Despite great strain caused by the recent series of disruptive events, global trade remains a force to be reckoned with. Michael Sugirin and Roshel Mahabeer explain.
Despite great strain caused by the recent series of disruptive events, global trade remains a force to be reckoned with. Predicted to grow by 70 per cent to almost USD30tn by the end of this decade even in the face of ongoing shocks, the potential for trade to expand opportunities for micro, small, and medium-sized enterprises, achieve global environmental goals, and empower marginalised populations has arguably never been stronger.
According to the Future of Trade 2030, a report by Standard Chartered, five trends are shaping globalisation. These include a wider adoption of sustainable and fair-trade practices; a push for more inclusive trade, with more people participating; greater risk diversification; more digitisation; and an accelerated shift towards high-growth emerging markets.
Roshel Mahabeer, head of clean tech and sustainable trade finance, and Michael Sugirin, global head of open account trade at Standard Chartered, explain the drivers of these top-level trends, and outline the collaborative approach that is needed across the trade ecosystem to build sustainable, resilient and future-proofed supply chains that will make globalisation work for more markets and businesses.
Q: In the Future of Trade 2030 research, Standard Chartered outlined how trade dynamics are changing. Intra-regional trade is growing amid a shift to ‘just-in-case’ supply chains, while growing sources of consumer demand in developing markets are enabling local suppliers to move up the value chain. What are the catalysts behind this trend, and what are you hearing from clients?
Sugirin: There are so many different macro forces at play. The obvious factor was COVID-19 and the ensuing lockdowns, but prior to that we could talk about the US-China trade wars, while today the disruption is stemming from the Russian invasion of Ukraine. To keep supply chains going, corporates are now focusing on building up a selection of smaller supply bases to add in greater resilience.
There is now also a lot more interest from corporates in understanding the second and third tiers of their supply chains, and what they’re exposed to. This includes aspects that relate to ESG, but also financial stability. What ultimately allows them to monitor all of this is, finally, the rise of digitalisation. COVID-19 taught us how to do business in a very digital manner, and a lot of corporates are showing a strong interest in trying to share information and data, after having accelerated a lot of their investment into digital.
Prior to the pandemic, everyone was looking to conserve cash. There was a strong sense of ‘let’s just find a way to stay alive’, which was almost reminiscent of the global financial crisis. As we’ve come out of the pandemic, there’s a notable growing interest in terms of pre-shipment and deep-tier financing, much more than I’ve seen over the last 18 months, and this is because corporates have moved on to different sets of suppliers, which were simply not in the supply chain before.
Q: As trade rebalances and new growth markets come to the forefront, 89 per cent of company leaders say they recognise the need to implement sustainable trade practices. What are the challenges to achieving this, and where are the opportunities?
Mahabeer: A lot more is being demanded of multinationals on the ESG side. They are being pressured to go deeper into understanding their supply chain and its sustainability impact. Western multinationals, for example, have extremely comprehensive strategies around procurement, and they’re required to check so many elements, such as the status of labour unions and emissions, every time that they start working with a new supplier base.
Doing this requires the collection of hundreds of datapoints; and given the sheer scale of the tiers all the way down the supply chain, there is no way that this can be done without digital solutions. What we’re seeing now is the rise of fintech companies that are providing some sort of digital traceability. It’s not perfect, and it’s not easily authenticated, but at least it’s enabling data to be collected at scale.
It’s an interesting time for ESG in supply chains. So much time has been invested into better understanding sustainability, and one of the biggest focuses right now is on net zero emissions because companies who have set those targets can’t get away from them. They are the ones who are really looking for guidance on standards – including how to collect data, how to measure it, and how to conduct their reporting.
Another important aspect on the resilience side is climate risk exposure, which people are now starting to understand. For instance, if there’s a flood, how is this going to impact my business? It’s in its nascency now, but this will increasingly become a factor in supply chain diversification decisions.
Corporates are also very concerned about material sourcing. Certainty of supply is going to be driving a lot of decisions. What’s more, when it comes to goods that are more sustainably produced, corporate buyers are currently willing to pay a premium.
Q: Are ESG considerations taking on greater importance as part of supply chain diversification decision-making?
Mahabeer: ESG is increasingly moving up the scale, particularly with respect to its impact on financial viability. The fundamentals of the reliability of the supplier and the ultimate cost to deliver remain unchanged, but increasingly, corporates are offloading suppliers that could be a risk to their reputation, or a risk to their achieving decarbonisation goals.
Conversely, though, we’re starting to see a lot of companies acknowledge that they are not there yet on ESG, and rather than removing suppliers, they are taking some very proactive non-financial decisions to help them reform and decarbonise. Outside of just a pure supply relationship, they are building really strong, intrinsic links, because they’ll never meet their goals otherwise.
There’s also a growing sense of collaboration, even among competitors. A buyer that sources 10 per cent of a supplier’s output can’t be expected to pay for 100 per cent of its decarbonisation initiative, so we’re seeing a lot of work being done on industry level solutions.
Q: 91 per cent of corporates surveyed by Standard Chartered said that globalisation needs to be reset to give more SMEs the chance to participate in global supply chains, calling out access to finance as a key priority. What strategies can banks put in place to support this?
Sugirin: Banks need to find ways to provide funding to suppliers right at the beginning of the cash conversion cycle, through solutions such as pre-shipment finance and deep-tier finance. As an emerging markets bank, we have a very good presence in a lot of the major sourcing markets, making us a very strong, natural fit. However, pre-shipment finance is a very different risk to supplier finance, and one that isn’t always well understood.
We’re focusing on numerous areas in this respect. The first is around collaboration and partnerships with our significant financial institution and correspondent banking network who deal directly with a lot of the suppliers that sit in these markets.
For our second point of focus, we are looking for ways to work directly with the investor community, where there is significant interest with regard to trade assets. We are now working through non-bank financial institutions to see how we can link that risk appetite directly into these opportunities.
The last point of focus is all about data. Here, we’re using performance risk models that leverage the platform engagements we have with partners such as Linklogis in China. Utilising the information that sits within the ecosystem will enable us to build out models that give us a better indication of a particular supplier’s creditworthiness.
The future revolves around how banks can deliver trade finance solutions directly, at the precise moment where we see the interaction between the buyer and the supplier take place.Michael Sugirin, Global Head of Open Account Trade
Q: In its research, Standard Chartered found that the overwhelming majority of corporates believe digitalisation will be a key enabler in making trade faster, more transparent and secure. How optimistic are you about the potential of digital to boost supply chains?
Sugirin: Perhaps what is most interesting and important when it comes to digital trade is: how do we, as a trade finance bank, become much more of a utility? For a majority of trade products, clients have to log in to a web portal and submit documents to initiate a digital transaction. The experience should be much more immersive and intuitive, with corporates and their trading partners being offered trade advice, risk tools and finance without the need to leave their digital supply chain stack. The future revolves around how banks can deliver trade finance solutions directly, at the precise moment where we see the interaction between the buyer and the supplier take place.
The key to achieving this is collaboration across multiple ecosystems. Where we once competed with fintechs, we are now working, ideating and co-creating – along with the broader ecosystem – to find better ways to serve our clients. This is what will elevate the potential of trade, and enable us to connect wider and deeper into supply chains and new emerging industries.
This article was also published in Global Trade Review.
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