Financial Journalist

27 November 2008 — Gerry O’Kane, Finance Week

Although factoring has become more important to the cash flow of British business, it still has its pitfalls. Here Gerry O’Kane looks at how to truly value your deal and points to other pitfalls and benefits.

The first thing to remember about factoring companies is that they don’t offer the same thing; there are always differences.

This is the considered opinion of Ian Johnston who has been in the business for over 30 years and runs Factoring Solutions, a broker for the sector. Although companies may only now be coming around to understanding the potential of how factoring can help in stabilising cash flow, they have also picked the worst time in 10 years to dip their collective toe in the water.

Even so, some SMEs have been forced to take this route over the past eight years as banks have pushed the business of lending from their company account overdrafts to higher charging factoring.New research from software house, KashFlow, revealed that SMEs in the business services sector are spending an average of five hours every week chasing overdue invoices to maintain their cashflow. Late payment of monies owed - including the time and resources taken to chase late debtors - is a large contributory factor to the failure of many smaller businesses.

Kashflow, a winner of Finance Week’s Software Satisfaction Awards, fielded more than 55 phone calls in one week from customers with clients who have gone out of business owing them money. Duane Jackson from the company said, “I’ve never know anything like it. We’re all aware of the economic downturn, but our small business customers are very concerned. And many are frankly scared.”

But can factoring offer a solution? Many of the largest in the business of factoring or invoice lending, are arms of the banks and we all know how cash flush they are. There are other companies in the business, but Johnston warns that both the big boys and the independents have drawbacks and customers need to be even more canny.

As it stands currently deals of anything under £100,000 are snubbed; the cost of money is too high and the factor’s fixed costs need to be serviced.

One major warning he makes, is to truly cost your deal. While one company may offer a lower interest charge on the invoice, their capability to turn your invoices into payments efficiently, may be much worse then their competitor. The result is that the company may end up paying more in charges.

For factoring companies their biggest expense after the cost of money [to be lent out] is staffing. As risk increases many factoring companies may take on more and more customers to spread this risk, this stretches staff and may affect how good they are at credit control.

The banks have become far more choosy in their customer base and Johnston comments that while Lloyds TSB would have taken “any business” months ago, now even well-heeled customers were under pressure as charges have been ramped up.

“I’m receiving a lot more enquiries from existing factoring clients partly because many of the major bank-owned factors that have spent the last couple of years just buying turnover at any cost who are now reassessing their portfolio a little more closely and pruning those that don’t meet this year’s criteria and upping the rates on some of the others,” says Johnston.

The highest rate on invoices from factors now stands at 90% at the very top end.

But these are not the only issues facing company customers. To protect themselves against unpaid invoices on which the factor has paid against, companies have tied up non-recourse factoring deals.

This structure means the factoring company takes on the risk of non-payment and you pay a fee for the privilege. However as times have got tougher so have the terms on non-recourse deals and in some cases they are no longer offered. Generally companies would be looking at a 2% charge over base rate for non-recourse factoring in addition to the charge of up to 3% to provide factoring.

Two sectors in particular have always been hand-in-hand with the factors (the company that provides the finance), the building industry and recruitment. “While construction is unloved by some factors there are those who will accept business and in my view it means they’re desperate for work, while the recruitment industry might take up nearly 50% of the business,” outlines Johnston.

The sector that does not benefit from the magic of factoring is retail; in part the Consumer Act prevents deals with those who rely on receipts from private individuals.

It is always worth taking legal advice when entering any factoring or invoice lending deal.

Factoring+UK business

12 November 2008, Finance Week

Working capital specialist, Brian Shanahan tells Gerry O’Kane that Tesco’s move to improve its own working capital by taking longer to pay its suppliers, is wrong.

Long accused of pushing suppliers into tough deals, Tesco has ratcheted up its squeeze on them as it searches for improved cashflow.

While it may be asset- or cash-rich, so important is improving the vast amounts of working capital Tesco needs for day-to-day business that it is trying to shore up cashflow by extending payment terms to its suppliers.

In other words it is using its purchasing muscle in a shrinking market to demand that companies allow Tesco to hold onto cash longer while cash-strapped suppliers struggle to handle longer debt periods. Drinks suppliers, amongst other firms, have been given ‘take it or leave it’ ultimatums demanding drops in prices by up to 10%, cough up extra cash for advertising and a moratorium on price increases.

It has also claimed that some of its suppliers have benefited from falling commodity prices so they could afford to pass on improved cashflows. Suppliers deny this.

“The fact that Tesco and others are trying to extend terms to 60 days is no surprise - we already have Argos extending terms to 105 days and other retailers are attempting similar strategies - what is surprising is the speed at which Tesco are trying to implement these measures,” observes Brian Shanahan, senior director at REL, a company with over a decade history in surveying British and European working capital practice.

He believes it reflects poor supply chain planning amongst retailers as the speed of these actions indicates that large retailers are desperate to rebalance the working capital strain that will come with large quantities of unsold stock. Tesco, in particular is under increasing pressure from perceived low-cost chains like Lidl and Aldi.

However the way in which companies like Tesco are trying to improve cashflow, by squeezing payment terms in their suppliers, will have a bad effect on the UK economy over the longer period. “It is pretty standard practice for larger companies to strong-arm suppliers, particularly when times are tough. But Tesco’s decision is bad business plain and simple. At best, they’ll damage their relationship with these smaller suppliers. Some may even walk away from the relationship. At worst, Tesco’s actions could even put some of their suppliers out of business,” says Shanahan.

He, like others, believes this type of tactic will cause businesses to fold creating short-term supply issues and possibly force up consumer prices at a time when the market place is ultra competitive.

“There’s no question that the current economic environment is very challenging. But rather than resort to these types of desperation moves, the most forward-thinking large companies will do almost exactly the opposite of what Tesco and others have done,” says Shanahan. “They’ll work more closely with their suppliers and collaborate with them, creating a situation where both companies share key data on manufacturing capabilities, inventory and demand forecasts. It is possible to create a win-win situation here, with buyers more easily able to find the products they need, when they need them, at the best possible prices, and suppliers able to count on their best customers and still make a reasonable profit.”

Tesco+working capital

31 October 2008 — Gerry O’Kane, Finance Week

Many British businesses are ignorant of working capital and need to understand forecasting, cashflow and the financial supply chain. But there are solutions to both ignorance and problematic working capital. Gerry O’Kane talks to working capital expert John Mardle.

If British business people do not learn how to handle working capital more professionally, the current recession will last much longer than it need do. This is the viewpoint of John Mardle, an expert in how to make working capital perform efficiently and managing director at Develin & Partners. He also warns simply delaying payments or cutting suppliers’ margins is not the solution.

“I’ve got a pessimistic outlook and groups like CIMA and the ACT have got to get finance directors up to speed on working capital,” he says. He estimates it’ll take at least nine months of education but should business people become more aware of handling their working capital, the supply chain finance and their forecasting, the impact on nationwide free cash flow could have a beneficial dramatic effect on UK business.

The down side, in his view, is that it will take 18 months to work.

As access to alternative finance for companies, whether from private equity companies or from banks, has been shrinking for nearly a year, finding money for new equipment or even paying wages is proving difficult and companies’ working capital needs to be handled more efficiently.“Companies are desperate for every penny of that £10,000 invoice, and think they can manage it well, but few do so,” he argues. Mardle lectures for CIMA in their Mastercourse qualifications, mentors at Cranfield Business School and will be lecturing at the ACT’s seminar on working capital in Reading in November.

