Nokia has substantial stakes in China, where it is number one in mobile phone sales and number two in global standard for mobile communications (GSM) infrastructure. Nokia has sales centers all over China, seven joint ventures and one wholly-owned plant.
"Nokia has had a large business presence in China since the mid nineties," says David Blair, managing director of Nokia Treasury, speaking at the recent Eurofinance Cash and Treasury conference in Singapore. And such considerable stakes warrant very careful foreign exchange risk management strategies. "But you can't apply the same techniques for risk management [as you can] in Europe. Risk management in China has to be adapted to local conditions and regulations."
How Nokia reduces exchange risk
Nokia maximizes local funding in China to reduce the exchange risk. "We replaced as much of our US dollar liabilities as possible with yuan funding from Chinese banks," says Blair. But that's easier said than done.
Initially, Nokia used stand-by letters of credit from foreign banks to secure yuan funds from Chinese banks. Although rates given by Chinese banks were not an issue as they are fixed by the central bank, the difficult part was obtaining the loan. The Chinese bank set credit quotas, and so at the end of the quarter, once Nokia had borrowed up to its quota, the funds stopped there.
Navigating Chinese bank relationships
Establishing good bank relationships are critical in China. "Chinese banks do not operate the same way as western banks," says Blair. "You cannot ignore local branch offices of banks, and you must work with the bank on all levels. Credit only became easier to come by when the banks learnt to trust us, although we were also helped by government policy moving to loosen credit".
In addition to the difficulty in getting Chinese yuan (CNY) credit facilities, the government has been making it difficult to get money out of the country. A system of customs clearance and state controls over overseas payments can add substantial time to the payments process. SAFE (state administration of foreign exchange) requires that customs rubber-stamps your airway bill or bill of landing before they (SAFE) will allow the payment. "Essentially the time taken on paperwork is quadrupled," says Blair.
Blair stresses the importance of communication with business partners and looking at the situation holistically. The need for close monitoring of bank relationships, JV partners, the working capital cycle, payment terms, customs and government controls were explained to Nokia's business partners. In addition, it was imperative they understood the foreign exchange risk in relation to local funding, payment of offshore payables, and Nokia's risk management strategies.
Lately, Nokia has been hedging through on-shore forwards, which at present are only offered by the Bank of China. Why on-shore forwards? "Because we want to develop our relationship with the Chinese banks, and because the pricing is attractive. Although, indirect costs are quite high. You need a credit line and collateral deposit, and there is heavy paper work and arcane procedures to be dealt with. Furthermore, on-shore forward contracts do not mitigate political risk," says Blair.
The real test of these innovative treasury strategies is whether or not Nokia has beenable to successfully implement them. "So far we have managed to find cost effective ways of containing risks in China without incurring excessive costs - if you exclude all the hard work we put in to find and implement these solutions," says Blair. "If success is measured by losses and costs, then our strategy has been very successful because we have not incurred any losses and have been able to keep costs at a low level," he boldly acknowledges.