Market supply chain finance is becoming an important method of corporate finance. With the growth of the internet, supply chain finance has developed rapidly and ushered in a golden age of development.
How will supply chain finance develop in 2017?
China's supply chain finance progressed into the three stages of development. Some primary examples of the commencement of the supply chain finance development: Shenzhen Development Bank in 1998, in Guangdong Province, taking in cargo as charge; and in 2002, Shenzhen Development Bank launched China’s first systematic promotion of the supply chain financial philosophy combined with trade finance; in 2005 Shenzhen Development Bank proposed the construction of China’s first professional supply chain financial service.
Supply Chain Finance Will Enter The Stage 3.0
Supply Chain Finance 1.0: Before the internet, a systematic approach, "1 + N"
The supply chain finance model was generally referred to as "1 + N", in this scenario, the bank assesses the credit worthiness of the core business known as "1," and provides credit support to a list of small and medium-sized suppliers, to what is referred to as "N" financing credit support. At this stage, there were two main difficulties in controlling the risk of supply chain finance in relation to the core company. One, the bank had problems authenticating what the “real” inventory was, especially in cases where the same inventory was pledged multiple times. Secondly, there were high operational risks in all businesses, which could not be monitored properly. In 2008, Great Wall Motor Co., Ltd. and Ping An Bank started "1 + N" dealer credit line facilities. At that time, Great Wall Motor had more than 20 cooperative dealers with an annual invoice volume of nearly 300 million RMB.
Supply Chain Finance 2.0: The Internet Age, "1 + N"
The traditional supply chain finance and then moved onto the Internet, allowing the core business "1" to link its data to the banks, allowing the bank to be able to access the core business’s supply chain partners’ warehouses, payments and other business information for both the upstream and downstream levels. The Internet Age’s supply chain finance can efficiently perform multi-party online collaborations and improves the overall operational efficiency. At the core of SCF, is still bank financing, with financial transactions being the base of all financing.
Supply Chain Finance 3.0: Internet Age "N + N"
The arrival of E-commerce platforms upheaved the traditional supply chain finance model once more, changing the base of finance activities back to transactions. The banks, recognizing this trend, have begun to gradually to build online cloud-based solutions to serve small and medium enterprises’ transactions, bills of lading, receipts, financing, warehousing and other business activities, while introducing logistics, third-party information and other services in order to provide a full range of services to their clients. In this system, the core business is the source of credit, making all related transactions and data credible.
Major Supply Chain Finance Players In 2017
The current trend is in the form of Government investments. One can observe that all levels of government (provincial, city, district, county) are busy with their own form of investments. Methods are being designed to further extend the government’s long-term commitment to act as backers for good regional companies and good online platform companies, in addition to putting huge resources into these companies. Their investments also benefits a small group of industry players, through which government investments, many platforms are built to upgrade basic services from online transactions to logistics.
Service Platforms, which were created by transforming traditional industries in the Internet Age, is also a major contributor. Traditional large scale enterprises such as Haier, TCL, Suning are transforming their core businesses and forming alliances to change their traditional business models to online platforms such as those run by Alibaba and Jing Dong Finance. Because they own their assets, it is easy for them to join in an online platform and further allows them to participate in other platforms. As these companies are generally cash rich and have many sources of finance, they are looking into areas in which traditional banks and financial institutions, such as commercial factoring companies and micro loan companies cannot finance, and thus are cutting out a new finance niche.
3.Supply Chain Companies
Supply chain finance companies which serves traditional supply chains are gradually converging, and are reaching a state of stagflation. Supply chain companies finance several categories such as export tax rebate financing, loan financing, and import tax financing. The most common form of financing for supply chain companies is export tax rebate financing. At first, financing this category would seem simple and clear, with straightforward returns, but there are hidden risks involved. Once there is a problem with the traceability on any part of the business transaction chain, the returns can be impacted and returns may be potentially held back for many years. In today’s context, supply chain companies = Supply Chain services + Supply Chain Finance.
Commercial factoring companies are facing difficult times, as they cannot participate in the business aspects of borrowers, and thus cannot design product services to suit their clients. They are searching for clients everywhere and are targeted on any specific industry or trade. At present, commercial factoring companies’ level of technology integration is weak, and their source of data is also not optimized. There is room for significant improvements.
5.Micro Finance companies
Micro Finance companies are generally strong in post-loan management and have diverse collection methods. These companies are filling up the gaps by lending to other borrowers that traditional finance providers are not lending to. Micro finance companies can also differentiate themselves quickly to face competition from larger financial institutions. In one example, a particular micro finance company in Shenzhen, with a staff of only thirty to forty people, generates an income of more than a hundred million RMB per year.
Banks are still the main driving force behind supply chain finance, but the competition to service only larger companies, are overall, eroding profits and reducing market share for the banks. However, with the entrance of government investments and Service platforms (mentioned above in point 1 and 2), there have been greater cooperation with banks, and their assets are used as leverage to offer better financing terms. In general, banks tend to avoid companies that are not focused, and those that cannot replicate their services. In general, their preference is for companies that compete in a large market space, with products that can be commoditized.