He points out that British industry is often led by those with strict accounting backgrounds and their grasp of working capital was slim. “They haven’t been taught what it is or top 10 tips to reducing working capital. When the economy was moving along well they sat back on their laurels and didn’t look at it properly,” explains Mardle.

There was an ability to analyse debt but not how to practically improve working capital.

While every case will have its own characteristics, Mardle argues that there are several steps all companies can take to (a) assess their future liabilities and (b) cut the pain to the company.

While he agrees there are methods like factoring and asset-based lending to increase working capital, these are much less available in the current market. “In terms of factoring who is going to want to fund invoicing efficiently?” he asks.

He points out that companies in Europe and the UK do not collect monies owed very efficiently. “And they also do not look at the financial supply chain any further than who they are directly dealing,” says Mardle. In the US it is not uncommon for the supply chain to be analysed seven companies down the line, in order to reduce risk or find ways to solve any glitches in the system (see ‘How to boost working capital with a broader view of supply chain finance’).

Another side of the same coin is examining how your other suppliers will be able to pay. Cutting what you’re prepared to pay by 10% might simply put your supplier out of business.

Go and talk to that supplier: it might be that you’re getting something that is completely over-engineered for what you require,” says Mardle. You might be getting benefits of economies of scale but paying a price for a premium product. With a few adjustments perhaps the product could give the same performance but save money to both you and the maker.

He gave the example of Rolls Royce requiring bolts for aeroplane engines. By dropping the specification from the over-engineered supplier, it saved 50% per bolt – or $500.

He warns that unreasonableness in cutting payments are lazy and sometimes self-damaging. “I already know of some companies who have reprogrammed their ERP systems not to pay invoices over £10,000 or under £5,000, but it’s the wrong way as it creates uncertainty. It’s important to know when payments are going to be there,” he adds.

The second area he sees as important is examining your own customer base. “A lot of firms are dealing with non-profitable customers, they’re just looking at revenues, when in fact delays in payment and profit margins might be low. It might be better to lose them and concentrate resources on the profitable customers,” explains Mardle.

John Mardle’s next CIMA Mastercourse on ‘Managing Work Capital’ is on 7 May 2009 in London. Go here for details of this and other CIMA Mastercourses.

working capital

Finance Asia April 1997

International institutional investors rebelled when the Riady family proposed restructuring some of their Indonesian companies. The family has quelled some of investors’ fears. But others remain, writes Gerry O’Kane.

There were smiles, handshakes and speeches all round at the opening of an extravagant new trading centre for the smaller retail investor on 6 March. James Riady - deputy chairman of Indonesia’s Lippo Group and the oldest son of Mochtar Riady Lippo’s founder - told guests how pleased he was that everyone could make it. Equipped with wall-sized trading monitors, chairs and lots of ashtrays, the ‘gallery’ was in the Lippo Securities building and the punters could walk into the next room and place orders with Lippo dealers.

For the younger Riady there was another reason to smile. In spite of some rough times over the past 18 months, times when his father’s business empire could have been brought to its knees, the group’s share prices that flickered across the screen in March, were at six-month highs or better. PT Multipolar, which less than a month before had bought store chain Matahari, hit Rp3,200 ($1.33) up Rp250 and Lippo Life Insurance, which held 40% of Lippo Bank, hit Rp3,075. The bank itself had risen Rp100 to Rp7,000.

It was also the most concrete proof for corporate watchers that Lippo was well on its way to fulfilling plans which had been forced on it by circumstances in 1995. In January of that year Lippo Securities’ partner, the Swiss Banking Corporation (SBC), split from its joint venture securities house operation. Eleven months later, Lippo Bank faced a run on funds. In mid-1996, the Riady family faced an investor revolt over plans to bring the bank, its life insurance arm under Lippo Securities.

According to the Riadys at the time, this restructuring would place the company in a prime position to exploit the demand for better financial products from Indonesia’s 200 million consumers. It’s a market others have an eye too.

“There’s little doubt that all of the big banks are trying to get into the retail markets,” says Susan Baker, an analyst with Jardine Fleming in Jakarta, although another comments cynically that what is said and what was done in Indonesia are two different things. Baker points out that most of the banks have traditionally concentrated on corporate finance. “But as the bigger international banks have come on the scene and there is now heavy competition for the corporate accounts,” she adds. Partly because of this, the Indonesian institutions have begun to look at the potential of retail banking.

Baker asserts this will put pressure on Lippo. Thanks to the foresight of James’ father, Lippo Bank became the epitome of retail banking in the country, the first with recognisable logos and incessant marketing. In many ways it to be first to try and grab new markets and beat its 239 banking competitors in the country.

The biggest threat to Lippo’s position, according to bankers, is Indonesia’s second-largest conglomerate, the Sinar Mas Group. Sinar Mas Multiartha (SMMA) is looking to get into the multifinance business too. It wants to exploit the group’s entities and Indonesia’s average national gross domestic product growth of 7.5% a year, to cross-sell financial products. Like Lippo, it plans to use its banking arm as a hub for these activities. SMMA’s key profit driver is PT Bank International Indonesia, the nation’s most profitable listed bank and second-largest banking stock. And two other leading finance companies, Bunas Finanace and Dharmala Sakti Sejahtera, have recently announced they’re hitching their wagons to this lucrative star.

But according to Ray Jovanovich, director and senior portfolio manager of Indoseuz Asset Management’s Indonesia Fund in Hong Kong, who has been in that market for decade, it’s a race that will see some casualties. “Quite honestly, there are too mnay banks and financial houses in Indonesia and we’ll be seeing a consolidation in that sector pretty soon,” he says.

And where does that leave Lippo in all this intense Indonesian competition? According to many analysts, all of them reluctant to be quoted, that’s a good question. “Smoke and mirrors” is how one analyst described the operations of Lippo Bank and other members of the vast Lippo Group. Bankers, investors and analysts have been scratching their heads trying to figure out what is going on in the Riady family’s business empire. The complexity of Indonesian business is such that not everything is as it first appears. With regard to the Lippo Group, its plans for a financial supermarket are locked in to what other arms of the business are doing.

Speaking about the gallery’s opening, the group’s investment banking director and president of Lippo Securities, Charles de Queljoe, ,says, “The major premise underlying all of our activities is that we believe Indonesia is on the edge of a consumer boom.” And that is probably the nub of the matter, as he adds, “People want to shop, they need life insurance and investment services, banking, you name it.”

At a glance, Lippo’s Indonesian operations cover not only the financial arena but property development, or as the company prefers to put it ‘urban development’, which includes supermalls, retail franchises, stores, housing. The list goes on. How these arms work together influences the group’s bottom line.

On the same day that the trading gallery opened, seven of the nine listed Lippo companies had risen to at least a six-month high on the Jakarta bourse. At the time Adnan Tan, the head of trading at Deutsche Morgan Grenfell in Jakarta said, “[James Riadyl has got a great concept and investors have made nothing. but money.” That’s true, and fancy corporate footwork over the past 18 months, using restructuring and rights issues has made Lippo companies the darlings of Jakarta’s climbing index.

But, according, to some analysts, that Lippo shares should look so healthy on such an important day for Riady Junior had nothing to do with miracles. Only a week earlier Lippo Securities had reported a quadrupling of trading volumes and profits of Rp40.4 billion for 1996, compared with Rpl4.1 billion the year before. Property firms Lippo Land and Lippo Karawaci (an ‘urban development’ to the west of the capital) also reported half-year profit surges. Coincidentally Lippo Securities’ head of research, Jos Parengkun, announced his favourite stocks for 1997 were Lippo Life and PT Matahari Putra Prima (bought only weeks before by another Lippo subsidiary).

