Underlying Kadle's revelation is a broad shift in the forces bearing on trade in Asia - and a new company response to the pressures of demands for faster, smoother trade. It's no secret that intra-Asian trade flows have grown very quickly in the last three years, completely altering the traditional scenarios of Asia in its time-honored role as an exporter to the West. In the most obvious example of the shift, trade flows between the rest of Asia and China were at a surplus of US$21 billion in 1997 and clocked in at a deficit of seven times that much in the period between January and June 2004.
In the past three years, China's trade deficit with Asia has grown from US$6 billion in 2001, to US$50 billion last year, and then leapt to US$147 billion in the first six months of this year. To be sure, this widening deficit reflects a shift in manufacturing priorities, as a search for low-cost labor has meant that Western companies have selected China as hub with supply chains radiating throughout China's neighbors, near and far-flung. Ultimately, most of the goods produced are destined for the US and Europe. But the rise in intra-Asian trade isn't exclusively a matter of China acting as Asia's conduit to the West. Citibank reckons that in three years, intra-Asian trade has moved from 38 percent of total world trade to more than 47 percent.
The overarching pattern, says Andrew Au, regional trade head for Asia at Citigroup, "is that north Asia has established itself as the engine. China is becoming the gateway for manufacturing and onward sale to Europe and the US. Trade between Korea and Japan is huge." But he adds: "India has been growing rapidly, too, fueled by its domestic expansion."
Amita Jhangiani, Asia Pacific head of global trade finance for Deutsche Bank, reports a growth in non-traditional trade flows within Asia, and from Asia to the developing world. "These so-called 'south-to-south' trading patterns have developed quickly over the past three years. We've even seen a growth in trade between India and China." Trades that the bank facilitated with letters of credit (L/Cs) include an oil deal between India and Libya, and an immense shipment of cars, destined to be taxi-cabs, between a South Korean manufacturer and a purchaser in Kazakhstan.
Moreover, China can hardly be characterized as 'South' anymore. "China is moving beyond the exporter of simple products to exporting more complex types of products," says Bruce Alter, head of trade finance in Asia Pacific for JPMorgan, "often related to technology. And on the other hand, because of surging economic growth, companies in China have a voracious need to build up capital equipment, which brings in trade flows from the outside."
With this shift within Asia trading habits have changed. Says Au: "Major buyers are reducing the numbers of vendors in the emerging markets. The buyers are more experienced with the vendors and have more leverage on them." Au adds that along with this process, vendors see themselves as having to shoulder more risk. Many Western companies sourcing in Asia have made strong efforts to reduce the number of letters of credit in trade deals, concentrating on open-account transactions with vendors they know. JC Penny, the US retailer, announced three years ago, for example, that it wanted to dispense with L/Cs altogether in favor of open account deals supported by internet-based trading platforms such as TradeCard, which JC Penny now uses.
The move to open account was widely seen as the lower-cost option, and is being followed by many major companies that source their products in Asia. But to vendors accepting open account without the guarantees associated with an L/C, the danger of non-payment carries a palpable sting. The 2002 bankruptcy of Kmart, the US retailer that sourced most of its goods in Asia brought a worst-case scenario to within easy grasp. "The buyer has a lot more power and the order flow is bigger," says Au. "With the trend toward open-account trading, the demand on the vendor for risk management has grown."
Ken Stratton, the head of trade and supply chain services for Standard Chartered Bank, notes that the transfer to open account has, in some cases, relayed cost back to the buyers. "It's not just a simple case of removing the cost of L/Cs - and it ends there," Stratton argues. "Some vendors have a high cost of funds, and when they're forced to borrow to finance a shipment, that cost eventually translates into the cost of goods sold, and that is passed on."
For sellers on the sourcing end of the supply chain, says Alistair Currie, HSBC's head of trade services for the Asia Pacific, "the problem becomes risk mitigation." He adds: "When the receivables concentrate on the balance sheet, the companies run into caps, which constrain sales." Increasingly, he says, "they come to us to look for the proper structure to take advantage of what they could be doing.".
