I'm interested in understanding how supply chain finance works

Supply chain finance is a good thing, I hope you can have it too

Supply chain finance, as the natural evolution of industrial model upgrading, "comes from the industry and goes to the finance", has deep industry roots, subverting the traditional financial "finance based on the financial and financial" paradigm, opening another window for modern economic development with both financial explosiveness and industrial sustainability. It subverts the paradigm of traditional finance "based on finance and finance", opens another window for modern economic development, and combines the explosive power of finance and the durability of industry. So, supply chain finance is a good thing, and I hope you can have it too

One thing is clear, everyone wants money, why do some people earn it and some don't? This is the first question I would ask our entrepreneurs in class, what does your business do? Everyone wants to make money, the question is where does it come from?

In fact, the starting point of the enterprise should not just rush to the money, but to create value for customers. The more people who don't want money end up earning more money. What does it mean to be someone who doesn't want money? Lei Jun will now tell you, you want to do this thing, the first must be your own favorite, the second must be you think this thing is good for the user, you run to do, do not even think about where the money comes from. When you meet the user's needs, you do a good job, the money will come naturally. It's called creating value first, meeting needs first, and then making money.

Now we are talking about supply chain finance. First of all, what is the concept of supply chain? A hundred years ago or earlier the development of the supply chain is vertical integration, the English is called VerticalIntegration, meaning that can do their own as much as possible to do their own. For example, in the past, Ford made cars, and then made its own steel, mines, and 4S stores, and the whole supply chain was all done by one company, so that it could make the most money.

But you'll find that there are very few such companies now. Nowadays, we are talking about asset-light companies - doing branding and supply chain management. You will find that large enterprises focus on brand design, market customer relations, innovative technology and other core competencies to enhance, and manufacturing and distribution jobs can be outsourced as much as possible outsourcing, so that the supply chain such a business. In this case, many small and medium-sized enterprises have grown up around them and become their suppliers, distributors and retailers, participating in the value chain and industrial chain together.　

The core company is what we call a brand owner/manufacturer. This manufacturer may not necessarily do the manufacturing itself, but mainly does the branding, is responsible for the quality, or does the final assembly. The consequence of this is an increase in efficiency. Because the SME can develop its own expertise, and because it is small, it is less expensive to manage and more efficient, and can reduce costs more than the core company doing it itself. However, there is also a communication/transaction cost, once there are so many upstream firms, how can the downstream firms coordinate well with it? This transaction coordination cost becomes important. There is also a capital cost within the transaction cost. In China, you will find that capital costs account for a significant portion of the costs of small and medium-sized suppliers.

Capital has a cost, even if you are willing to pay interest, SMEs are still not easy to borrow money. And without capital, businesses simply can't grow. Borrowing money requires credit or collateral, which SMEs lack, and banks don't trust their financial statements. Now it becomes an interesting thing, the core companies have credit and they are not poor, it is easy for them to borrow money, but their supplier-distributor SMEs can't borrow money.

We talk about the supply chain, what is the most critical part of the supply chain? It's called supply chain management. The supply chain is the whole chain, in other words, not a core business to do things right on their own, but upstream and downstream to do the right thing, so that the entire industrial chain is efficient, the lowest cost, the fastest speed, the best quality, the core business in order to win in the competition. This is not all at once can do well, small and medium-sized enterprises are not strong, you can be strong?

For example, there are many excellent electrical manufacturing enterprises in China, but have you ever heard of which suppliers of electrical manufacturing enterprises are very good? This is the gap between our Chinese manufacturing and Japanese manufacturing and Korean manufacturing. Electrical appliances manufacturers say I attach great importance to quality, but your suppliers themselves are very small, poor capacity, and can not innovate, and quality can not be guaranteed, and finally the parts are to do your refrigerator and washing machine inside, your washing machine and refrigerator quality will be high? So if the ecosystem of small and medium-sized enterprises or suppliers is very bad, and there is a gap in capital and there is no place to go to finance, nothing can be done.