Despite numerous requests from Finance Asia by fax and telephone to Lippo executives, few wanted to talk openly. In some respects it is understandable. In 1995 an Asiaweek article about the Group pointed out that, despite Lippo Land’s profit increases, analysts had zeroed in on the 20-fold increase in total debt to Rpl trillion. The article also claimed that Lippo Bank was highly exposed to covering this debt and other property companies in the group. There was a run on deposits and Lippo Bank saw roughly 15% of its deposits worth about $347 million withdrawn. Its share price fell by nearly 30%, while Lippo Land dropped 28%.

What can be said with certainty about the Riadys is that they do not lack vision, determination or skill. They moved quickly and, by discounting central bank certificates with Bank Indonesia and raising cash with four other local banks, the haemorrhaging was stopped. Deposits had been recovered by the end of the same year and interbank loans repaid by the end of the first quarter 1996.

According to one analyst who knows the family well, that 1995 run was a bit of a shock to Mochtar Riady, the group’s founder. Known as a master player of the stock market, he didn’t want to be in that position again and decided to restructure the group into three core businesses: property, finance and retail. “He’s learned from people like Li Ka Shing and is moving to hold strategic interests in his businesses rather than the whole lot,” explains the analyst. Hong Kong’s famed tycoon, Li ka Shing, has 5.6% of Lippo Karawachi and interests in the Lippo-controlled Hongkong Chinese Bank.

Indeed these kinds of links with Li Ka Shing are believed to have been what saved Riady and engineered the dramatic turnaround of Lippo Bank after the 1995 run: what the Chinese call guangxi (relationships). Mochtar Riady has powerful friends. Before he started Lippo Bank, he was chosen by Liem Sioe Liong to head Bank Central Asia, part of Liem’s industry-leading Salim group.

While banking secrecy laws make it impossible to prove whether or not Lippo received help from its friends, an analysis of the bank’s quarterly results show some interesting anomalies. Lippo Bank records a surge in deposits from Rp228 billion in December 1995 to Rp600 billion in June 1996. From the period June to September 1996 this fell back to Rp157 billion. As one analyst delicately puts it, the April to June deposits “may not have been derived from a stable source,” and adds, “It raises the issue of whether the strong inflow was merely window dressing.” What fuels this speculation is that Lippo Bank did not channel this surplus cash back into the loan business, instead placing the funds in lower-yielding marketable securities and with other banks.

Of course, this may just be down to prudence on the bank’s part. It was just getting over the shock of a run on its cash and perhaps casting its eye forward to this year’s May election, felt it needed surplus funds to hand.

Liquidity problems in the property arms could be another factor. Whatever the reason, its loan-to-deposit ratio has fallen dramatically and in the eyes of many brokerages this needs to be rectified. Although, in the past, the stability of the bank and its high profile meant it could offer lower deposit rates than competitors, now consumers are demanding premium rates. The bank also faces one of the highest cost to income ratios in the industry, in spite of good use of technology and the waiving of the Riadys’ massive management fee in June. Before the restructure of the group’s financial arms, the Riady family received a large consultancy fee of Rp13 billion, nearly 10% of pre-tax profits of Rp137.3 billion.

In many respects it is understandable that ethnic Chinese might have bailed Riady out. While President Suharto has gone to extremes to keep the peace between Indonesia’s Chinese minority and the pribumi (native Indonesians), it is often a tense situation. Suharto’s personal wealth is believed to have flourished under the astute business eye of, among others, Salim’s Liem, but that is not the same for the rest of the nation. Figures indicate that while ethnic Chinese make up less than 7% of the population, they control as much as 70% of the country’s wealth. And while the average GDP per capita stands at only US$1,184, it is much higher for ethnic Chinese. The concept of the financial supermarket is aimed partly at this group, which although only a small proportion of the total population, still numbers about 19 million - double the populations of Singapore and Hong Kong combined. And both these countries have higher GDPs than most West European nations.

The strength of feeling on this issue cannot be underestimated. Only a week after James Riady was opening his retail investment gallery he was reported locked in a head-to-head battle with former minister of trade Sumitro Djojohadikusumo for control of Indonesian hotel operator PT Hotel Papatan. The president of Hotel Prapatan, Nurman Diah, was quoted in a news release as saying, “Politically it is quite sensitive that a business founded by a pribumi business family be taken over by conglomerate controlled by non-pribumi. This is bad news.” He added that James should “mind his own business”.

Given these factors in mind, and the rumour-mongering that business in Jakarta inspires, it was unsurprising that there was mild panic among smaller investors when the Riady family announced a restructuring of the financial arms in August, last year.

The immediate reaction of minority and institutional investors was to suspect that the family was bailing out. Out of what, exactly? Some thought it was the banking business - because of exposure to affiliates’ property loans. Others thought it was Indonesia the Riadys were leaving, to expand their interests in Hong Kong and China. It was only in February this year, when the Riadys made the surprise announcement they had bought 50.1% in Indonesia’s largest department store chain, Matahari , that investors believed them. But the shares for sale during the restructure would come from a Riady investment company. Lippo Securities already held 4.9% of Lippo Life. Lippo Life was then to take 40.15% of Lippo Bank, again from the Riadys.

The day after the announcement not only were investors getting nervous but Indonesia’s stock market supervisory agency, Bapepam, said it wasn’t happy either. One of the agency’s directors, Herwidayatomo, announced that Lippo Bank held 11.67% of Lippo Life and Lippo Life had 9.46% of Lippo Securities and he didn’t want cross-holdings to become a part of Indonesia’s stock market structure. Questions were also raised about how smaller share-holders would benefit from the restructuring.

The Riadys’ famed crisis management abilities came into play yet again. James Riady said the family was not cashing out and that it intended to plough cash back into Lippo Securities after its rights issue and maintain a controlling share. Both he and Lippo Bank president, Markus Permadi, said the move would create “tremendous synergies … creating effective financial supermarkets which will provide one-stop shopping to our more than 1.8 million strong retail customer base”.

Some analysts say they still see little “synergy” since the companies cross-sold products before the restructuring. Baker at Jardine says it was a move Lippo Securities had been waiting for since it bought SBC’s 17% stake in early 1995. “They have been wanting to expand their retail side from the institutional business since then,” she says.

But the Riadys had to sweeten the pot. To appease Bapepam, the cross-holdings were to be divested. To encourage private shareholders, they pledged to plough back proceeds from the deal and take 50% of Lippo Securities after its rights issue this year, increasing it from 19%. As a final move, they agreed not to take their 10% annual cut of Lippo Bank’s pretax earnings.

The moves got the deal approved at Lippo Life’s and Lippo Securities’ meetings of independent shareholders. While the votes were 95% and 100% respectively, only some 60% of shareholders turned up. Suggestions have been made that various proxy votes were ruled out of order but this is unconfirmed. But, according to Jovanovich, while most of the institutional investors initially disapproved of the restructure, the fact that the Riadys listened to minority shareholders’ concerns boosted their reputation in the industry.

