Clarissa Dann Welcome to Trade Finance TV during lockdown. I’m your presenter, Clarissa Dann. With me in the studio today, we’ve got Daniel Schmand, Global Head of Trade Finance and Lending from Deutsche Bank, and John Ahearn, Group Vice Chair and CEO Americas from Falcon Group. We’re here to talk about, just in time to just in case, lots of dislocated supply chains, and new problems with new solutions.
Welcome John and. Daniel.
Daniel Schmand Thank you.
John Ahearn Thank you.
Clarissa Dann A year into COVID-19, all those supply chains aren’t quite what they used to be, are they? So what have you been seeing?
John Ahearn Your opening comment about just in time to just in case – that’s clearly what we’re seeing in the market. There was just an announcement a couple of days ago about two major Japanese automakers that are going to reduce their sales by 250.000 cars, because they can’t get a computer chip. And it’s not just COVID-19, it’s also Brexit, trade wars, etc. Over the last 10-15 years, many companies were really, really streamlining their supply chain, and what’s become clear today is that you’re going to have to carry more inventory, your supply chains are going to have to be closer in many places to your production, and we’re just seeing a whole new rethink.
Clarissa Dann What do you think, Daniel?
Daniel Schmand Liquidity is more critical than ever, and the near-shoring will have an effect on the physical supply chain and in particularly driven also by Germany. We’ve seen the effect of the supply chain law, which has just been introduced, which focuses heavily on the ESG element. So you also need to rethink how compliant your supply chain is.
The easiest one is the E out of ESG. So I think the emmission is pretty clear. There is a tool kit, tracking, there is independent parties who can help you. It gets more complicated when you come to the S, which, driven by COVID-19, has become more and more relevant. So do we have sufficient hospitals? What do you do with emerging markets is very important. And the geopolitical aspect in particular really put stress on the G from a governance perspective, so human rights, child labor work and all of the those things.
And I think that one is, if you’re a supply chain manager in a company, you really need to rethink where you’ve sourced, how you’ve sourced. And now for us, how do we make sure what we finance is in adherence to a given standard? Or if a company has imposed themselves a taxonomy on how they want to deal with the ESG elements?
Clarissa Dann Let’s take a closer look at this whole area of inventory – it comes to different places, it’s causing quite a lot of problems in terms of getting hold of it. Could this be done differently? Is it being done differently, John?
John Ahearn Inventory is the asset that everybody needs but nobody wants to own it. And a lot of our clients are all looking at, how do I get this stuff off balance sheet? How do I make it much, much more efficient from a capital point of view? And then when you start getting into all the accounting rules, regulations, that access becomes very, very tricky, because I know we have to make sure that we’re taking real risk, and clients need to make sure that at the end of the day, the program we put together is sustainable from an accounting point of view. It is getting critical. We have one major car manufacturer, who has to maintain 10 years of spare parts by law when they sell a car. Are they the most appropriate person to carry that inventory or should it sit on someone else’s balance sheet? This seems to be the common thread that we’re seeing around the world. Even in the pharmaceutical industry, we’re being asked, can you take inventory of this? Can you take inventory of that?
John Ahearn Coming out of the pandemic with all these other impacts to the supply chain, what we’re going to see is that companies are going to have to carry 2x, 3x what their historical inventory levels have been. The question is, ‘how do you make sure that you don’t end up downgrading your company, impacting your working capital?’ I mean, there’s a whole bunch of other considerations that you need to operate in a new world, post-COVID-19.
Clarissa Dann I worry about balance sheet management and especially with Carillion having such an upset over ratings agencies. So where are we on all this, Daniel? Got some thoughts?
Daniel Schmand Yes, it needs to sit on someone’s balance sheet. The question now is how you structure it. And that is where also people like Falcon Capital market instruments come in to play. A second accelerating trend is what we call asset-as-a-service or pay-as-you-go, which is also a change change in generations; we were used to buy a car, but the next generation might only want to ride a car when they need it. Maybe the car needs to pay for itself. So the entire ecosystem is changing.
You just have to think about smart cities, the massive investments which are needed and nobody wants to carry the balance sheet, and then, in the equipment industry, there is another story, so hey, ‘why has every car manufacturer, his own painting, street and equipment, why can’t they use it as a utility?’ And that is where financing the asset, per se, is critically important. What COVID-19 has really taught us, is you have at times different usage of an equipment or an asset, and actually only if an asset is being used or is producing. It creates cash flow. So you want to tie the two together.
Clarissa Dann Are we going to be seeing more of this in the next five to 10 years? Is this just going to go on a roll – rent-a-crane sort of thing?
John Ahearn I think this is really a whole new world that we’re approaching where you’re not going to have the traditional I-own-everything, and maybe I use it 50-60% of the time. I think someone else is going to own everything. And when you bring that back to inventory, when you bring it back to the next five years, it’s a huge challenge. And a lot of it, again, has to do with the accounting rules and regulations. And as you look at companies moving forward, they really want to make sure that all the assets on their balance sheet are really producing.
And when you look at things like inventory and finished goods that aren’t sold, etc., those really are not producing assets. So you’re really going to see a major shift in the whole mindset. And I think a lot of it also has to do with the new generation. The current lease structures are all going to have to be rethought. At Falcon Group, we’re already looking at a lot of not only the inventory business, but asset-as-a-service. How do you structure it correctly? How do you make sure that you’ve complied with IFRS? You’re going to need to put your own balance sheet at play, because if you don’t take risk, the client doesn’t get it off the balance sheet. And that’s one of the things that we’re really concentrating on.
Daniel Schmand Traditional banks like Deutche Bank and specialized companies like Falcon Group will come together closely, because you need that collaboration, but it doesn’t end there. We will also see companies and insurance companies jointly set up a company, put the asset in, it goes to the capital markets, and that will not stop, given a look at the interest rate, the quantitative easing. There is so much ample cash in the system which needs to be invested. But if you want to package something, you need highly professional intermediaries like Falcon who can help out. So I think from a banking and from an industry perspective, we’re just at the start of something big and very, very different.
John Ahearn Very big and very different. Thanks, John, thanks, Daniel.
John Ahearn Clarissa, thank you.
Daniel Schmand Thank you so much.
Clarissa Dann I’d like to thank Daniel and John for coming into the studio today and, of course, all of you for watching. To catch up on further episodes of Trade Finance TV, do visit TRADEFINANCETV.NET.