So let's look at the whole thing from a supply chain perspective. The core business will care about its own interests first and foremost before it cares about the interests of others. What is it thinking about? Return on assets (ROA). DuPont breaks down ROA into two layers of stuff, one called asset turnover and one called operating margin.

There are three things to do if you want to improve ROA. The first is to reduce costs, and cost reduction is the most effective way to improve ROA. Chinese companies generally do a relatively good job of capturing costs, but when the core business is trying to drive down supplier costs as much as possible, suppliers will be under a lot of pressure. Second, do marketing to increase sales. Third, improve turnover. Improve it with what? Reduce assets. Assets are divided into fixed assets and current assets. If a company is asset-light and has few fixed assets, it will be concerned about reducing current assets, such as inventory and net accounts receivable. So for the core business, they want the accounts payable period to be as long as possible. So you'll find that in a supply chain where the core company is very strong, the longer the accounts payable period is, the more accounts receivable its suppliers will have.

This asymmetry seems to be a matter of distribution of benefits between the two companies, but from a supply chain perspective, it actually undermines the efficiency of the entire supply chain. Why? In fact, back to the cost of capital, the core business cost of capital is very low, they do not lack of money, borrowing interest is the lowest interest rate. And their suppliers can not borrow money, or borrow the interest rate is very high. From the perspective of the supply chain, the cost of capital of the entire supply chain is definitely not optimal. So I've said this much to bring out the so-called supply chain finance concept.

From the perspective of supply chain finance as a whole, in fact, the core enterprise has the opportunity, the conditions, and can do is to see the supply chain as a whole. Upstream suppliers can not borrow money to cause the enterprise can not develop, and finally the competition between them is not into the competition of quality, nor the competition of manufacturing capacity, but into the competition of money, who has money who can be a supplier, and finally made out of the quality is not good. This is not a good thing.

Additionally, downstream distributors and traders are under a lot of financial pressure due to the pressure of goods or the core enterprise's request for prepayment. According to statistics, accounts receivable and inventory inside the supply chain account for at least 50 percent of the assets of China's small and medium-sized enterprises (SMEs), which are seldom accepted or accepted at a low discount rate when they are pledged as collateral for loans.

Why is it more difficult to use inventory and accounts receivable as collateral security? Risk control is the key point. Banks have no incentive to do things that are hard to do when the money is too good in a near-monopoly market environment. And doing a chattel mortgage is tougher. If you want inventory to collateralize, where do you put this property rights stuff? Real or fake? Who is going to keep it? And I have to find a third-party logistics to help me supervise this thing. Imagine lending money to a real estate developer, giving him 15% interest, a steady profit, and finally become a great crowding out effect on the manufacturing industry. Banks do not have any incentive to serve small and medium-sized enterprises (SMEs) and are not willing to lend money to SMEs, so how can we develop?

What is the difference between supply chain finance and piecemeal chattel mortgage? Chattel mortgages generate liquidity, but chattel mortgages themselves are not supply chain finance, and supply chain finance is not exactly the concept of mortgages. In supply chain finance, banks can dominate, core enterprises can dominate, logistics enterprises can dominate, and third-party platforms can also dominate. So domination is not the key, integration is the key, system is the key, efficiency is the key. For example, Yun Tu Credit, a third-party platform, focuses on supply chain financing services for small and medium-sized enterprises. It uses all its strength internally to study big data risk control and, combined with its own understanding of the industry, is able to minimize risk. At the same time, docking the ERP system of core enterprises, the historical real transaction data of small and medium-sized enterprises, into credit assets, and the capital side can trust the report issued by the cloud credit report, to achieve T or at most T +1 days lending, which is called integration, which is called the system, which is the efficiency.

Supply chain finance has a characteristic of self-payment, a closed-loop system. For example, like logistics enterprises, in addition to all the logistics can also help finance, not only because of the final cost of capital is low, and inventory are in the logistics business side, in case you want to sell it is very convenient. Therefore, when banks want to do supply chain finance, they often need third-party logistics companies to help them do cargo monitoring. There is a word called four streams in one, that is, the logistics, cash flow, business flow, information flow four streams integrated. The system mentioned just now is this concept, in which the very important thing is the business flow and information flow. Now do supply chain finance, if there is a ready-made network, if everything is E-ized, the efficiency can be increased without limit.