The Riadys are no strangers to controversy. Most visibly, they gained a certain international notoriety when, along with close associates, executives and affiliates of the Lippo conglomorerate, they donated $854,000 to the US Democratic National Committee in the course of the past six years. In March their Los Angeles-based LippoBank received its third “cease and desist” order in seven years from the Federal Deposit Insurance Corp. Whatever the “practices” are, the FDIC is not saying yet but records show the bank has levels of non-performing loans many times larger than those of other similar-sized banks in California. According to reports in the Los Angeles Times, James Riady himself has injected $20 million of his own money over the past 10 years.

Probably the most relevant concern investors have is the state of the Riadys’ property divisions. At the end of November the Bank Indonesia Governor, Soedradjat Djiwandono, expressed concern over the rising proportion of bank loans to the property sector.

Lippo Bank’s 1995 trauma was caused by concern over its exposure to its own property affiliates. Within the group are Lippo Land, Lippo Karawaci and Lippo Cikarang. In March this year, there was an unconfirmed report that the group would consolidate its property holdings. Lippo Cikarang would merge with Lippo Karawaci, providing a back-door listing, and then Lippo Land would take over Karawaci. Karawaci is a large mixed development project in Tangerang, to the west of Jakarta, including schools, hospitals, housing, shopping malls and clubs. But, despite positive noises from the company, most independent observers believe Karawaci and the similar development by Cikarang are facing problems.

According to property analyst Scott Buder at Satyatama Graha Tara, an affiliate of Brooke Hillier Parker in Jakarta, the market in general is suffering but these developments even more so. “They’ve moved from trying to shift the luxury apartments, the $150,000 to $200,000 down to the $10,000 market. They’re desperate to improve cashflow and must be under a lot of pressure,” he says. Li Ka-shing and China Resources, an arm of China’s foreign trade ministry, hold nearly 6% of Karawaci but analysts say the Riadys are eager for them to take more. The word on the street is that China Resources might take up to 20% of Lippo Land after the restructure.

Senior Lippo executives frequently say how wonderfully the projects are doing. But, according to Butler, most of the office space is taken up by Lippo’s own staff. Indeed PT Matahari is to move its headquarters there and the Riadys have only recently bought more than 50% of that retail operation. Butler says even the massive shopping mall, another private company, is not doing business. Lippo claims it has some great names there: Matahari, WalMart and Pennys. But it holds the Indonesian franchises for WalMart and Pennys. “People aren’t spending money, except maybe on the fairground rides they have in the mall,” says Butler.

But things may be looking up for the Riadys on this front. Karawaci’s Rp100 billion flotation in June brought in fresh cash and after the restructure it may well sell off more to China Resources. There have also been reports that it will be selling off some 50% of the Karawaci supermall to an Australian firm.

While analysts greet all this as good news, reducing exposure to property, they remain sceptical. “Property remains [the Riadys’] Achilles heel,” says one analyst at Deutsche Morgan Grenfell. While officially analysts accept that Lippo Bank has moderated its loans to affiliates, not everyone is convinced. “I wish I knew I knew what the exposure is,” says another analyst. “For example, Lippo Land’s accounts showed a loan from Lippo Bank but the bank didn’t show it and later claimed to have sold it off to others,” he adds. And, ironically, executives at Lippo know such things happen. Priasmoro Prawiroardjo, vice-president with joint venture BNP Lippo told Asia Times, “It’s clear that the loan process in this sector is commonly engineered. Because the economy is still growing at above 6%, the unpaid loans from this sector can be hidden.”

On the other hand these kinds of project may boost its retail banking supermarket concept. By developing projects to house 60,000 people, the company is creating a market in which to sell products they should need; life insurance, short-term loans and financing. According to Jardine’s Baker, apart from plans to develop other investment galleries in Lippo Bank branches, the company is already talking about selling life insurance at Mataharis. Digby Falkner at Deutsche Morgan Grenfell in Jakarta says people should keep an eye on the credit card business too. While Bank Bali currently has a form of Affinity card with Matahari, if contractual obligations allow he foresees Lippo Bank moving in on that business.

And it all goes back to the beginning. To attract customers to Bank Central Asia during his time there, Mochtar Riady used a lottery. At present the Matahari group is running a lottery in exchange for personal details, phone, address and income details. “This will give them a massive marketing list and will most likely be used by the finance arms,” says Baker.International institutional investors, Riady family

Riady Family, Indonesia, Lippo Group, Federal Deposit Insurance Corp

Window, JUNE 28,1996

Hong Kong grapples with telecommunications upheaval

By Gerry O’Kane

HONGKONG Telecom has just had one of its worst years, according to NEW T&T president Leslie Harris, one of those who have helped to make it so. Over the past year, Telecom’s international growth rate has slowed down, three local telephone service competitors have appeared, its much-vaunted video-on demand service has been delayed and the extent of its exclusivity over international services is being reassessed.

Telecom also faced the prospect of dealing with a merger of British Telecom and its own majority shareholder Cable & Wireless. Then it had to weather rumours that Chinese companies were hunting it in a Cathay-style take-over, only to find China International Trust and Investment Corp dumping $3 billion-worth of shares weeks later.

The most significant of these developments is the possible loss of the monopoly on international voice services before Telecom’s exclusivity licence expires in 2006.

These have been confusing times for consumers, too. They have watched the new operators offering cheaper international calls while Telecom retains the international call monopoly. But the key question at the heart of all the hype is what place Hong Kong will have in the world of telecommunications. The next two years could be crucial.

The one thing the industry has managed to do successfully is bamboozle punters, and things may get worse. The complexity of the technology is creating greater competition while making it difficult for users to figure out which solution is best for them. International regulatory issues compound the problem, along with the continuing re-interpretation of Hong Kong’s own telecommunications regulations. Urgency creeps into the equation as the 1997 handover approaches.

Reckon
Hongkong Telecom International and Hongkong Telephone also have to reckon with the man who can determine how fast things change Alex Arena, head of the Office of the Telecommunications Authority. In April, Arena re-examined Telecom’s international licence. Although his ruling came as something of a blow to Telecom, the company did manage a sigh of relief. Arena did not suggest taking away the company’s exclusive right to provide international calls, but he did narrow this exclusivity.

“A number of areas are open to competition without breach of HKTI’s exclusivity,” said Arena in his ruling. “These areas include simple resale of HKTI’s international private leased circuits for tax and data services, virtual private networks for internal communications of companies and organizations, video-conferencing services and customer mobile terminals for mobile-satellite services.”

This opened the way for other companies to compete with Telecom in providing any of these services except basic voice and video-conferencing. Already, it is rumoured, firms like the GlobalOne consortium of Deutsche Telekom, Sprint and France Telecom, with their Asian headquarters in Hong Kong, are looking at getting into these areas.

But then, just a few weeks ago, Arena announced that the government and Hongkong Telecom were to discuss the surrender of exclusive international access before 2006 in return for compensation.

Many people saw the move as a reaction to developments in Singapore, where the government, through the regulatory authority, had said that due to rapid technological advances, it made sense to shorten Singapore Telecom’s hold on international exclusivity. In return for opening international access in 2000, seven years before its franchise was due to run out, the government would compensate the company to the tune of US$1.07 billion.

Despite grumbles from the board of Cable & Wireless, which holds 57.5 per cent of Hongkong Telecom, the company has agreed to talk. However, Arena’s latest statement seems to have less to do with Singapore than with the direction Hong Kong’s telecommunications industry will take over the next few years. The issue is political.

