Lessons from the East: Adapt and survive

Trade Finance, Covid-19, China dossier

Lessons from the East: Adapt and survive

26 May 2020

Covid-19 has upended supply as economies move away from just-in-time procurement and prioritise security of supply over cost. In an article first published in Germany, Carmen Chan, Dirk Lubig and Ulf-Peter Noetzel examine general lessons from China’s recovery from the pandemic

While the Covid-19 epidemic may not be over in China, official figures show a sharp decline in infections, placing it ahead of the curve when compared to Europe and the United States.1 Given the importance of China to global supply chains, the country’s recovery will have a direct impact on economic activity across the globe. But its experience and journey out of the crisis also provides significant foresight as to what may happen over the coming months in Europe in terms of trade flows, supply chain adaptations and financing. For German exporters, the learnings are clear: adapt and survive.

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Carmen Chan - Head of Trade Finance Greater China, Deutsche Bank
Head of Trade Finance Greater China, Deutsche Bank

Carmen Chan

Dirk Lubig - Head of Global Transaction Banking China, Deutsche Bank
Head of Global Transaction Banking China, Deutsche Bank

Dirk Lubig

Dirk Lubig - Head of Global Transaction Banking China, Deutsche Bank
Chairman, Trade Finance Financial Institutions, Deutsche Bank

Ulf-Peter Noetzel

Shifting supply chains

Adapt and deliver to where the demand is

One of the more notable impacts of the pandemic is how it has re-shaped business models and supply chains. The economic slowdown heightened the financial strain on Chinese companies, forcing many to adapt dynamically, identifying and adjusting to new points of demand.

In particular, with foreign demand shrinking as the virus spread worldwide, many of China’s traditional exporters have looked to adapt by retuning their focus to the domestic market, where demand for certain products began to spike as citizens prepared to hunker down. This is in line with a general decline in import-export activity, which was down 9.6% year on year in March, according to the National Bureau of Statistics of China.4

“Adapt and deliver to where the demand is” became the watchword of successful companies during the pandemic, with many shifting production to roll out entirely new products such as children’s games, masks and medical equipment.

Alongside this trend, companies have sought to bolster their supply chains against some of the shocks. Notably, a number of companies found that they were unable to procure the necessary parts to roll out production even when factories were staffed – holding back progress.

To address this issue, many have begun turning away from so-called “just-in-time” production models, where inventory is kept at a minimum and parts are delivered only at the moment they are needed. Instead, companies – particularly larger corporates – are developing stockpiles and setting out policies to maintain certain levels of stock as a guard against further supply shocks. For these businesses, holding stock is now seen as critical to maintaining a sustainable production line.

With the same end in mind, companies are also looking into diversifying their supplier bases, bringing in multiple suppliers with different exposures to supply the same parts. This should add extra resilience to supply chains, with one supplier able to ramp up delivery – or at least stop production from halting altogether – if the other is taken out of action.


Impetus for change

Border closures and the focus on fulfilling domestic demand have naturally affected global trade volumes and, by proxy, the demand for trade finance. Yet with risk mitigation now more important than ever – as both importers and exporters feel the strain on their cashflow and activities – the availability of trade finance products remains essential.

Chinese importers unable to procure the necessary components to continue production have naturally looked to working capital support, such as short-term loans and receivables finance, to help them stay afloat while economic activity is subdued. Those that do have access to the parts they need, meanwhile, are still exposed to delays in payment from end customers, whether domestically or from overseas, representing a further growing risk to business continuity. Again, trade finance can step in to mitigate the impact – with traditional instruments such as letters of credit and guarantees providing critical risk mitigation, for instance.

As it has been for Chinese corporates, so it will be for those in Germany. When it comes to trade finance provision, adjustment and adaptability remain the key themes. Social distancing measures present new and significant barriers to day-to-day business in trade, prompting another adjustment – this time accelerating the shift towards digital processes.

China has notoriously complicated export processes and, with courier services out of action or overwhelmed by demand, a paper-based approach threatens to consign businesses to irrelevance. The difficulty is that the physical exchange of trade finance documentation is embedded at the very heart of the trade finance industry’s processes and, in many countries, it remains illegal to use electronic trade documents.

Change is already underway, albeit slowly across the industry, with increasing numbers of digital solutions and platforms appearing over the past several years. However, with the current circumstances imposed by the Covid-19 outbreak, businesses, regulators and finance providers are increasingly recognising the need to accelerate this transition away from paper-based processes.

This has been supported by industry organisations, such as the International Chamber of Commerce (ICC), which recently released a series of guidance documents to support business continuity – notably including advice on the modification of ICC rules and statements to governments and regulators encouraging them to void any legal prohibition on the use of electronic trade finance.5

Digitalisation will enable a range of processes to be streamlined and improved for greater efficiency across the lifecycle of a trade. In China, on a domestic level, initiatives have been put in place to facilitate document handling, while the growing interest in blockchain-based technologies is also surging.

The question remains as to how such platforms and processes could be extended at cross- border level, while differing or prohibitive legal and regulatory frameworks remain in place. Yet one thing is clear: if businesses and the financial industry embrace change, they will come out of this crisis intact, and perhaps even in a more robust shape than when they entered it.

First published in German by ExportManager online on 13 May 2020 and reproduced in English by permission from the publishers




1 https://bit.ly/3ebzHl2
2 See Covid-19: The economy after Wuhan at https://bit.ly/3gdtGGi> https://bit.ly/3gdtGGii
3 https://bit.ly/36mlMWx https://bit.ly/36mlMWx
4 National Bureau of Statistics of China, 16 March 2020, National Economy Withstood the Impact of COVID-19 in the First Two Months; https://bit.ly/3bWjjDs
5 International Chamber of Commerce, 06 April 2020, ICC provides guidance to the trade finance market to address COVID-19 disruptions; https://bit.ly/3bTbxdp


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