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FX INTERNATIONAL PAYMENTS

GLOBAL TRADE AND FINANCING IN ASIA

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Phillip Silitschanu is the founder of Lightship Strategies Consulting LLC, and CustomWhitePapers.com.

Phillip has nearly 20 years as a thought leader and strategy consultant in global capital markets and financial services, and has authored numerous market analysis reports, as well as co-authoring Multi-Manager Funds: Long Only Strategies.

He has also been quoted in the Financial Times, Wall Street Journal, Barron’s, BusinessWeek, CNBC, and numerous other publications. Phillip holds a B.S. in finance, a J.D. in law, and an M.B.A.

PHILLIP SILITSCHANU

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The world shrinks smaller...

Borders, barriers, vanish...

Opportunity!

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INTRODUCTION

Opportunities in Asia

How technology is breaking down barriers to global trade

Considerations when establishing operations internationally

Paying and getting paid in emerging markets

THE BIG PLAYERS

China

India

THE EMERGING MARKETS

Bangladesh

Cambodia

Indonesia

Lao PDR

Malaysia

The Philippines

Thailand

Vietnam

CONCLUSION

Endnotes

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INTRODUCTION

OPPORTUNITIES IN ASIA

Chances are you are reading this whitepaper on a computer. That computer is a veritable microcosm of Asia: it’s likely that the screen was made in Malaysia, the CPU in Taiwan, the hard drive in Indonesia, the memory in Vietnam, the battery in Thailand, and final assembly was in China. Just a decade or two ago, the only companies that would have dreamt of purchasing parts or goods from emerging market countries such as Vietnam and Bangladesh were enormous global firms. Firms with massive amounts of resources and capital at their disposal, allowing them to offset the risks (and potential losses) of doing business in those countries.

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Today, the world is shrinking, partly thanks to better cooperation between emerging market countries, but also in large part due to the rise of technology. Where before only the largest of companies had the resources to conduct business in these emerging countries, today small and medium-sized enterprises (SME) and mid-market enterprises (MME) are taking advantage of the opportunities to purchase and sell in these markets.1

The increasing adoption of containerised and intermodal shipping in Asia has allowed even the smallest business to import and export goods to and from emerging market countries in Asia. The normalisation of relations between governments that in the past were hostile to one another, has led to the easing of travel restrictions—fostering the trade of goods, but also enabling services to be offered to (and from) these emerging market countries. The greatest catalyst for the explosion of commerce in these emerging markets is the rise of the Internet, the conduit through which businesses today are able to source new suppliers, secure new clients, and expand their horizons.

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HOW TECHNOLOGY IS BREAKING DOWN BARRIERS TO GLOBAL TRADE

Shipping goods to and from these countries, as well as delivering and obtaining services, is all well and good—but there has historically been one overarching hurdle: sending funds to, and receiving funds from, these countries. Historically, banks have been the sole channel through which to transfer currency from country to country, and businesses begrudgingly suffered banks’ high set-up, maintenance and transfer fees. But today, technology is allowing businesses the freedom to choose modern, expedient, efficient—and inexpensive—alternatives to transferring currencies through banks.

Businesses who conduct both importation and exportation with a foreign country can often build a natural hedge by setting up a local bank account, utilising the payments received from clientele in the local currency to pay suppliers’ invoices, and negating the need for international currency transfers.

But, for businesses seeking only to import from or export to a foreign country, there may be no need for the costs, delays and paperwork often associated with setting up local bank accounts. Corporate FX providers can offer a cost effective and efficient alternative for SMEs and MMEs to conduct trade successfully in emerging market countries.

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As every business owner knows, there are hurdles to overcome when first starting a new venture. For businesses entering new markets, they will face similar hurdles, as well as additional ones not encountered when the business is operated solely in their home country. For example, businesses establishing operations in emerging market countries may face foreign ownership restrictions. While these vary from country to country, the general idea is that a foreign company or citizen may not own, outright, a business in the local country.