As an aid to understanding present moves, it is necessary to trace the roots of the current situation. In 1981, the government approved a licence giving Hongkong Telecom a 25-year monopoly on international services. Observers say the motivation for this can be traced to domestic British politics. At that stage, Margaret Thatcher’s government was lining up state companies for privatization. Cable & Wireless was near the top of the list, but one of her advisers, Lord Sharp, pointed out that its value was stunted while it held licences for only four or five years in places like Hong Kong, Bermuda and the Maldives. He was backed by then head of the Trade and Industry Department, Lord Young.

Since Hongkong Telecorn was then, and remains, C&W’s cash cow, a longer franchise in the territory would make it an attractive float.

It is not clear whether Britain ultimately influenced the Hong Kong decision to grant a 25-year monopoly. Subsequently, however, Lord Sharp became head of C&W and was later succeeded by Lord Young.

In the years that followed, Hongkong Telecom International, Hongkong Telephone Ltd and Cable & Wireless began to develop one of the most sophisticated local networks in Asia. They also strove to build strong working relationships with China. Telecom was led by Mike Gale and his China strategy was put in the hands of Greg Crewe. Crewe and his team spent years building links with provincial telephone companies and cultivating ties with the power circles of Beijing.

Crewe himself was well liked within the industry. A fluent Mandarin speaker with a love of Chinese calligraphy, he and his colleagues gave China free technology while increasing profits and strengthening relationships. As Hong Kong replaced telephone hardware with the latest digital technology, the company gave its older analogue exchanges away to provincial telephone companies which were underfunded and under pressure to provide services to a population with few telephones.

As CSL, Hongkong Telecorn also wanted to boost its business, so it gave Beijing base stations to serve visiting Hong Kong businessmen with mobile phones. China also collected a hefty 40 per cent of the international call charges.

C&W and Hongkong Telecom set up a little known company called Great Eastern in China to build a fibre-optic link from Hong Kong to Guangdong, Shanghai and Beijing, which has only recently been completed.

But the China strategy began to fall apart when Crewe returned to Britain to join C&W subsidiary, Mercury, which was competing with British Telecom in the UK domestic market. It was believed that C&W was grooming Crewe for a return to Hong Kong, having gained the experience of being the smaller competitor, in time to help Hongkong Telecom face the competition of new local service providers. However, Crewe became a victim of a boardroom battle within C&W, as head of Mercury James Ross, also deputy chairman of C&W, fought for supremacy with chairman Lord Young.

Elevated
By this time, Hongkong Telecom had lost its other doyen, Mike Gale, who died suddenly, and Linus Cheung was elevated from the deputy’s position to head the company. To support him, C&W sent out the experienced Peter Howell Davis, but his term of office was short-lived. In November last year C&W’s board of directors had had enough of the struggle between Ross and Young and both resigned. Howell Davis returned to Britain to head Mercury.

All this had severely weakened Hongkong Telecom’s traditionally strong relationship with China. The company had been well-supported by China’s Ministry of Post and Telecommunications. Hongkong Telecom was one of China’s largest foreign exchange providers, through what are known as call termination fees.

Virtually all international calls into China go through Hong Kong. Under international rules, Telecom can charge the company sending the phone call —like BT or AT&T —for delivering the call. China’s fee goes on top of that. Last year these calls and those coming directly from Hong Kong made up 47.8 per cent of the company’s international calls. International services last year constituted more than 56 per cent of Telecom’s turnover, and this is believed to exclude international leased line services to which much of the China traffic has now been transferred.

In 1992, AT&T approached China and offered to set up an international receiving centre in the mainland, cutting out Hong Kong. China refused. Since then, however, the weakening relationship between China and Telecom, the creation of two state telecommunications competitors to the MPT in China, and the recent World Trade Organisation’s preoccupation with communications liberalisation, have completely changed the lay of the land for Telecom.The first sign of trouble has been the year-long delay in China’s approval of personal communications system licences, which potentially will provide a higher-tech, all-purpose service. The Joint Liaison Group is reported to have agreed to award six licences, but Telecom is not said to be among them. Neither is its old ally in Beijing, the MPT, which was in the bidding with Smartone. One of the most obvious signs of deteriorating relationships was the revelation last month by C&W chairman Brian Smith that a cellular project in China was well behind schedule because Beijing did not want Telecom to be involved.

Another has been the WTO’s insistence on liberalising the telecommunications industry. Hong Kong’s position cannot be compared to Singapore’s in terms of competition. SingTel dominates almost every aspect of its domestic market —the first cellular competitor, MobileOne, has yet to launch and there is no local fixed-line competition. Nevertheless, the WTO issue remains important to Hong Kong for political reasons.

Hints of this came at a recent luncheon meeting at which Alex Arena spoke. He noted that 80 per cent of the territory’s GDP came from the service sector and that telecommunications itself was becoming a new trade route.

“But we cannot afford the slightest touch of cornplacency,” he warned. “The premier positions in the information age will be held by those who occupy positions on the intersections of the superhighways. These hubs will be strategic locations and these will be competed for vigorously. Hong Kong’s existing strengths as a hub today can easily be replicated and overtaken: therefore we must be diligent to ensure that we build on these strengths and move ahead lest our position be eroded. That is why we are liberalising the industry rapidly, dismantling monopoly and encouraging new entrants.”

The US has been strongly behind liberalizing these hubs. If HKT sends a call to the US it can negotiate a delivery fee with numerous companies, like MCI, Sprint or AT&T.

The US companies, on the other hand have no choice but to deal with Telecom. As the handover approaches, the issue of WTO membership is a lever for the Americans, either getting access to international traffic delivery in Hong Kong or at least having a choice of players.

Trade
The territory’s trade is dependent on it remaining a member of the WTO, a position it can hold, analysts say, regardless of whether it is a part of China. And China needs Hong Kong to keep its WTO status for two reasons: politically it cannot be seen to be allowing Hong Kong’s trading position to go down the drain after the handover; and China’s own entry to the WTO is still in the air —the issue of telecom liberalization may follow intellectual property rights as the leading criterion in the process.

While Hongkong Telecom’s relations with China might once have given it some protection on these issues, the circumstances have changed, according to John Ure, head of telecommunications at the Centre of Asian Studies. He notes that the MPT faces competition from Jitong, which offers long-distance data services and is run by the Ministry of Electronic Industries and Citic, and Liantong (more commonly known as Unicorn), comprising the MEI, Ministry of Electric Power, Ministry of Railways and other groups, which offers long-distance voice services.

These firms would no doubt like to get some of the termination fee business within China and would be happy to deal with firms like AT&T. They also have the political clout to influence Beijing.

According to Leslie Harris, this is probably why HKT is lamely discussing an early end to its monopoly, “Hongkong Telecom would prefer to have deal with people they know rather than those they don’t,” he says, referring to the coming change of sovereignty.

Though there is no love lost between HKT and Arena, he is seen as being fair, and it is probably best to get a settlement now, for despite the existence of a legal contract, the situation could be overturned by a future administration which deemed such a move to be “in the interests of Hong Kong.”

Recouped
According to Andrew Harrington, telecommunications analyst at Salomon Brothers, the settlement could be worth US$2 billion, to be recouped from the sale of other international licences.

And this is what the new local carriers want. According to Harris,. they do not want what is known as ‘,simple international resale,” in which a company sets up a lowcost gateway to receive international traffic and passes it on to local carriers, either in Guangdong or Hong Kong. “Doing that means the real value would be sucked out of Hong Kong,” he says.

