Double redundancy—Standard Chartered discusses supply chain duplication and deep financing
Over the past two years, supply chains have been discussed more widely than ever.
People give little thought to the long and arduous journey of produce on grocery store shelves.
At least not before the COVID-19 pandemic began to disrupt this seemingly reliable facet of modern society.
With store shelves bare and toilet paper nowhere to be found, many people started hearing a lot more about the supply chains that power our lives in the background.
As the world has largely emerged from the clutches of the pandemic shutdowns, several other macroeconomic and geopolitical factors have acted as supply chain disruptors.
To learn more about the changing nature of global supply chains, Trade Finance Global (TFG) spoke with Kai Fehr, Global Head of Trade and Working Capital at Standard Chartered Bank, and Samuel Mathew, Global Head of of flow trading and financial institutions, at Sibos, held in Amsterdam in October.
Supply chains are becoming redundant, and that’s a good thing
The landscape is currently very complex coming out of the COVID-19 pandemic. Given additional challenges such as geopolitical tensions, inflation and energy prices, it can be particularly difficult for some companies to navigate.
The confluence of all of these factors has resulted in significant market delays for almost everything. People who build houses struggle to get their hands on the supplies and devices to get the job done.
For many companies, overcoming these obstacles means building the resilience of their supply chains.
Fehr said, “You need to have contingencies to be sure your supply chain departments are still able to deliver in a number of scenarios.”
Geopolitical tension has the ability to divide the world, with the pandemic quarantining cities. These are all things that can happen and supply chains need to be prepared for them.
One of the main themes emerging from global supply chains today is an increasing amount of amishoring, which is when companies move their supply chain closer to a friendly nation.
This is becoming particularly prevalent in the energy and technology sectors, given the many geopolitical tensions that plague these markets globally.
As friendhoring becomes increasingly popular, companies are still struggling to escape China’s massive gravitational pull.
It is becoming increasingly clear to Standard Chartered customers that the global market is important to them, but the Chinese market is essential.
With this in mind, companies are increasingly building two independent supply chains, one supplying the Chinese domestic market and the other using friendship processes in the rest of the supply chain.
As long as this phenomenon occurs, it is unlikely to manifest itself in the short term.
Indeed, changing supply chains is a significant process requiring supplier and environmental due diligence. This is planned in addition to the actual movement of products and the setting up of manufacturing facilities.
Fehr added, “It’s a multi-year project, not a multi-month project.
“So if we look at this a year from now, I predict we’ll see changes, but the real permanent change won’t be seen for three to four years.”
Digitization to help in-depth financing
Digitization is often widely touted as a tool that will solve countless problems in the trade finance and supply chain spaces.
In some cases, however, this buzz occurs without a clear and tangible understanding of what is really going on behind the scenes.
Often the technology only provides visibility into ongoing transactions without actually being able to change the underlying reality.
While visibility is a key first step, these solutions don’t solve many end-to-end problems in the supply chain.
On a different note, although still in the realm of digitalization, is the idea of deep finance, which has huge potential to help solve the trade finance gap.
Often in large multinational supply chains, tier one suppliers are usually already quite strong financially and could obtain funding from a number of sources.
However, advances in digital technologies can allow the company’s financial strength to travel further down the chain.
Standard Chartered is able to use technology to tokenize trading assets and let the token travel deep into the supply chain.
Fehr and Mathews noted how in one scenario the bank had reached level eleven, when the normal depth is level three to four.
Fehr said, “I’m not talking about digitization as a theoretical idea, it’s a reality for us.”
This happens because the technology makes it possible to split tokens at each level of the chain and pass parts of the whole to each level of supplier in a way that represents the physical reality of the supply chain.
By layering the pricing components, these tokens can allow the financial prowess of large multinational corporations to trickle down to multiple levels all the way to a small local farmer who might otherwise struggle to secure financing despite the fact that their products are ultimately sold to a financially stable company.
By easing barriers to financing small businesses, more of them will receive financing, reducing the trade finance gap in the process.