The key global crises of the past two years – COVID-19, the war in Ukraine and the pandemic-related lockdowns in China – have highlighted the fragility of the world’s supply chain model, not least in terms of logistics and financing.
From the production of electric vehicles in Europe to the supply of medical masks in Africa to the manufacture of semiconductors that are at the heart of innumerable products, global commerce has borne the brunt.1 And the fallout has left few unscathed, from the largest corporates to countless small- and medium-sized enterprises (SMEs), and ultimately consumers. What is needed is to diversify global supply chains and to boost access to funding for SMEs – and this requires the right technology and right partnerships.
Disruptions to the existing supply chain model
On the banking side, one interesting consequence seen by Motasim Hasan Iqbal, Regional Head of Transaction Banking Sales, Africa and Middle East, Standard Chartered, has been a shift by corporate clients from focusing solely on their own financing needs to those of their vendors.
“Now corporate clients are saying: “How can you support my vendors to get immediate financing?”” he said, “Our customers’ clients are asking for extended payment terms. And in return they come to us for monetisation of those receivables from a liquidity and a risk management perspective.”
More broadly, the crises have undermined a supply chain model that for decades was based on economies of scale, lowest-cost and just-in-time inventory management, said Nicolas Langlois, Managing Director, Global Head of Trade Distribution, Transaction Banking, Standard Chartered.
“That model created heavy concentration and hidden interdependencies,” he said. “[For example], about 25% of European car manufacturers source their wiring harnesses from Ukraine – which is the first element you put in a car, and that brings all the cables together.”
The war has forced some European automakers to slow or even temporarily cease production.2 This hidden interdependency, said Langlois, explains why companies worldwide are rethinking their supply chains to prioritise flexibility.
Diversification and the impact for clients
In discussions with our corporate clients, it’s evident that the need to diversify supply chains has affected how firms think about their ecosystem in two other noteworthy ways, he added.
The first relates to near-shoring and on-shoring. As not all components lend themselves to this solution – for instance, manufacturing semiconductors is tech-intensive – many companies are instead turning to several suppliers at once. Second, firms are moving away from just-in-time to a “just-in-case” model. While this increases costs like warehousing and working capital, it boosts resilience and ensures that customer needs are met.
Take the example of a Dubai-based conglomerate. At the start of the pandemic, its just-in-time model worked well and the firm adjusted orders rapidly and reduced pressure on working capital. However, as the pandemic progressed, factories shut down and shipments were delayed. The company was able to resolve some issues by planning more in advance and anticipating customers’ needs, and ordering and storing goods.
However, it ran into logistics challenges with freight forwarders and carriers that it had dealt with for years, prompting the company to seek out new yet trustworthy providers, and sometimes paying rates five times higher than before. This forced the company to seek out the best daily and weekly quotes from freight companies.
This wholesale revamping of the supply chain networks has played out across the globe. In Africa, local production dried up as factories could not source raw materials and had to import finished goods. In the pandemic’s third year, a further shift is underway: companies are shunning imports and looking again to manufacture locally or source from the region.
Collaborating to close the SME funding gap
As firms in Africa rejig their supply chain networks, companies elsewhere are also rethinking the outsourcing of production and seeking to diversify the sourcing of certain components – including hard-to-manufacture products like semiconductors.
These trends point to a greater need to fill the supply chain financing gap to support these new networks, said Langlois. This gap, of course, is not a new challenge, particularly for SMEs, many of which struggled during the pandemic. Now, as before, most SMEs cannot access such financing, and the minority that do must pay far higher rates than large firms. Resolving this issue is crucial, said Langlois, not least because SMEs account for 70% of total employment globally.3
“SMEs are also the ones that are getting the largest level of rejection in financing – and that’s a large part of the US$1.7 trillion trade finance gap,” said Langlois.4
Helping SMEs – the most vulnerable and sensitive to this crisis, Langlois said – will help to build resilience. It would also remedy another important aspect: the social gap, or the “S” in ESG. SMEs’ lack of access to supply chain financing has a major social impact; being able to ease access across the board would generate an enormous global dividend.
Central to closing the gap is collaboration with other parties, particularly multilaterals that focus on the SME sector in developing economies. Afreximbank, for instance, is launching supply chain finance platforms in Nigeria and Kenya. Through them, the bank identifies anchor buyers – larger corporates with a string of SME suppliers – so that the SMEs can leverage the lower rates at which the anchor buyer is able to attract financing.
The Asian Development Bank (ADB) is another multilateral focused on the SME supply chain financing gap and it works with banks like Standard Chartered to provide guarantees and loans. In 2021, the ADB aided around 7,000 transactions supporting US$8bn in trade. In addition, the ADB works with governments to introduce supportive legislation. It also helps provide local banks in Asia the capacity they need to offer such solutions, and assists larger banks like Standard Chartered bring deep-tier financing to suppliers further down the chain.
Then there is the sustainability element, added Iqbal, which needs to be considered as companies restructure their supply chains. "Corporates have to take into consideration the impact of their decisions on the planet,” he said. “And then it’s a natural adjustment for financial institutions as well to reward the right behaviour, rethink how they select the clients they want to deal with and how they select the suppliers they are prepared to finance.”
Simple, flexible, accessible
While the array of crises has undoubtedly upended the global supply chain network, it has also revealed useful lessons in three areas: simplicity, flexibility and access.
Simplicity reflects the evolving relationship between companies and banks, with the former seeking greater efficiencies and a wider range of liquidity options. The result is a more collaborative approach, where Standard Chartered can bring in the client’s other banks and expand the opportunity to invest in this asset class to participants that like the risk but lack the infrastructure to do so alone.
“We play the role of the orchestrator,” said Langlois. “That collaboration with other banks and that extension of liquidity into the supply chain is a trend that we have seen and that we continue to play a big role in.”
The second is flexibility. As corporates reshape how they interact with suppliers, “we need to have systems and capabilities that allow us to reach out to those new players in the supply chain,” Langlois said. This requires partnerships and technology, not least with fintechs, which develop solutions that plug into banks’ existing systems and offer the nimbleness required to meet clients’ needs.
The third area is improved access and financial inclusion. Here, banks need to be able to help large firms make their supply chains resilient, and target deep-tier financing. This can sometimes prove challenging for banks from a credit risk profile perspective. Yet collaborating with multilaterals to drive this process could take such solutions to the next level – moving away, for instance, from a name-by-name assessment to a portfolio structure that could result in securitisation and bring in capital markets investors.
Should these collaborative efforts succeed, Langlois said, such partnerships could “really build that resilience of the supply chain not just to the first level, but to the full ecosystem.”
This article is based on themes discussed during a panel at Standard Chartered’s recent Global Credit Conference: Riding the wave. View the recording.
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