Hongkong Telecom is now trying to adapt to rapidly changing conditions. In this year’s financial report, the company admits it is heavily dependent on international traffic and is looking to shift the balance both with new local services and in overseas investments, like a new Taiwan cellular licence.

C&W, in recognition of the importance of developments in the region, has for the first time appointed a chairman for Asia Pacific, Rod 0lsen, an old Telecom hand who is expected to be based locally.

Hong Kong Telecom

HONG KONG FRIDAY, APRIL 12, 1996 ISSUE No. 280

Desperate to dominate equipment supply, chaebols force licence prices skyward

Korean companies are quietly pumping billions of dollars into bids for US wireless telephone licences, and in many cases, blowing American contenders away. It’s all to protect huge investments in CDMA, or code division multiple access, technology. While it’s doubtful the Korean government is directly behind the effort, Seoul’s traditional relationship with the chaebols and its deepening involvement in CDMA network issues, suggest it’s more than a disinterested party. Of the top four bidders — for literally hundreds of wireless licences across the US — Korean companies are heavily behind three of them. A fourth is being fronted by a broader Asian amalgam of faceless investors.

Dozens of US firms have been priced out of the bidding. Underlying the frenzy is Korea’s desperate bid to capitalise on its CDMA strategy and become the major overseas player in mobile telephony. With its eye fixed on opportunities in the US, Korea embraced America’s CDMA digital cellular standard. Indeed, it launched the world’s first CDMA network in January and another this month.

It did this in the face of GSM’s rampant spread across Asia and Europe. Going against the tide, Korea pressed ahead in CDMA, to the point where chaebols are developing a growing range of products based on licences from US-based Qualcom. Only two days ago, Samsung announced that, after an investment of US$2.5 million and three years work, it can now make its own “linear power amplifier” for CDMA systems. Such CDMA developments are being announced weekly by Korean firms like LG and Hyundai, with switching systems, handsets and hi-tech components flowing from their factories every day.

They hope to strike pay dirt both as operators and equipment suppliers. Equipment sales could run into the hundreds of billions. The current top bidder is NextWave Personal Communications, which has the distinction of never having installed a network. Despite that, it has big money behind it, backing over 60 bids in New York and Los Angeles and other markets. Bill to date: over US$4 billion. Korea’s LG has already invested US$30 million in the company; US$20 million comes from the partially government owned Poand Iron and Steel Company. KEPCO, the Korean electricity utility has put in another US$20 million. The second largest bidder is DCR Communication, with about $1.4 billion on the table. It’s backed by Masa Teleconi, a joint venture of unnamed Asian investors.

But LG’s domestic rivals, Samsung and Hyundai, are in the running too. Hyndai is backing the third runner in the race, GWIPS, and number four in the league, BDPCS has scooped US$25 million from Samsung.

But it is not all as straight forward as it seems. Although these bidders have been using overseas cash to put themselves at the front of the running, US regulations forbid licence holders being more than 25% foreign owned. Watch this space.

Korean chaebols, CDMA, cellular phone, licences, US

Asian Business: January 1994
The soaring yen and the continuing recession at home threaten to lose Japan its pre-eminence in the global consumer electronics market. By Gerry O’Kane

Are Japan’s consumer electronics giants losing their dominance of Asian and even world markets? And if they are, who could take the lead? Those are the questions industry observers are asking after a year of turmoil in the industry. Certainly, the figures are not good for the Japanese. In October, Matsushita, the world’s biggest maker of household appliances, issued a half-yearly report that rocked the industry. It admitted that in the six months to September, pre-tax profits had plunged 43%. Sharp’s half-yearly report, issued soon after, was better, but still by no means good; it showed a fall of 23%. Sony’s report, in mid-November was the worst yet; it showed profits had slumped 53.2%.

These Japanese companies are caught in the same double squeeze as the rest of the country’s major corporations. First is the fall in domestic sales because of the continuing recession. Japan now imports 51% more TVs than last year and while many of these come from Japanese-owned firms in Southeast Asia, the figure shows how the consumer electronics industry is changing. And despite this rise in imported TVs, the domestic market has shrunk.

The second disaster has been plummeting export figures as the Yen continues to appreciate against most other currencies. Sony’s deputy president Tsunao Hashimoto illustrates the problem: The appreciation of the Yen, he says, has lopped V74 billion (US$692 million) off revenues. In the early 1980s Japan made 95% of all VCRs sold around the world. The figure now is down to around 65%. The Japanese manufacturers are also suffering from a third major problem: The lack of new hit products to capture buyers’ imagination in the way Sony’s Walkman did 15 years ago.

‘Generally speaking the whole electronics market is looking out for the next widget —over the past two years there has been no major product launch they’re all variations on a theme,’ explains Terry O’Connor, director of electrical purchases for Courts, Singapore’s largest chain of furniture and electrical goods stores.

In Western markets, which are pretty much saturated with TVs, VCRs and CD players, the Japanese desperately need that new widget.

They have been trying. Sony introduced its Mini Disc (MD) system and Matsushita replied with Digital Compact Cassette players but neither has seen much consumer response. Since November 1992, when the MD was launched, Sony has sold 300,000 systems worldwide and Matsushita just 35,500. Small numbers for the big companies.

In Asia, where there are vibrant, growing markets with demand for existing products, the strong Yen means consumers are giving Japanese products a miss and going for products from elsewhere, which have just as many functions but are cheaper.

The biggest of these competitors is just across the Sea of Japan: South Korea.

Through the roof
While Japanese sales have been falling through the floor, Korean figures have been going through the roof. All of South Korea’s three major electronics manufacturers expect to post record export figures for 1993. Samsung is predicting a rise of US$1.9 billion, Goldstar expects an increase of 16.7% and Daewoo a 29.6% increase.

The rising Yen has been a blessing for the Koreans. Samsung’s managing director for overseas strategy, Ko Chang-Li, says, ‘When the Yen climbs 10% against the dollar, our products gain a price edge over Japanese products of 3% to 4%.’

The Korean trio are now planning for greater successes. Daewoo, which has 80% of the Middle East colour TV market, has stated its aim to have 1 0% of the world market by 2000. It is planning to manufacture in Fiance and Poland, in addition to plants it already has in Mexico, Burma, Vietnam and Pakistan. The Koreans are also spending hugely on R&D. Samsung’s research chief Chung Moon-gun explains: ‘To strengthen our position in the world market, R&D will be our focus. We now spend 7% of turnover on R&D, much higher than the average 2% to 3% for Korean industries as a whole.’ That level of R&D spending is similar to the proportion the Japanese used to spend on new ideas before the current recession.

The Japanese, by contrast, have been forced to trim R&D spending —Fujitsu, for example, snipped 13%offitsresearchbudgetin 1992-atpreciselythe time when they can least afford to do so if they are to stave off Korean competition. The Koreans have also taken giant strides to shake off the low-quality image their products used to have. Samsung chairman Lee Kun-hee has been pursuing better quality relentlessly. In August he spelled out why: ‘How stupid it would be if 6,000 workers were working to fix what 30,000 workers produced. A defective product is like a cancer in an enterprise; it will eventually kill it.’

Daewoo, meanwhile, has been concentrating on making its products simple, but extremely robust.

Not unnaturally most manufacturers are concentrating on the one region of the world that is not going into or through recession: Asia. One of the hot favourites is China.

Clamp-down
But swift growth does not necessarily mean big opportunities. China already has a big electronics industry —17,000 firms employing 1.8 million, according to government figures-and it is growing 20% a year. It is also exporting. Overseas sales in 1992 brought in US$6.87 billion.

