I recently attended a media briefing by Coface, the global credit insurance company. Executive vice president for Asia Xavier Farcot confirmed what journalists have been hearing on the ground: Asia’s companies are encountering problems collecting on their payables.
In a survey of 2,274 enterprises in Australia, China, Hong Kong, India, Japan, Singapore and Taiwan, Coface found that 43% are experiencing an increase in the amount of overdue payments. In a similar survey in 2011, only 29% said the same.
The surge is particularly notable in China (56%), Singapore (43%), Hong Kong (42%) and Australia (34%). Farcot noted that these markets have significant exposure to global trade.
But what about Taiwan and Japan? Both are also major exporters, yet only 20% of the 215 companies surveyed in Taiwan and 22% of the 205 enterprises in Japan reported an increase in the level of overdue payments.
‘The difference is the use of credit management systems,’ says Farcot.
According to the survey, companies in Japan (100%, against the Asian average of 66%) and Taiwan (80%) are users of credit management tools such as credit agency reports and recommendations, credit insurance and factoring.
‘Even in a difficult environment, you can still have good companies and good processes, depending on what tools you’re using and who is controlling the credit management,’ he added. In practice, of course, those controllers are typically accountants in business.
One key task is to conduct due diligence on customers to gauge their ability to pay. In the Coface survey, the majority (53%) identified ‘customer’s financial difficulties’ as the main reason for late or non-payment. This can happen, according to survey respondents, because of the impact of fierce competition on margins (60%), lack of financing resources (36%) and impact of rising raw material prices (15%).
A telltale metric is the amount of debt overdue for six months or longer as a percentage of annual turnover; Coface puts the danger threshold at 2%. Other risk factors include the buyer’s industry and operating country. Coface ranked industry sectors on four metrics, including most number of companies with overdue payments and with 2% or more of annual turnover unpaid for more than six months.
The riskiest industries in Asia are building and construction; information technology; internet service providers and data processing; textile, clothing, shoes and other apparel; industrial machines and electronics; and paper and printing. As for countries, Coface gives the lowest grade of ‘D’ to many in Africa, including Nigeria, Sudan and Zimbabwe.
What if the buyer fails to pay? Seven out of 10 (74%) respondents said that amicable negotiations towards crafting a new repayment schedule is a good approach. Only 10% pointed to third-party intervention, such as deploying a lawyer or debt collector, and just 6% to arbitration.
Given the economic crisis in Europe, the USA’s lackadaisical growth and a slowdown in China, it’s all food for thought for the region’s CFOs and others in the finance function.
Cesar Bacani is editor-in-chief of CFO Innovation Asia