LENDERS WORKING ABROAD
Byline: Jennifer L. Brady
NEW YORK — As more manufacturers and retailers move to do business outside their borders, finance companies and services are quickly expanding to meet their needs.
This growing array of services was explored by a panel of experts in the WWD Impact seminar co-sponsored by Citibank on “Selling, Buying and Financing Internationally.” The participants included:
David Goldberg, a principal in Marketing Management Group, a consulting firm.
Natica von Althann, managing director of Global Retail Industry, Citicorp Securities.
Dennis P. Lockhart, president of Heller International Group.
Gerard Reidy, vice president and director of marketing at Guilford Mills.
Carmelo L. Foti, founder of Initial Funding Corp.
There are pull forces and push forces driving retailers to expand internationally, von Althann pointed out. The push forces are slower domestic economic growth, overstoring and market saturation.
Then there are the pull forces that make other markets more attractive, she said. These include the demographic trend in many foreign countries to more consumers 20-to-44 years old and an emerging middle class resulting from greater political stability. This political stability is also breeding economic stability, less volatility and less inflation. Moreover, pushing the movement overseas are markets in which the consumer is being helped by the availability of credit, probably for the first time, von Althann said.
“There has also been the adoption of American culture,” she noted. “As retailing is becoming more global, our approach is mirroring that. We have a presence in all the major markets that we think our clients need us in. That means we provide a network in 98 countries, but we are specialists in retailing in over 20 of those countries.”
Because of these local bases in foreign countries, von Althann added that Citibank can be a “jungle guide” to anybody going overseas, with services such as real estate advice, banking, trade finance, foreign exchange and risk management with respect to currency and interest rates. It also has developed a “theory of cross-border financing” to take advantage of the differences in the tax and regulatory environments between one country and another.
Lockhart of Heller International noted that successful exporters are moving toward a better relationship regarding the financing of their importers.
“There is a recognition that you have to pay attention and take interest in the financing of the downstream distribution of your product,” he said.
He added that it makes sense to partner with the importer to design a financing scheme that meets the needs of all the linkages to the ultimate buyer.
This does not mean that a relatively small exporter has to take responsibility, he said, but rather that it must pay attention to the financing of all those involved to insure that the system works and the product competes at the lowest total cost.
Today, he noted, global distribution financiers largely deal with very high quality credits, and few institutions can finance the whole commercial chain or offer a program that will work in many countries.
“The truth is that in many countries middle-market credit is still very much a black art. It is very hard to find someone who can serve the needs of the total system from top to bottom, but it will come,” Lockhart said.
Right now, though, there is concern whether there is financing available to help situations of relatively weak credit on both sides, he said.
For smaller apparel firms, largely involved in importing goods, Carmelo L. Foti, Initial Funding Corp., said it is difficult and expensive to get financing, but it is available and becoming more so as new forms of financing spring up.
Smaller businesses are primarily sourcing from Asian countries, he noted, and need the same sort of services as the larger and middle market firms can get from conventional lenders.
However, he pointed out, “We think the consolidation of the banking and factoring industries in the last 20 years has resulted in higher hurdles being established for small business in terms of gaining bank support or the support of a large factor,” he said.
The smaller firms, Foti said, generally have very limited capital and liquidity, and lack a great deal of expertise in financing receivables management. These clients typically have two basic needs, Foti said: “cash and cash.”
Suppliers and bankers are going to insist that these companies provide letters of credit to obtain merchandise from exporters, and that poses a significant problem, he said.
Yet, the consolidation of the industry has led to the development of a number of refugees from big banks and factoring companies to help smaller firms.
“There are small finance companies and factors that are interested in providing letter-of-credit support, particularly for companies who can demonstrate an ability to sell their merchandise in advance to credit-worthy customers,” Foti said.
Such finance companies look at the importer’s credit history and at the suppliers to see if they have the expertise to fulfill the needs of the importer, and the financial resources to manufacture goods on a timely basis.
“The smaller end of the market [for financing] is more labor-intensive, more expensive, but it is available if you have the right customer base,” he concluded.
Goldberg told the group how MMG has been involved in alliances between overseas producers and domestic vendors with product development capabilities and sales facilities.
“In such relationships the producer seeks a reliable captive distribution, market savvy and product development facilities. The U.S. distributor seeks financing, a direct link to the factory and the ability to alter the fundamental economics of their business,” he said. The outcome of such partnerships ultimately equals cost savings on both sides, particularly lower-cost financing for the U.S. firm.
But overseas producers and U.S. manufacturers are not the only groups teaming up in the industry.
“There has been a whole spate of factoring and finance companies that have linked themselves to freight forwarders, custom brokers and logisticians,” Goldberg said.
“We believe that is just the start of things with financial institutions broadening their activities and the scope of their involvement in international transactions both in the financing and the movement of goods.”
Goldberg noted that MMG is working with a partnership between an overseas producer and a domestic manufacturer to create a private label program. The target customer is a regional department store chain that is getting squeezed in the branded markets and lacks the resources to develop its own private label programs.
In this deal, a link has been made between a large Hong Kong trading and production company and a product development affiliate on the West Coast. The combined entity, according to Goldberg, creates large private label programs for the regional chain, structured to generate a 62 percent profit margin and lead to the elimination of heavy costs, including production agency fees, showroom and sampling costs, and warehouse and distribution expenses.
“There is one profit center,” Goldberg said, “that runs from the sewing machine to the retailer.”