Often, the foreign citizen must partner with a local business, or citizen of the local country, in order to establish a business in that country; and while in some countries this is innocuous, in others the foreign citizen might never be permitted to own or control more than 49% of the local business. This can expose the foreign citizen or company to the

risk of never truly having control of their business in the local country, or—even worse—having their business in the local country expropriated, with little or no legal recourse, as we have seen in Argentina, Venezuela and Zimbabwe, among others.

While businesses which seek to fully enter an emerging market country (establish a local corporation, develop a franchise, build a factory, open offices, etc.) will navigate the entire course of establishing a local business, for others which are simply seeking to purchase or sell goods or services in the country, the facilities offered by corporate FX providers are well suited to their needs. By utilising inexpensive and efficient corporate FX providers, a foreign company can import from or export to the emerging market country, without the rigmarole of establishing a local business, office, or bank account.*

* For a more in-depth discussion of how corporate FX providers can help your business in foreign markets, please see the American Express FX International Payments white paper “Trade Financing & Best Practice B2B Payments.”

CONSIDERATIONS WHEN ESTABLISHING OPERATIONS INTERNATIONALLY

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One of the difficulties SMEs and MMEs seeking to export or import goods to emerging market countries have encountered is the ability to establish business relationships in emerging market countries without developing working relationships with local banks. This is especially true when a business’s employees are first entering the new country, to develop a foothold there. These employees need to make the critically necessary connections with the right local businesses, while paying the local licensing fees and tariffs.

Those employees need a way of accessing money to pay for local goods and services (as well as government fees and tariffs) immediately. Corporate FX providers have helped to fill that gap admirably, allowing businesses who are involved in either import or export to execute currency transfers to companies and government agencies in those countries quickly and easily, enabling their employees to establish the necessary relationships in those countries.

Corporate FX providers can also give businesses importing or exporting goods the ability to avoid committing their valuable resources to a market in

which they are not certain of establishing business ties. For example: your business would like to conduct exploratory business in an emerging market country such as Vietnam, but is not yet sure whether it would like to commit fully to conducting business with the local supplier. With a corporate FX service, your business can purchase goods from the local supplier once, and simply transfer the currency to pay the invoice—no need to establish a cumbersome local bank relationship, only then to close it weeks later if the decision is made not to continue further business with the supplier in that country.

Conversely, your business receives a purchase order from a new client in an emerging market country: the new client needs the order delivered urgently. It is simple enough to deliver those goods quickly, even overnight, by utilising expedited shipping companies. The difficulty most businesses encounter is how to receive payment from their client for that urgent order: establishing a new local bank relationship may take weeks. Today, you have the ability to receive the payment from that client quickly (often in just a few days), simply by having the client send funds to your business via a corporate FX provider.

By utilising inexpensive and efficient corporate FX providers, a foreign company can import from or export to the emerging market country, without the rigmarole of establishing a local business, office, or bank account.

PAYING AND GETTING PAID IN EMERGING MARKETS

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THE BIG PLAYERS

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When one speaks of doing business in Asia, there is one country that cannot be avoided: China. With a population of 1.364 billion, and a gross domestic product (GDP) of US $10.36 trillion,2 it is not only an enormous source of products and supplies, but has also perennially held the glimmering promise of being the utopian market that foreign companies hope to crack. There are indeed cracks, but not the promising cracks to break into the Chinese market of which foreign companies dream: China’s imports and exports have actually been declining.

China’s office of the General Administration of Customs recently reported that export figures for China have fallen nearly 6% in just one month—followed by a further drop of 4%.3 This is rather foreboding, and while it does not signal the conclusion of China’s two-decade explosion of growth, it certainly does foreshadow China’s inevitable growing pains: that higher labour, land and operating costs are an unavoidable consequence of success—and that China’s neighbours in Asia are quickly learning that they, too, can emulate the success of China by providing goods and services at competitive costs to foreign businesses.

