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Trade Financing Falls Victim to Economic Pressure

Trade Financing Falls Victim to Economic Pressure

A&S talks to Benjamin Schwall, Manager of Greater China for Jablotron, about trade financing challenges for manufacturers.

Czech alarm manufacturer Jablotron was founded in 1990 and expanded globally. The recent economic downturn has affected how it conducts business.

"Following the financial crisis and economic downturn, a lot of folks are facing problems — less so for Jablotron — with trade terms," said Benjamin Schwall, Manager of Greater China for Jablotron.

Banks are tightening credit, with fewer mortgages even to qualified buyers. This extends from formal channels to traders running day-to-day actions — the informal channel. "Previously, companies readily granted trade terms like payment in 30 days, cash on delivery or following a down payment," Schwall said.

"In the good old days, everyone had credit for everything," said Schwall. "You would buy from your suppliers who granted you 30, 60 to 90 days to pay, which in turn their suppliers granted to them and you did the same to your customers. This was a huge daisy chain of credit terms that was based on good will."

Tightened Credit
After the collapse of Lehmann Brothers in September 2008, suppliers were afraid to extend credit. "If one cuts back on you and you do so on your customers, everyone suddenly has a problem, especially so for companies that are not cash-rich," Schwall said.

Jablotron experienced this firsthand. "We had a supplier that we had been working with for several years," Schwall said. "Following the financial crisis, he started asking us for a down payment on all our orders. He stated that this was to pay for material costs and that he too needed to make down payments to his suppliers."

Other suppliers started asking for cash on delivery as well, instead of extending credit. "If you didn't agree to the terms, suddenly your suppliers were afraid of you; if you agreed, then you were afraid of them," Schwall said. Jablotron eventually agreed to the supplier's terms.

Financial realities are making traders and suppliers more sensitive. Schwall, who owns another company, sent a shipment to a customer with 14-day credit terms. After receiving the goods, the company declared bankruptcy two days later, giving him a nasty shock.

Background Checks
Further credit checks are impractical. "Opening letters of credit (LCs) for each and every order would be time-consuming and costly," Schwall said. "Unless the sum involves tens of thousands of dollars, no one is going to be willing to pay hundreds of dollars in bank fees to do so."

As manufacturers face component shortages and source from brokers, Jablotron became more careful after the financial crisis. "We've joined the Hong Kong Inventory Association," Schwall said. "You have to pay a fee, but you get access to a database of brokers and vendors dealing with various components. You can determine how long they have been in business and whether there have been any complaints filed against them."

He also noted that many Chinese SMBs seem to have less capital to work with than their Taiwanese counterparts. "That's just my impression," said Schwall. "These Chinese companies without sufficient funds are the ones who are really going to feel the squeeze. That's why I'm more worried about our Chinese suppliers."

International Trade
The economic turmoil means companies suffer more from currency fluctuations. "Exchange rates have gone bonkers," Schwall said. "Before, you might have to deal with a few percentage points either way."

He cited the Czech crown. "Two years ago, it was around 40 to the U.S. dollar; last year, it was 14 to the US dollar; now, it is 22 to 1," Schwall said. "With wild fluctuations of more than 20 percent, you either go out of business or double your profits. Who in electronics has 20-percent margins?"

Hedging currency rates is, therefore, necessary. "Previously, this might have been something that only large companies would do," noted Schwall. "Now, even small companies need to be aware of these problems and to do something about them."

Light at the End of the Tunnel?
Is the worst over? In Schwall's opinion, that appears to be the case. "Banks seem to be loosening up lines of credit. At Jablotron, we have been fortunate as we are less susceptible. We are less in need of securing lines of credit."

Credit is becoming more available. "Now, we're seeing an increase in the flow of credit," Schwall said. "Perhaps, this is because all of the folks that were in trouble are now out of business? Or, perhaps, the banks are just willing to lend more? I don't know for sure, but I imagine it stems from a combination of these two factors."

Manufacturers need to remember the recession's lessons. "Know your vendors and customers," Schwall said. "You definitely need to visit both, especially the vendors. Drop by even if it's just to have a cup of tea. You will get a good sense of how things are going."

The best solution to determining what to do is visiting factories. "There, you can smell whether they've been busy," Schwall said. "You can visit the warehouses, see what's going on with the inventory, see how many pairs of underwear are hanging outside the dormitory to dry after washing. All of this gives you an indication of how busy they are. We were, thus, able to determine that while not as busy as before, that business was still stable."

Businesspeople need to trust their intuition as well. "Take the time to do credit reports and then trust your nose," Schwall said. "If something doesn't smell right, then it probably isn't. In those cases, maybe you should consider relying on LCs."

The business landscape has changed irrevocably in light of the financial downturn. "The days of unlimited, easy credit are over," Schwall said. "It will take 10 years for collective amnesia to return to the markets."

The crisis also brought back eerie déjà vu for Schwall. "I still remember the savings and loan crisis in the U.S.," he said. "I can't help but feel that this is a repeat, albeit on a much bigger scale."

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