to be able to escape being hit by them?
MK: It’s a difficult issue. Groupe SEB has producers all around the world and we’ve managed to diversify the business and develop production in the US, China, Europe, in 29 different production places. This allows the company to balance some of these issues. But, eventually, we are using things like steel, aluminium, not as much as, say, the automobile industry, but there may be an impact of tariffs. It’s not affecting us right now, but it might. When the ‘big ships’ are moving, there will be ripples.
That’s why we are cautious and are trying to balance these issues regionally. But an increase in nationalism is not just an issue of one country. Eventually big MNCs and operations will have to be careful and diversification is one of the key elements where it’s possible. Eventually there will be some reaction from corporates.
I am surprised by the tension at this level. But so-called ‘safeguard taxes’ (tariffs) are becoming one of those instruments that governments easily reach to. Is it sustainable? It might not be forever, but eventually there will be a balance between nationalism and globalisation.
If corporates’ margins are limited – and in Turkey and elsewhere we are measuring the cents – everything counts. The government understands that a few percent can change the game dramatically and are playing their cards accordingly.
As a corporate we are not helpless, though, and good solutions like our ‘local-for-local’ producing in this market without our own facility can help us benefit from these challenges and new conditions we’re faced with. Eventually, if you are on the right track there will be a sustainable solution.
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