An Asia Pacific CFO Takes On Inflation -- to Win

Who’s afraid of inflation? Virtually every company in Asia and elsewhere. Not only do surging consumer prices erode the value of cash on balance sheets (and there are billions of dollars sitting idle in this region). They also threaten to dampen consumption and thus revenues, and to cut profit margins as well.

 
So when China reported on April 15 that inflation in March represented a 32-month high (it came in at a higher-than-expected 5.4%), many a CFO’s financial antenna went on overdrive. In Singapore, inflation in the first two months of the year was tracked at 5.2% while India’s Wholesale Price Index rocketed 8.98% in the year to March.
 
In truth, the threat of inflation has been on the radar screens of Asia’s companies for some time. “We have been facing some challenges, including the price increases in raw materials,” says Ben Ho (pictured), Regional Vice President for Finance and Controlling, Asia Pacific, at Henkel, the German giant in laundry and home care, cosmetics and toiletries, and adhesive technologies.
 
Being in the product lines that it is, the company is particularly vulnerable to inflationary pressure, although its large industrial additives business in Asia provides a substantial cushion. Henkel has strong pricing power on the business-to-business side, where it is relatively easier to pass on price rises in adhesives, films, inks and coatings to downstream industrial users.
 
“But on the consumer side, we are seeing very stiff competition,” admits Ho, a situation that makes raising end prices difficult. “We can pass on only part of the increase [in oil prices and raw material costs] to our customers.”
 
Henkel’s consumer brands in Asia Pacific include Dial and Fa body and fragrance products, the Citré Shine line of shampoos and conditioners, Persil detergents and Renuzit air fresheners, which are duking it out with the likes of P&G, Unilever, Colgate-Palmolive and other international and homegrown products.
 
Cash Management
Henkel is tackling the problem on a number of fronts. “We will pass on the price increases to the end consumer to a certain extent,” says Ho. “We will also enhance innovations and cost controls.” As CFO, he is focusing particularly on cost management and operational efficiency to help contain price increases.
 
Ho says that Henkel Asia Pacific has been lucky. “We started consolidating cash management in Asia two years ago, after we acquired National Starch in 2008.” Henkel paid Akzo Nobel £2.7 billion (US$4.4 billion at the current exchange rate) to acquire National Starch’s adhesives and electronic materials businesses, which Henkel said perfectly complement its own adhesives assets.
 
Deutsche Bank was Henkel’s primary banking provider while National Starch had a relationship with HSBC. The different platforms needed to be integrated.  It took several months to “review all the different banks and their solutions,” Ho recalls. “At the end of the day, we decided, together with headquarters, to go with the solution from Deutsche Bank.”
 
With most regional cash management activities now on the Deutsche Bank platform, Ho says Henkel was able to improve operations excellence. Cash functions were centralized in Manila, where a treasurer reassigned from Germany manages regional treasury operations. The unified arrangement allows Ho and other executives to see how much cash Henkel has at any one time, making it easier to deploy or invest of idle assets.
 
“By doing this, we generate cash flow for reducing our debt position and for further support of business expansion,” says Ho. The cause of cost management is also served. The centralization and associated automation have improved productivity and put a lid on employee numbers. “Salaries are always going up, whether in China or other countries,” says Ho, who once managed the in-house shared services centre in Manila of another company.
 
The Manila Solution
The success of the Manila solution is emboldening Henkel to centralize other regional processes. “Currently, Manila covers finance, a little of IT, and then HR,” says Ho, “and also a bit of purchasing. In the future, we also want to look into other possibilities like operations, supply chain and customer service.”
 
This is not to say that the initiative has been entirely trouble-free. Australia and New Zealand are not on the Deutsche Bank platform because the German bank does not have branches there. Henkel’s businesses in these two countries use Citi solutions, which are linked to the company’s global cash pool in Germany. “We don’t really need an additional interface with Deutsche Bank there,” says Ho.
 