China, while slowing down, is still the largest export economy in the world, with US $2.25 trillion in exports and US $1.56 trillion in imports.4 For businesses looking to enter China, there are several agencies that must be taken into consideration, and the regulations of each one must be taken into account. Namely, there is China’s banking regulator, the China Banking Regulatory Commission,5

as well as the Ministry of Commerce,6 and the National Development and Reform Commission (NDRC).7

The Chinese Communist Party (CCP) represents a very opaque system of governance, and experts on the matter agree that outsiders still are unsure how power within the party is divided. On average, there is a major change of governance every twelve years, but while many expect this to mean redirection of policy, in recent history there has been little real shift in policy.

Foreigners seeking to conduct business in China should be aware that the CCP controls the appointment of all court judges. Special consideration should be taken to obtain effective legal representation with experience in navigating China’s legal system.8

The most common method by which foreign companies establish themselves in the Chinese market is through a joint venture with a local company. The most common structure is the Wholly Foreign Owned Enterprise (WFOE), followed by Variable Interest Entities (VIE), and State Owned Entities (SOE). WFOE’s can be owned by non-Chinese citizens, even if ownership by that foreigner exceeds 50%. But there are a few limitations to be aware of: WFOE’s cannot be involved in the internet/web business, certain types of metals, or hospitals. Businesses which seek to develop property in China also need to bear in mind that there is no private ownership of land in China.

Yet, despite these hurdles, China is still the land of promise for many businesses seeking to enter a foreign market, and these days often the easiest foreign market in which to take the first step when establishing international relationships.

China is the largest export economy in the world with US $2.25 trillion in exports and US $1.56 trillion in imports

CHINA

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India has a population of 1.125 billion, half of which is under the age of 27, and the majority of those speak English. India would appear, from a purely quantitative measure, to be the ideal country with which to conduct foreign business—and an even more promising country in which to establish a foreign business. But there are significant hurdles for foreign businesses looking to establish themselves in the country.

Each of India’s twenty-nine states has differing laws on land purchases, taxes, employment, and environmental regulations. India, for all its promise, still ranks near the bottom of the World Bank’s “Ease of Doing Business” rankings: 142nd out of 189 countries.9 Yet despite the complexity, and difficulty, of developing a business in

India, there is still opportunity for success there, and the easiest way to do so is to export and import goods and services to and from there. In the 2014-2015 fiscal year, India had exports of US $310 billion, and imports of US $448 billion.10

While there is a strong international banking presence there to serve large and mid-size corporations, there is as yet an untapped market of smaller businesses in India which are seeking to export and import goods. To address the needs of these smaller businesses, and allow foreign businesses to tap into this lucrative market, a corporate FX provider is well suited to fill this niche.

In 2013, India had exports of US $290 billion, and imports of US $420 billion.

INDIA

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THE EMERGING MARKETS

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Bangladesh’s future holds great promise, and this is borne

out in a telling statistic: 20% of the country’s population

(nearly 30 million people) are currently students.12

BANGLADESH

Bangladesh may very well be the rough diamond of South Asia. Boasting an annual growth rate of over 5% every year, for the past sixteen years; English as the prevalent language; and a poverty rate that has been reduced by half in the past decade, Bangladesh has made enormous strides since its independence in 1971.11

A burgeoning textile and clothing industry has helped Bangladesh improve its fortunes, and that success is being replicated in numerous other industries. There are, however, still some difficulties in establishing a business, or operations, there: corruption is common, there is a notable lack of transparency, and the presence of heavy bureaucracy must be dealt with if one is to be successful. For foreign businesses which prefer to conduct business in Bangladesh without a long term commitment or capital expenditure, a corporate FX provider may be an invaluable partner.

