CEF sees great potential for factoring in China
China Export Finance (CEF) is an international company that provides financial support on behalf of European or US buyers, to exporters and manufacturers in China.
Headquartered in London, the service-provider taps the fledgling factoring business between the West and China and acts as an interface in providing accounts receivables purchasing and related solutions for the movement of goods produced in China.
CEF helps Chinese exporters gain direct access to EU and US customers under competitive payment terms. It also helps exporters improve their cash flow and reduce their working capital needs.
The company's CEO, Karl Alomar, told China Daily reporter Wang Zhenghua in Shanghai about their business and his perspective on the prospects of accounts receivable purchasing and related services in China.
Q: What exactly do you do in China and what are the unique features of your solutions compared with the factoring service usually provided by banks in China?
A: Rather than being a local factoring company we provide early payment on invoices by purchasing receivables on behalf of international buyers.
With an overseas operation, we support the buyers by providing receivable purchasing services and in turn giving them open credit terms.
CEF focuses more on small- and medium-sized enterprises (SMEs), which usually have a harder time securing comparable credit terms locally.
With a particular focus on providing significant service levels to exporters, we create personal relationships with them, and help them create a complete supply chain management system including documentation, logistics and other support services.
Q: Do you see any competition with Chinese banks because they also provide factoring services to exporters?
A: We provide a very different risk management solution and also a different level of services. We provide different types of services with more focus on the trade perspective rather than the finance perspective.
We don't really see ourselves competing with banks. In fact we are very interested in working with banks to help them provide our level of service and expertise in the local market. We are interested in working with them to enhance their service offerings to their customers by allowing them to let us give our additional services and personal attention to their customers. So we consider banks more as potential partners than anything else.
Q: Which potential customers do you focus on and why target that group? What, do you feel, are the biggest concerns for SMEs conducting exports based on your contact with them?
A: We look at the SME market and think that's the key market that needs our services and support to compete internationally.
Small businesses with $20 million worth of exports to upwards of $250 million are the size we feel have the biggest advantage to work with us.
The biggest concern for SMEs is risk. Chinese exporters need the ability to ensure their buyers will follow through with their commitments, and because through local solutions they don't have as much direct access to buyers they feel a high level of risk. Actually the Chinese default rate in terms of payment to their direct exporters is about 5 percent, whereas internationally the rate is only 0.25 to 0.5 percent 10 to 20 times smaller than in China. Solutions like ours will help them resolve those problems ahead of time. Exporters' risks are mitigated significantly.
Q: Chinese SMEs are trying to expand into the world market, but the prices of their products are being pressed down by their buyers, international retailers such as Wal-Mart, Costco and Tesco. How can you help small Chinese businesses reach their end customers directly and how large is the margin created by contacting the end clients directly rather than going through a distributor?
A: Since Chinese exporters are able to compete less and less on price, service and quality and payment terms are the three key areas they need to focus on.
With our help end customers who never had the ability to directly source products from China's SMEs can now go directly to them.
We don't find the buyers for the exporters, but through the buyers we provide a service to the exporters. From a buyer's perspective we at this time mainly concentrate on the North American and European markets. In time we may expand our services across other markets.
There is a margin which SMEs can benefit from by speaking directly to the end customers, but it's hard to estimate how large that margin is.
Today's Chinese market is not what it was 10 years ago, when you had to go through an agent if you wanted to enter China. At this stage the role of sourcing agents is becoming less and less relevant.
Buyers will access the market and find their own exporters and other relationships in China because of improved access to the country in this modern age. Our role is to help them create a very smooth trade process financially, logistically and documentarily once they have identified from whom they are buying.
Q: Few companies in China are engaged in your business. What makes you see an opportunity and how do you feel about the prospects for the factoring business in China?
A: The key thing is to look into some statistics. In 2005, there was about $750 billion worth of exports from China, about 55 percent of which was specifically from the SME market.
So with about $400 billion worth of exports from SME markets, right now there's only an 0.2 percent factoring rate for exports from China, while in the international market the rate stands at 2.5 percent, and is growing annually by 35 percent.
The market should reach or have the opportunity to rise to at least 2.5 percent of this $400 billion, giving an addressable opportunity of $10 billion, and growing each year.
China is one of the most advanced exporting and manufacturing countries and will have to catch up on financial solutions to support its level of exporting.
We believe we can be a very major player.
(China Daily 01/16/2007 page15)