China, which hosts Henkel’s Asia-Pacific headquarters, is a special case. Because of currency restrictions there and limitations placed on bank branching by foreign financial institutions, Henkel has created a China-only unit within the regional cash management structure. “We have a treasurer sitting in Shanghai reporting to our treasurer sitting in Manila,” says Ho. “She is basically taking care of day-to-day operations. In terms of planning and strategy, that’s the head in Manila.”
 
Because Deutsche Bank does not have an extensive branch network in China, Henkel is also working with local Chinese bank ICBC, which boasts more than 16,200 branches across the vast country. “ICBC is more for the customer or sometimes for the supplier to deposit the money,” says Ho. “Day-to-day, there will be a swap for the cash pooling to allot the cash into Deutsche Bank.”
 
Henkel has similar arrangements in India. “We use a local bank [in addition to Deutsche Bank], although we also try to centralize also with one local bank in one country,” says Ho. “Most treasurers and CFOs don’t use just one bank. Deutsche Bank or HSBC or Citibank may not have enough branches to cover the need.”
 
Beyond Cost Management
Ho says the improved operational efficiencies and cost management are helping margins. “We have improved our return on sales from 8.4% to 14.1% [in 2010],” he points out. “That’s an increase of almost six percentage points.” Last year, revenues in Asia Pacific reached €2.2 billion (US$3 billion), accounting for more than 14% of Henkel’s €15 billion in worldwide sales. “Our EBIT [in Asia Pacific] was €306 million and the growth rate is almost 100%,” says Ho.
 
Still, Henkel knows cost management and operational excellence can go only so far. If there is runaway inflation, consumers may skimp on personal care and beauty products in favour of food and other basic necessities – food price inflation is a key driver of the rise in the consumer price index, along with fuel costs.
 
For now, consumer demand remains robust, especially in China. “We are still seeing a positive trend,” says Ho. Total sales expanded 30.8% region-wide in 2010, with organic growth at 17.8%. “But of course we pay close attention to the market.”
 
In cosmetics, the strategy is to continue focusing on professional products used and sold in beauty salons, whose customers are less price-sensitive than mass consumers. “The target market also has higher brand loyalty,” notes Ho. “The growing number of wealthy consumers in Asia makes this business more promising.”
 
But Henkel is not withdrawing from the mass market. For example, it recently introduced Syoss shampoo to Asia. “This is one of our innovations to increase both affordability and accessibility among mass consumers,” explains Ho. Syoss is positioned as a ‘professional quality’ product that would not be out of place in beauty salons that use Henkel’s Schwarzkopf Professional Seah Hairspa, BC Bonacure and other products.
 
Saving the Planet
Ho is confident that Henkel’s squeeze-costs and add-value-to- products approach is a winning combination in dealing with inflation. But surely, two years after integrating cash management in one platform, there is little in the way of new efficiencies in the finance function? “There’s always room to improve and find new ways of doing things,” Ho argues.
 
More savings are projected from environmental and sustainability initiatives. When CEO Kasper Rorsted took office in 2008, he pledged to achieve by 2012 reduced usage and other specific targets in five focal areas: energy and climate, water and waste water, materials and waste, safety and health, and social progress.
 
Henkel claims to have reached all the targets last year, a couple of years ahead of schedule. “Measured on a per-ton output basis, energy consumption decreased by 21%, water usage by 26%, and the amount of waste generated by 24%,” it said in its 2010 sustainability report. The company has also developed environmentally friendly products, such as a hotmelt adhesive that can bond packages in just 130 degrees Celsius, cutting energy consumption by up to 40%.
 
“It’s more about how to operate the business more efficiently and sustainably, rather than choosing cheaper solutions and saving on costs,” says George Zhu of Henkel Asia Pacific’s Corporate Communications team. Henkel is striking a good balance between people, planet and profit, he adds, and that is why the company has been in business for 135 years.
 
Perhaps so, but in helping save the planet, Henkel is also reducing its energy, water and other input costs. Every little bit helps in an environment of rising consumer price indexes, electricity and fuel costs, and raw material prices.
 
About the Author
Cesar Bacani is Editor-in-Chief of CFO Innovation.
 

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