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CAMBODIA

Cambodia’s economy has grown at an average of 7% every year for the past decade, driven primarily by clothing manufacture, construction, agriculture and tourism. The Cambodian government has been aggressive in promoting generous incentives to foreign investors, and imposes few restrictions on imports from foreign countries. One factor which helps Cambodia stand out is that foreign investors are entitled to hold 100% foreign ownership of companies, and are offered corporate tax holidays of up to eight years (with a 20% annual corporate tax rate after the holiday period concludes), duty-free import of capital goods, and no restrictions on capital repatriation.13

Cambodia offers favourable tariffs in a successful effort to attract foreign investors—and boasts significant natural resources that are only recently being tapped.

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INDONESIA

Southeast Asia’s largest economy, Indonesia has a GDP of US $888 billion (making it the 10th largest economy in the world), and an average of over 5% growth during the last decade.14 While Indonesia has had a steady rate of economic growth, boosted by successful macroeconomic policies, there is still the looming shadow of protectionism, widespread corruption, inadequate infrastructure, and relatively weak rule of law. Tariffs have been reduced, but there are still significant barriers to entry: heavy bureaucracy, opaque (or conflicting) laws, and local content requirements that prevent some products from being imported and sold in Indonesia.

But there is a silver lining: as the infrastructure improves, demand for imports of foreign equipment and technology increases. Aviation, telecommunications technology, and consumer goods (targeted towards the expanding middle class), are also areas of rapidly growing demand. While establishing a business (or foreign operations) is still rather cumbersome, Indonesia presents an excellent opportunity for foreign businesses looking to purchase goods, as well as a market that is eager—and able—to purchase foreign goods.15

With the fourth largest population in the world, Indonesia’s middle class is as large as the entire population of Spain—and has been largely untapped until recently.

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Lao PDR (often called Laos) has a GDP of just $11 billion, but it has been growing recently at over 7%. Laos may be the most under-addressed country of the Southeast Asian countries, with very few foreign businesses conducting business there, and even fewer establishing manufacturing or operations there.16 This is in large part due to inadequate infrastructure, but also because of a lack of sophisticated banking services.

Commercial banks in Laos have grown in number in the past few years, to nearly 30, but the services provided are still limited. Making, and receiving, payments in Laos is still rather difficult, but corporate FX providers are easing this difficulty. The good news is that the Lao PDR government is working to ease legislative barriers to the establishment of businesses, and Laos is slowly climbing up the “ease of doing business” index.17

While arguably behind the curve in trade liberalisation, Laos is putting forth great effort to catch up: e.g., developing a US $7 billion new rail line connecting it to China.

LAO PDR

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Malaysia is one of Southeast Asia’s largest centres of manufacturing and outsourcing of services, and rightfully so: a well-educated workforce that speaks English, business and legal practices that are similar to those found in other common law countries (United Kingdom, United States, etc.), and a modern and well-developed infrastructure and transportation network, all work together to make Malaysia a relatively pain-free country in which to do business.18 This comes as no surprise, as countless foreign businesses have entered, and succeeded, in Malaysia. There are some pitfalls to be aware of, however: there is a significant amount of corruption, and policies that can sometimes be unfavourable towards foreigners seeking to conduct business in the country.

Malaysia’s GDP growth has averaged 5% per year since the year 2000, and there is a well-educated, prosperous middle class that is becoming accustomed to purchasing foreign goods. For foreign businesses entering Malaysia, the process is comparatively straightforward, but for those who prefer not to enter the market fully (by establishing a local business), corporate FX providers can offer expedient and inexpensive currency transfers into and out of the country without having to set up local banking relationships.

Considered by many to be the greatest success story of Southeast Asia, Malaysia is a manufacturing powerhouse—and the growth in GDP from that manufacturing is creating a population with fast increasing disposable income waiting to be spent.