When it comes to E-ization, e-commerce and automotive supply chain will have a slightly higher degree of E-ization. One of the essences of financing is credit, borrowing money needs collateral largely because of the lack of credit, and credit is something that can be mined with E-enabled big data. E-commerce has the benefit of a near-waterfront in this place, where everything is E-enabled.

And the automotive industry has an obvious benefit in that it has a stronger supply chain concept. In other words, there's a bigger gap in the concept in China compared to the US or developed countries. In China, the concept of supply chain as a whole is very weak in many people's minds, the recognition of suppliers is very low, they always say that the core business is squeezing me; the recognition of the core business is not deep, they think more about me spending less money and you spending more money, and how long they can delay the billing period of the suppliers, in which case it's very difficult to do supply chain finance. But the automotive industry has an advantage, multinational companies come in after the concept of supply chain management also brought in, whether it is the automotive manufacturing industry itself or the supply chain management itself is the leader, which is its first advantage; there is another advantage, that is, it is the development of the system is more perfect, in other words, it is the degree of E is relatively high. These two things helped it a lot.

Back to systems integration. Our traditional financing is a bank facing a single enterprise for business processing, the core enterprise's bank and the upstream enterprise's bank are not related to each other, they are fragmented. And supply chain finance is a systematization, from retail to wholesale concept, wholesale after the efficiency is high. What does wholesale mean? Banks handle the core business, the core business to provide the system data to the bank with the words, to handle the core business upstream and downstream will be too easy, so that not a business a business to do business, but either do not do, a dozens of enterprises, the efficiency is out.

In China this model is rural surrounded by the city, while abroad is the city to guide the rural areas, it is very interesting. How to understand? For example, why does Citibank do supply chain finance? The main concern is the loss of core businesses. Because Citi is mainly for large enterprises to do business, especially after the financial crisis, in order to do a good job of the core business services, Citi to extend their services to the upstream and downstream of the large enterprises, which is the model in foreign countries.

China's model is reversed, our core business is not enough power and lazy, will not think in this direction, do the supply chain, do the financial people can not think of doing supply chain finance, who are not interested. Small and medium-sized enterprises are very interested, but can not borrow money, so they have to surround the core enterprises. Banks have taken care of many suppliers upstream, and finally come to surround the core enterprise. After all the suppliers are customers of the bank, the core enterprise realizes that if I become a customer of the bank, my business will be much better because all the money is gathered in the bank, so the transaction will be much easier. That's what the Shenzhen Development Bank used to do. This model is from N surrounded by 1, while in foreign countries is 1 into N.

Banks are a service industry. Banks should be the more service the more money they earn, not because of monopoly spreads the higher the more money they earn. The spread itself, if marketized, should reflect the bank's operating costs. Where to earn the rest of the money? Provide intermediate business services. In fact, to small and medium-sized enterprises to carry out chattel mortgage is in this area, trouble is a little trouble, but the risk can be reduced, the loan interest rate can also be higher. Banks can find good SMEs if they really sink their teeth into the service. Why? You find out the good ones and let them do better, so that they become a very good supplier and get bigger and bigger in the future. Our Chinese supplier ecosystem really need to become better, the bank can really play a very big role, so that there is hope for China's manufacturing.

Lastly, supply chain finance is a good thing, is a good direction of entrepreneurship, which is able to create value for people and earn money for their own place, do not necessarily have to have a lot of big data, some of the big data put there is useless, but to find ways to dig it out. The potential market for supply chain finance in China is ten trillion dollars, and people are encouraged to tap into it. In China, there is another thing called institutional environment, there is a good rule of law environment, the cost of doing business will be dramatically reduced. So we need to build a civil society, promote the reform of this society,**** with the construction of this society.