3Com's Asia-Pacific operations in Singapore are tucked well away from the city centre. The large, non-descript building is a hive of activity. 3Com has just sold off Palm, Inc., makers of the personal organizer. And this is just the first of many streamlining projects 3Com is embarking upon. Another project underway is the consolidation of 3Com's banking relationships. Jonathan Woon, Treasury Manager of 3Com's Asia-Pacific operations talks about 3Com's plans for centralizing treasury control with the one bank.
Q: 3Com is undergoing some strategic changes; what does this mean for your treasury ?
A: There will be no significant change, except that as we are embarking on a consumer focus, we have to start thinking about credit card collection capability, and local currency pricing which we are not doing now.
Q: 3com is in the midst of consolidating it's banking relationships. Why ?
A: We use the commissioner model. This means all sales within the Asia-Pacific are invoiced out of Singapore, with the other offices acting as agents on our behalf. As a result, we are already very centralized. So to start with, we didn't have much concern about consolidating. They receive sufficient cash for their operational needs only. So while our exposures are not of a major concern, we want to be able to control any risk out there, as well as duplicate the same level of banking service and pricing across the countries. That is why we have embarked on a project to consolidate our banking relationship.
Q: What does that mean for your treasury?
A: Firstly, we want make sure that we are all on the same banking platform - regionally, and eventually on a worldwide basis. The advantage of implementing a worldwide relationship is that it gives us better negotiation power in terms of price, terms and conditions, more visibility and ease of operation. We also get a better level of service.
For instance, in a country like Malaysia, we only have 10 people on the ground there. If they operated on their own and tried to get a good level of service from a bank, you can be assured that no bank will be interested. But if we have a global relationship, they don't see the 10 people, they see the whole business we are giving them. That is really the main advantage.
We are probably about half way through the process of putting each of the offices into the one banking platform. In some instances, we could not completely roll them over, we would then have a dual banking relationship, but most transactions would be done through the core bank. We have chosen Bank of America as our banking partner.
Q: What are the obstacles or issues that you have come across?
A: One obstacle was political resistance. People will feel threatened, depending on how established their local presence is. For us, we were quite lucky, we started out with a more or less centralized system. But for other companies, when they start out with each country office being quite independent and then you try and take their functions away from them, you will meet with resistance. So the first thing you need to do is to communicate and reassure them that you are not taking away their job, but enhancing it. Take away the cash management function and they should be able to spend more time on their core activities. Then you have to get them to sit down with the bank that you have chosen to make sure that they are at ease.
Q: What capabilities/functions can you do now that you couldn't do before?
A: Firstly, I 'm able to check all bank accounts across the region when I want to. Secondly, I am able to do some sort of pooling or zero balance accounts. At the moment, I send the country offices an amount of money, and I'm not sure what they do with that money. Whether they put that into a current account and earn no interest for example. And I might also fund them more than they need. So there is no actual active cash management, but once I have them on the same platform, I will have control over them. I can now have a pooling structure where all my local currencies would sit in an account managed by me, and the local offices can take money as and when they need it, which keeps their account at zero. This means I am able to invest the funds in my account more aggressively.
Q: Are different regulations and legal structures a problem for you?
A: Definitely. That is part of the problem of doing things like pooling. In Asia, some countries do not allow pooling at all, while others have restrictions that make it less efficient. Overall, we have been able to achieve what we want to do, so the benefit is still there.
Q: Do you have much forex exposure?
A: We sell predominantly in US dollar. So we don’t have much exposure. Most of our receivables are in US dollars. The only exposure we have is on the payables side. But still that is not very large, as much of our payables are also in US dollars. Our exposures will only become significant once we start billing in different local currencies, which we are starting to see already. And there will be more of that as we focus on the consumer sales. For example, we are already doing some ad hoc sales in Australian dollars.
Q: Why bill in local currency then?
A: Because that is what the market wants, especially in the light of the tourmoil that we saw in Asia. If we bill them in US dollars only, the customer is taking on the currency risks, and under those conditions, they don't want to end up with all the risk of fluctuations. Also, our competitors are offering bills in local currency. Even where there is no turmoil, people prefer to deal in their own currency. There are countries in Asia that restrict the amount of foreign currency that is you can get a hold of, countries like China.
Q: What hedging instruments do you use?
A: We mostly just use outright forwards. And these are short term forwards, not six-months to a year.
Q: What are your plans for expansion in the Asian region?
A: We are looking to expand into China. But the country is still quite restrictive, so it is hard to do business there, especially if you are not manufacturing there. It is difficult to even establish a selling entity in China, unless you go into some sort of joint venture, an option which we are exploring. We are also trying to take advantage of the free trade zone in Asia to shorten delivery time and make things like local currency billing possible.
3Com sees huge opportunities in India. Unfortunately, both India and China are also the most challenging countries.