MALAYSIA

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THE PHILIPPINES

With a population of over 100 million, the Philippines is one of the largest countries in Southeast Asia. There are certainly several attractive features to the Philippines, but there are also significant hurdles to establishing a local business. Establishing a business there is a major bureaucratic task, with numerous signatures required from various agencies; and corruption is still a real problem, although it is slowly improving. More troublesome are the restrictions on foreign ownership of companies and land, as well as restrictions on investments.19

Yet, there are glimmers of hope: a strong and growing services industry taking advantage of an English speaking population, a liberalised economy, and disposable income buttressed by over US $21 billion in overseas remittances (much of it using the services of corporate FX providers), make the Philippines an attractive place to conduct business, although that business is likely to be conducted without establishing a local presence.

The Philippines boasts a large English speaking population, and has quickly established itself as an exemplary offshore client service centre; while the manufacturing and pharmaceutical industries are expanding fast.

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Thailand is perhaps the most attractive of the Southeast Asian countries in which to do business, and not only because of its beautiful landscape. A growing, and affluent, middle class, a government that is consistently pro-foreign investment, and an excellent location which places it in the centre of its Southeast Asian neighbours, all add up to an easy country in which to establish a business. No place is perfect however, and there are some problems: corruption still exists, though it is being curbed; there are foreign ownership restrictions, though these are limited to only a few industries; and perhaps most telling: Thailand’s unemployment is so low that it is becoming difficult to locate and hire skilled labour at the low costs that are commonplace in neighbouring countries.20

Countless foreign companies have established themselves in Thailand, almost to the extent of new foreign businesses being crowded out. Opportunities still exist, especially for smaller businesses such as SME’s and MME’s, which may be more nimble and dynamic than the large corporations that are already there. Global banks are well established in Thailand, but corporate FX providers can offer a less expensive (and easier to use) alternative to banks when it comes to currency transfers.

Thailand strongly encourages foreign investment, and is one of the most open economies in Southeast Asia; leading many to call Thailand the best location in Southeast Asia to establish a foreign business.

THAILAND

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Vietnam, with its long history of French influence, initially recovered slowly from decades of armed conflict. But since launching major economic reforms in the mid-1980’s, it has been on a steady climb for three decades, and is forecast to become one of the top-ten fastest growing economies in the next three decades. One of the latest boosts to trade in Vietnam (and indeed trade between France and Vietnam) is the signing of the Vietnam-European Union Free Trade Agreement in 2015. Notably, Vietnam has seen its exports to France alone register US $2.8 billion (an increase of approximately 7%) and imports from France reached US $1.1 billion in 2014.21

New infrastructure programmes are also underway, including an international airport hub, expansion of regional airports, and new railway networks. A young, dynamic, population of nearly 100 million Vietnamese, eager to participate in the world market as producers

and consumers, bodes well for the success of foreign business seeking to take advantage of the opportunities Vietnam offers.

A few problems are worth mentioning: Vietnam is still plagued with corruption and bureaucracy, and Vietnamese law is rife with grey areas. English is still not widely spoken, which can lead to some difficulties when establishing businesses there. These issues are all improving, but one matter which still causes difficulties is transferring currencies via banks. Slow, expensive and unwieldy, banks are not the optimal channel by which to make and receive payments. Corporate FX providers can offer a fast and efficient alternative for businesses that require a secure method of transferring currencies, and may prove indispensable for businesses seeking to succeed in Vietnam.22

Vietnam has been successful in attracting new foreign investment, and is becoming a popular location for European (notably French) companies establishing manufacturing there. But hurdles still exist: poor infrastructure, corruption, and vague laws still plague the country.

VIETNAM

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CONCLUSION

Asia has seen a veritable renaissance in the past few decades. Hurdles still remain in many countries, but for those businesses willing to put in the time and effort required to make inroads in those countries, the rewards are well worth it. Small and medium-sized deals with local businesses are an excellent way to establish relationships in these countries, and these relationships are the stepping-stones to establishing deeper business ties, and a local business presence, in these countries.

There are also opportunities in the more established markets of China and India: simply because other firms have already entered a market does not mean that your business cannot enter it as well, providing a better service or product to that market, reaping the rewards of venturing outside your home country’s borders.

