With a population of less than 550,000 occupying 29.2 square kilometers of land, Macau has evolved from a village into a county with highest per-capita gross domestic product (GDP) in Asia, and a strong GDP growth at 25.3% in 2007.
The economy evolved from a manufacturing sector in 1970s that relied on low labour costs to an economy driven by tourism and gaming, especially after a change in gaming regulations in 2001. Gross gaming receipts have increased in the past few years and reached a record-high of MOP109.8bn in 2008.
However, faced with mainland China’s tightening policy in the ‘Individual Traveller Scheme’, and the global economic crisis, Macau experienced the first negative growth in GDP since 2003, when it slipped by 7.6% in the fourth quarter of 2008. Merchandise exports fell by 54.2% year-on-year for the first half of 2009, which included a contraction in the exports of gaming services of 13.3%.
Source: Quarterly Gross Domestic Product, Statistics and Census Service (DSEC)
In order to achieve a more stable economy, there have been various initiatives from the government and the mainland to encourage an environment for commercial activities such as the Closer Economic Partnership Agreement (CEPA) and the Pearl River Delta framework
At the same time, economic recovery relies a lot on how corporates themselves react to counter the economic downturn. Many corporates have experience of two extreme economic situations in Macau within a short period of time, which is unique among other markets.
During the rapid growth in 2007 and 2008, scalability and hiring new staff were major problems for most corporates. Today, focus has shifted to tightening controls and cost-cutting during the economic downturn. From a positive perspective, the labour force has become more stable, allowing companies to have the chance to do more planning. The extreme turnaround is also prompting companies to look into repositioning their business in order to sustain it in the longer term.
Case 1: A Pearl River Delta Case
The economic crisis has caused drastic drop in the demand from the US and European markets for exports from Macau. A lot of companies running factories on the mainland were faced with extraordinary pressures in cost control. Some of the factories have even cut down on labour or working hours as a response to the reductions in orders. Cost savings have become one of the top initiatives to help improve the bottom line.
Due to the taxation benefits via the Macao offshore company (MCO) scheme, existing MCOs might consider moving more transaction processing to their Macau operations to enjoy further savings.
This case refers to how such MCO explored innovative ways for further savings by further migration of the data entry and administrative work of the finance team into their factory in mainland.
Challenges
- Skill set – in Zuhai or Zhongshan, where most of the factories are located, most of the labour force do not have the required level of education to handle finance-related operations. Those with relevant skill sets will be expensive.
- Supervision and control – as the preparation work will be done in the lower-cost area, there is a need to establish a control and supervision infrastructure to ensure accuracy and that proper authorisation policies are met
Solutions
To ensure that appropriate employees can be sourced, the MCO has been collaborating with universities in other provinces, such as Wuhan, to introduce graduate trainee programmes. For these graduates, where job opportunities are scarce in their home cities, working in foreign invested entities is considered as good opportunity for widening their exposure. Since accommodation facilities are already set up in the factory, only minimal investment is required to set up a similar model for graduates.
Unlike large corporates, where internal systems might have been built up for control and supervision of the total work done, this customer is looking to explore the feasibility in leveraging HSBC to fulfill their requirements.
As a result, the comprehensive approval matrix, supported by the internet banking platform, becomes the most cost-effective option to support the control and monitoring required.
The finance team in the mainland is divided into sub-teams according to different suppliers. Making use of the templates, the list of suppliers can be added with strict control. Individual operators will only be allowed to trigger the payment and capture the invoice details. Approval will be carried out in Macau, according to signature limit arrangements.
Given that Macau and Zhongshan are close to each other, the training and support to the mainland’s team is relatively easy. In just two hours, the team on the mainland, which has not used any internet banking before, was trained to construct the transaction with satisfactory results.
Key success factors
The customer has put strong focus on the staff morale by providing extracurricular activities and staff development. The implementation of the cash management solution is considered as a learning opportunity for the employees at the company, and it is this atmosphere that has shortened the learning curve significantly.
Case 2: Going Global
The early 1970s was golden age for manufacturing in Asia, including Macau, due to its low labour cost and the utilisation of the Multi-Fibre Arrangement (MFA) quota. Faced with keen competition, these traditional manufacturers had to migrate their factories to mainland China in order to achieve a lower-cost model to sustain their business. A few successful ones even diversified their business into different markets to maximise on the opportunities.
The next case study looks at such a diversified family business with presence in various locations covering Europe, Hong Kong and China.
During the economic downturn, working capital efficiency became a key concern for the corporate. Having the most up-to-date and complete picture of its financial positions across different locations became critical. By exerting better control and management in working capital, this corporate can minimise the cost of funding and be in a position to respond quickly to new opportunities.
Challenges
- To monitor different entities’ working capital usage, the company has to rely on the financial reports or statements provided by the overseas entities, availability of which can lag due to time differences.
- Currently, most of the payments have to be approved by headquarters. While this will ensure sufficient control, the operational efficiency is greatly reduced by this.
- As there is no timely assessment of the overall working capital position, it is difficult to utilise the surplus funds to earn better interest.
- Most of the finance processing is manual.
Solutions
In order to resolve the difficulties stated above, the company approached HSBC for a solution. Instead of simply providing the product to the customer, the bank has adopted a consultative approach, analysing different models, all the way from fully centralised to fully decentralised. During the discussions, the customer also mobilised its staff to carry out a detailed study into funds movement and capital needs for each of the entities.
In order to achieve the twin objectives of greater efficiency and better control, centralised processing is recommended for handling major payments, while local bank accounts will be maintained for receivables and expenses that are handled locally.
With payments being centrally handled by the headquarters, balances in different currencies in different entities can be used to minimise foreign exchange (FX) cost. Maintaining local accounts for receivables can minimise the impact to the end customers. Delegation to overseas entities to handle local expenses will maintain efficiency.
Most importantly, the bank’s single global internet banking platform will increase the visibility in the overall positions and therefore management of the overall working capital becomes easier. The solution can now cover 20 accounts from three markets within a single platform, with payments centrally controlled from the headquarters. Balances in different currencies in different entities can also be used to reduce FX and enhance the working capital efficiency to support future business expansion.
Key success factors
Revamping the finance process is not easy, particularly for a traditional company. Therefore, support by senior management is the key for a successful execution.
During the implementation stage, the senior management has shared their business model with the bank, demonstrating a partnership and working atmosphere that encourages their staff to operate a culture of openness. Their in-depth involvement is equally important in energising the team and encouraging the thought process around the reengineering concept. This support also facilitates a seamless collaboration between the user and the technology team, which is crucial in order to achieve a smooth implementation.
The bank not only provides a solution to the customer but also a partnership with the company that helps to upgrade its internal processes, performance and control.
Banking Partners
For a conservative market, banks can act not only as a service provider, but also as a partner for their customers to recommend the best-fit solutions. Instead of throwing all of their capabilities at the customers, a more advisory approach is sensible in order to demonstrate the value proposition to the customer. Customers should also look to bank professionals to be a bridge to elevate their capabilities to the next level, in order to cope with the challenges and opportunities ahead.
Macao’s economic positioning has recently been reaffirmed as ‘World Tourism Centre’ under the Framework for Development and Reform Planning for the Pearl River Delta by China. It is expected that forthcoming initiatives, such as RMB trade settlement, Hengqin Island joint-development, etc will lead to greater economic diversification.
Companies might make use of this time to strengthen their internal processing and preparing to seize the opportunities ahead.
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