Many of the Chinese firms were producing goods before the relaxing of foreign investment rules, so when it comes to brand recognition they have a good head start on their foreign rivals.

New arrivals will find competition is fierce and that vice premier Zhu Rongji’s austerity drive has made heavy inroads into sales. Since the summer, prices in Beijing for foreign electrical appliances have fallen between 10% and 20%, according to the Xinhua news agency. Figures from the State Statistics Bureau showed that sales of colour TVs fell 37% between June and July alone. The Chinese government is already telling its own companies there are too many basic electronic goods being made. At the end of October the Ministry of Electronics Industry said the output for colour TVs, VCRS, video cameras and electronic telephone sets all exceeded market demand. ‘Therefore,’ the agency said, ‘no more construction projects in these fields should be ratified.’ Another target has been Vietnam, but even there the more affluent regions are awash with consumer electronics. In Ho Chi Minh City, for example, 90% of homes have a colour television and more than half have a VCR.

Another trend among Japanese consumer electronics companies is to go to new, cheaper sources for components and even complete products.

Pioneer, for example, is to begin importing small stereos from Malaysia, the first complete product line the company has brought into the Japanese marketplace from overseas.

But while this trend may initially help the companies and delight consumers, it will hurt workers, adding to unemployment figures down the line.

In any case, sourcing from countries with cheaper labour —assuming you can find one that also has the necessary skill of levels —is by no means without its draw backs.

Take Indonesia. At the moment it is distinctly at the low end of the technology scale, but the vocal technology and research industry minister B.J. Habibie is pushing the country to become a hi-tech home by the next century. Tariffs on the import of electronic components have been cut from 35% to 5% in a bid to attract

foreign manufacturers, and value-added consumer products like TVs, radios and VCRs make up more than half of the country’s electronics exports -worth over US$800 million in 1992.

But manufacturing in Indonesia can be tricky. Unreliable power supplies can be a severe problem, as can bureaucracy. Sony, which manufactures in Indonesia for export, recently had to close its plant temporarily when customs held up incoming components. Not the way the Japanese like to do business.

Strategy change
Some analysts are forecasting that the Japanese giants will be back in the money by next year, but they concede that this will be at the expense of jobs at home. Manufacture of components and assembly will increasingly move to cheaper countries —assuming the authorities there help rather than hinder.

John McKie, the director in charge of Sony’s display device factory in Singapore believes in any case that major manufacturers must set up production close to their markets. ‘I don’t think the strategy of shipping goods around the world will continue. More, and more, if you want to sell in the US you’ll have to make in the US.’ And to succeed in Asia, he says, you have to have ‘the right product at the right time and at the right price’.

These days the Japanese can’t do that. The Koreans can. While they are by no means counting the Japanese out, they do see a real possibility of their own country becoming the force in consumer electronics.

In a Tokyo conference in March last year Samsung president Lee said: ‘The next three or four years will be a crucial test for [Samsung] to become a top-class global power or just to fall backward.’ So far Samsung and its Korean counterparts look like passing that test with flying colours.

Japan’s consumer electronics giants

Asian Business - September 1992

So you’ve got an export contract. Now how are you going to get the goods to their destination? It may not be as easy as you thought

By Gerry O’Kane

It’s 6.30 on the morning of April 29, 1992, 180 nautical miles (330 km) east of Hong Kong. The 504 passengers aboard the German cruise liner Europa are asleep, as are most of the crew. Suddenly both passengers and crew are woken by the noise of rending metal. They are thrown from their beds as a great gash is torn in the stem of the 37,000-ton cruise ship by the bow of a Greek freighter, the Inchon Glory.

Despite flooding of the Europa’s aft engine room and water in the number one and two holds of the Greek ship, no one is hurt. After an uncomfortable couple of days the Europa’s passengers arrive in Taiwan. The Inchon Glory limps back to Hong Kong.

While the holidaymakers have had a shock, the owners of the freight being carried on the Inchon Glory are in for a much bigger one. The vessel, including its cargo, is held by the salvage company until the ship’s insurance company can post a bond guaranteeing payment for the cost of the salvage operation and any subsequent costs.

Shipping by sea, as the owners of the cargo on the Inchon Glory found out, can be fraught with perils. And those dangers vary with the waters a ship is cruising. ‘South Korea [for example] has a completely different legal system from many of Asia’s countries,’ says Chris Gordon, a shipping and cargo legal specialist with Robertson, Double solicitors and notaries. ‘While Hong Kong lawyers may seem quick off the mark to have vessels held, in Korea it can be done at the drop of a hat and [ship and cargo] sold without any scrutiny.’

The story of the Inchon Glory is a not unusual example of one of the hazards which companies face when they ship goods, whether by sea, land or air. If the carrier makes a mistake, it can cost both the shipper and his customers a great deal of time and money. Indeed, the cost of delays in the movement of goods may go well beyond cash. It may also mean the loss of contracts.

For companies with products to ship, being aware of the possible problems is of vital importance. Finding reliable freight forwarders is often not easy, but it is essential. Later in this article we’ll tell you how to protect yourself. But first here are the pitfalls.

The liability minefield
Small suppliers who ship relatively small quantities have little hope of guaranteeing goods will arrive at the other end on time. The horrible truth —and it comes from the mouths of industry analysts, lawyers, shippers and even forwarders themselves —is that only the ‘big boys’ have any clout in the market.

‘The fact is that carriers and forwarders are not as draconian as the 18th century carriers [were] in admitting absolutely no liability. But they are not far off,’ says Gordon. International laws such as the Hague Convention for shipping and the Warsaw Convention for airlines offer only limited legal rights for shippers, Gordon says.

For example, under the Hague Convention a carrier is liable for damages assessed per unit. ‘The problem,’ says Gordon, ‘is that the carrier is likely to define “unit” as a “20 foot container unit” (TEU) and that one unit could contain half a million small items valued at US$10,000 each. But the [limit] of liability on one TEU is relatively small.’

Let’s look at a fictional worst case scenario —one which people in the business say is not at all far fetched. Indeed, they say, this sort of incident happens regularly.

Mr Luk in Hong Kong is shipping watches to a new client in Thailand. The watches need to be in Bangkok by Tuesday night. He tells Mr Wo of Wonky Freight Forwarders that if he can deliver the watches on time, his company can have the ongoing business.

‘No problem,’ says Wo. ‘We’ll put them on a plane tonight. And to save you money we’ll consolidate the goods.’

What this means is that the shipment of watches will be placed with other goods to create a bigger unit in the aircraft’s hold. But Wonky is a small operation and it doesn’t have anything else going to Thailand that day. So Wo calls an agent —Mr Chan. ‘No problem,’ says Chan. ‘I have space in a container leaving for Bangkok first thing Tuesday morning.’

Luk’s watches are put in Chan’s container. But as the container is waiting to be loaded after passing customs, the cargo executive of DodgyAir International gets a call from another client, Makin’ Money Ltd. Makin’ Money has had an emergency and needs to get a five-tonne container of spares to Thailand. Makin’ Money spends US$6.5 million a year with DodgyAir, compared with about US$75,000 from Chan. Chan’s container —with Luk’s watches —is bounced off the flight. Thursday morning Luk calls Wo, the freight forwarder, ‘The watches haven’t arrived in Bangkok.’