Being able to make, and receive, payments in these countries quickly, efficiently, and securely is a priority for companies conducting business in Asia. Corporate FX providers, such as American Express’s FX International Payments, are a central pillar in giving foreign businesses access to these markets, offering access to over 100 currencies. These services are easy to set up and use, right from one’s computer: the very same computer on which you may be reading this whitepaper, built with parts sourced from nearly every country in Asia.

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ENDNOTES

1SMEs are defined as companies with turnover of £25m or less, a headcount of 250 employees or less, and gross assets of less than £12.5m. MMEs are defined as companies with turnover of £25m to £500m. Collection, Mid-sized businesses, U.K. Department for Business Innovation & Skills (30 June, 2012), https://www.gov.uk/government/collections/mid-sized-businesses.

2The World Bank: China, The World Bank, http://data.worldbank.org/country/china.

3China Growth in Focus as Exports and Imports Fall, The Wall Street Journal, http://www.wsj.com/articles/chinas-exports-imports-fall-again-1444704325.

4The Observatory of Economic Complexity, China, Massachusetts Institute of Technology, http://atlas.media.mit.edu/en/profile/country/chn/.

5China Banking Regulatory Commission, http://www.cbrc.gov.cn/english/index.html.

6Ministry of Commerce, People’s Republic of China, http://english.mofcom.gov.cn.

7In addition to the General Office of the NDRC, there are 32 sub-departments to be considered and taken into account. National Development and Reform Commission, http://en.ndrc.gov.cn.

8China adheres to a statutory-based legal system, similar to the system found in much of Continental Europe and Latin America; as opposed to the “Common Law” system found in most English speaking countries.

9The relative unease of doing business in India, The Economist, http://www.economist.com/news/asia/21664982-ease-and-unease-doing-business-india, 17 September, 2015.

10Global Export Import Market Intelliegence, Infodrive India, http://www.infodriveindia.com/export-import/trade-statistics.aspx

11Doing Business in Bangladesh: Bangladesh trade and export guide, United Kingdom Trade & Investment, https://www.gov.uk/government/publications/exporting-to-bangladesh/doing-business-in-bangladesh-bangladesh-trade-and-export-guide.

12Ibid.

13Embassy of the United States, Phnom Penh, Cambodia, Economic Affairs Office, Doing Business in Cambodia, Embassy of the United States, http://cambodia.usembassy.gov/doing_business_in_cambodia.html.

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14Indonesia, The World Bank, http://www.worldbank.org/en/country/indonesia.

15Doing Business in Indonesia?, Export.gov, http://www.export.gov/indonesia/doingbusinessinindonesia/index.asp.

16Doing Business in Lao PDR (2014), Export.gov, http://export.gov/thailand/build/groups/public/@eg_th/documents/webcontent/eg_th_076786.pdf

17Doing Business 2016, Lao PDR. http://www.doingbusiness.org/data/exploreeconomies/lao-pdr/~/media/giawb/doing%20business/documents/profiles/country/LAO.pdf?ver=3

18Doing business in Malaysia: Malaysia trade and export guide, United Kingdom Trade & Investment, https://www.gov.uk/government/publications/exporting-to-malaysia/exporting-to-malaysia.

19Doing business in the Philippines: Philippines trade and export guide, United Kingdom Trade & Investment, https://www.gov.uk/government/publications/exporting-to-the-philippines/exporting-to-the-philippines.

20Guidance: Exporting to Thailand, United Kingdom Trade & Investment, https://www.gov.uk/government/publications/exporting-to-thailand/exporting-to-thailand.

21Free trade to bolster VN-France business, VietNam News, http://vietnamnews.vn/economy/275334/free-trade-to-bolster-vn-france-business.html.

22Doing business in Vietnam: Vietnam trade and export guide, United Kingdom Trade & Investment, https://www.gov.uk/government/publications/exporting-to-vietnam/exporting-to-vietnam

ENDNOTES

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