“B2B” Platforms allow both transactions to be executed, as well as provide a platform where various services can be offered. They also contribute to the changing traditional supply chain finance industry, but ultimately, they provide only a platform to serve their clients; furthermore, most B2B platforms do not provide financial services in their service offering. We believe that through the integration logistics and risk control on the platform, this provides greater assurances or guarantees which can ultimately lower financing costs. Furthermore, the availability of supply chain information through the platform, provides more assurance and security for financiers in the money they lend out
8.Inter Company Group Finance
Inter-company Group Finance has a lot of innate financial management advantages, such as being able to optimize capital usage and lowering debt ratios; and in instances in which internal funding requirements are not met, outsourcing of funding can then be considered.
9.Companies That Provide Finance Through Data Bridging (Data Finance Companies)
Data Finance companies are getting more popular recently. These companies have strong technical ability to bridge good front-end assets that belong to core companies, to multiple capital platform participants. Asset platforms that belong to core enterprises, B2C platform, B2B platform, commercial factoring, micro finance, P2P, and other multi-level finance providers bring services closer to the client. These data finance bridging companies provide the connection, the preliminary risk assessment models, as well as the internal and external data.
10.Supply Chain Design and Solutions Company
There are companies in China that help design supply chain management and finance programs. They understand country policies, controls and risks, and design business models to help finance supply chains through sets of arbitrary products.
11.Asset Trading Platforms
There are Asset Trading Platforms that provide matching, and preliminary qualification audits of B-grade assets and capital. These platforms provide capital matching and preliminary assessment and risk control of the asset being offered. Many companies have shown interest in such asset trading platforms.
Since 2016, P2P has been on a decline, but it is undeniable that P2P lending has played a significant role in promoting internet finance. This led to the rise of China’s first domestic P2P lender, Creditease (NYSE: YRD) to list on the NYSE. To date, YRD is still performing well, and some small companies still use this channel as a source of supply chain finance funds.
2017 Supply Chain Finance Outlook
At present, the development of supply chain finance in China has shown positive results, and its sustainability and integrity have been improving significantly. The development of supply chain finance in China is due to the following views:
The acceleration and innovation of supply chain finance product development
In the present financial market, the financing situation of small and medium-sized enterprises in the supply chain is the focus of both domestic commercial banks and foreign banks; and this has intensified the competition among the banks to a certain extent. At present, China's supply chain financial products are concentrated in the automotive, steel, home appliances and energy industries, thus there is a convergence of similar supply chain finance product offerings, putting smaller commercial banks in direct competition with larger state-owned commercial banks at a disadvantage. Under intense competition, the small to mid-sized commercial banks are looking at innovation in new product offerings in the field of supply chain, to improve their competitiveness.
Supply chain finance promotes transparency in corporate information
Banks in the supply chain finance financing model can get easy access to relevant business information through their supply chain information flow. Third-party logistics companies who have first-hand information of their clients’ inventory movements, product values and sales prospects, have also joined the supply chain finance model. While their entrance has filled the information gap of corporate borrowers to banks to a certain extent, it still does not solve the information gap of banking services and rates to corporate borrowers. This will only encourage the banks to actively adopt a series of strategies to improve the supply chain financial financing model in order to correctly determine the prospects of the corporate lending market, and further use their own professional advantages to help companies make the right financing decisions; banks having access to privy information of small and mid-sized companies, which were previously unavailable, will enable them to lend out to them, since they can effectively control the risk.
Promotion of multiparty interest convergence
Small and medium-sized enterprises, third-party logistics, core enterprises and other supply chain participants are major components of finance. Small and medium enterprises and core enterprises comprises the corporate borrowers while financing companies and banks comprises the financiers. In China, supply chain finance will define the purpose of financing for enterprises and banks in the financing process; optimize the bank's approval process; improve service efficiency; and change the way banks traditionally prevent financial risks. This also enables companies to seek supply chain finance by properly considering the benefits of financing, capital utilization, supply chain operation efficiency and other factors. Supply chain finance is rapidly developing in China by aligning supply chain finance stakeholders’ interests in broader development across relevant fields.
Construction of an optimized credit system
Supply chain finance has changed the credit process model. Banks in the supply chain finance, financing model have changed the way they look at core companies. They have also changed the way they assess the credit rating of SME by now looking at the credit assessment of entire supply chain instead. This has placed a higher requirement on the bank's current credit rating system, and in China, there are initial stages in place of setting up credit intermediaries and social credit information collection system. In this situation, the development of supply chain finance will enable China to gradually improve the credit system to enable banks to accurately assess and effectively collect information on small and medium enterprises; strengthen risk management; and expand supply chain financial services.
Improve Traditional Bank Risk Control Concepts
The sound credit of the core businesses through supply chain finance can be extended to their upstream and downstream participants to small and medium enterprises, it is possible that risk can spread quickly in the industrial chain. Supply chain financial services in China is relatively new, and bank risk management and assessment is bound to be affected by credit extensions. These risk factors will enable banks to establish a sound scientific, reasonable and comprehensive risk management system, and the need to use the correct risk management philosophy to guard against financial risks.
The development of supply chain finance has been closely related to the development and application of related technologies, especially information technology. These innovative technologies can effectively reduce the cost of the whole supply chain and improve the efficiency in the whole supply chain. Therefore, the establishment of information sharing, automation, and transparent supply chain financial systems is future.