Wo calls Chan. But neither Wo’s representative in Bangkok, nor Chan’s, knows anything about the missing container. They only earn a nominal fee for their troubles in any event, so they haven’t really put much effort into tracking it down.

Chan calls the cargo executive at Dodgy International. ‘Didn’t we tell you we didn’t have room on that flight?’ says the cargo exec. ‘Your container leaves this morning, but I’m afraid you’ll have to pay one night’s warehouse fees.’ Luk’s watches arrive in Bangkok on Thursday night. Suphot, who wanted the watches two days before, has received his bill of lading and paid the bank, so the watches now belong to him.

But although the watches have cleared customs and are waiting at the airport, Suphot can’t take them. He doesn’t have the airway bill from the airline —Wo the forwarder left that part of the transaction to Chan the agent, who decided that DodgyAir should take care of it. DodgyAir dutifully printed up one copy of the bill on the morning of the flight and posted it to Bangkok.

Suphot finally gets the airway bill in the mail on Monday and goes to collect the watches. He finds that while the consignment sat in the warehouse some of the watches have been stolen.

The luckless shipper, Mr Luk, has been paid for his watches, but he has lost any other business he might have done with Suphot. He approaches Wo for compensation. Wo tells Luk to read his contract Wonky is not liable. DodgyAir and Chan can’t be sued for the delay either, because their contracts, too, protect them from liability. In any case Luk has a contract only with Wonky. The thefts are not the carrier’s liability either —the goods went missing from the Bangkok warehouses and DodgyAir has no intention of bringing up the matter with the airport authority and spoiling relations over a few watches.

And to add insult to injury Luk is the one who is stuck with paying for the one night’s warehousing in Hong Kong and the three nights in Bangkok.

The paper chase
Problems concerning bills of lading are also of increasing concern. Willy Lin, managing director of Hong Kong-based Milo’s Garments, told delegates at last year’s FIATA (Federation of International Freight Forwarders) World Congress in Singapore that he was worried by the growing use of agents employed by the receivers because of the conflict of interest.

What happens, Lin asked, if an agent releases freight without the bill of lading because of the relationship he has with the receiver? The shipper could end up not getting paid, especially if the customer was in financial difficulties.

So far such occurrences have been rare in Asia. But in South America examples of goods being handed over without a bill of lading have become commonplace. ‘We’ve had complaints,’ says Gordon. ‘[The shippers] have never seen their goods or money again. As far as South American [customers] are concerned, if goods go through the carrier and bond then they should be delivered regardless of the bill of lading.’

Court cases against carriers which have released goods without bills of lading are proceeding. But with local laws and customary international law often in conflict, the cases are certain to be protracted and expensive for the shipper.

Bills of lading aren’t the only type of paperwork causing headaches for shippers. ‘For the type of [hi-tech] goods we ship, we have to have precise details on the forms —letters of credit, bills of lading, airway bills, insurance certificates,’ says Gary Robinson, managing director of Arnhem Technology, which has offices in Taiwan, Hong Kong, Beijing and Southampton, England. ‘Many of these [forms] are filled in by the forwarders and no matter how many times we tell them how to fill them in, and how important precise information is, they sometimes do not follow instructions.’

The result of slipshod filling in of forms has been goods held up in China and Taiwan. That puts Robinson’s company in the difficult position of having to obtain permission from Chinese banks to amend documentation so that the company’s clients can get their orders delivered.

‘We use several different freight forwarders from Britain, the US and Asia, and we come across [these and other] problems time and time again,’ says Robinson. ‘We’ve had goods in Beijing that have cleared customs but there’s been no airway bill. It can take up to two weeks to get the airway bill [causing delays when] the goods could have been moved in 24 hours. It’s frustrating.’

Mark Wilson, general manager of Benair, a freight forwarding company that specialises in moving cargo from Asia to Britain, also says that airway bills can be a problem. ‘A good freight forwarder should be able to pre-clear goods for the other end,’ he says. ‘And that includes providing the overseas office with an airway bill. We call it the “wheels-up system” while the [plane’sl wheels are [still] up we’re already clearing goods for entry.’

Custom-made problemsWhile Hong Kong and Singapore are noted for easy customs clearance and efficient service, some shippers (who wish to remain nameless) complain that it is sometimes necessary to grease palms in other Asian countries such as Indonesia and Thailand.

But worse than corruption, says Arnhem’s Robinsdn, is the abundance of stupidity and carelessness. ‘We supply a hi-tech gel to use on the production line of fibre optic factories,’ he says. ‘It is highly toxic and delicate. We had a case in the UK where customs [officials] off-loaded the drums for inspection, did not inform us or the forwarders and did not take the documentation from the carrier. They claimed they thought it was flame-thrower fuel and without reading the documentation they proceeded to stick ladles in it.’

The result: The gel was ruined, and in any case the ship had sailed without it. And Arnhem wasn’t even informed that its goods had been off-loaded until the day they were due to arrive in China. Arnhem paid the costs. The company has also had goods seized by customs while changing vessels and again, no one thought to inform the company. The goods were late arriving and Arnhem got landed with customs authority storage charges.

‘[These problems are] very common for anyone shipping unusual goods to North Korea, China or Vietnam,’ admits Robinson. ‘The base line is that any customs authority has the right to do it.’

Benair’s Wilson agrees that in many cases little, if anything, is done by the forwarder to help with problems in transit. But that, he says, isn’t necessarily the forwarders’ fault. ‘Once it is cleared by customs it’s difficult to get a shipment back,’ he says. ‘And once it’s on the way, we can’t know what is happening to the shipment unless the carrier tells us. But if you do use an established forwarder they often have the scope and pull to get answers and solve the problem.’

What can a shipper do
‘What you do depends on whether you are a big or a small player,’ says Chu Tian-Cho, a partner and shipping expert with McKinsey & Co management consultants. ‘If you are a big player it pays to shop around.’

For very big shippers it may pay to create your own transport division to make deals directly with shipping lines. (It won’t work with airlines; they have a pact with freight forwarders not to get involved in the forwarding business.) To be considered big, according to Chu, you need to ship about 500 tonnes a year by air (probably one percent of an airline’s freight business) and 50,000 tonnes by sea. The vast majority of firms simply aren’t that big.

One big shipper is Hong Kong-based Sono Centra. A low-profile sourcing company for German department stores, with offices from Karachi to Japan, Sono contracts with factories to make products to its specifications and then ships to Germany. It turns over somewhere in the region of US$306 million a year.

‘We have our own transport company with a just-in-time computer system,’ says Helmut Henkel, Sono’s managing director. Once we know goods are ready to leave the factory we use forwarders.’ But while many other firms simply allow the forwarders to take over completely from that point, Sono takes a more active interest in the process.

‘We tell the forwarder which ship to put the goods on, the estimated time of departure and if the goods are to wait and be consolidated with other products. The [forwarders’] only job is to consolidate goods and put them on the ship.’ Henkel says that this works well. Sono rents space on vessels directly from the shipping lines and the goods are picked up by the customer in Germany within 22 days.

‘For us it’s not too difficult,’ he says. ‘We have five shipping lines under contract and we just don’t have problems.’ He never uses forwarders or carriers in the conventional way. ‘[To do that] would be too dangerous for our business.’

A company which can consolidate its own goods and use its financial muscle is in a better position to deal with airlines as well as freight forwarders. ‘A smart shipper will negotiate his own terms and conditions with a forwarder [so as] not to get caught by some of the get-out clauses,’ says Wilson. ‘But they’ll need a lot of buying power.’