Battling it out, for tea, & rubber

I read an interesting aspect on the Battle of Panipat-III, fought between Marathas and Afghans more than three centuries back. The Marathas lost, despite having a superior military strength. One of the principal reasons cited in the article was problems in Maratha supply chain. Over a period of 4 months preceding the war, Afghans managed to weaken Marathas’ food supply chain. The end result was so huge that when the actual war began, Maratha horses could barely reach up to the enemy positions, and made their army far less effective.

2020 has been a battle too…

Supply chain is extremely critical, be it on the battlefield or industry. Fast forward to 2020, all of us across industries fought against an invisible and fast moving enemy. We read about disruptions in domestic and international supply chains and their impact on firms irrespective of their size and power. However, similar to any adverse scenario, SMEs bore the maximum brunt. In fact, we observed contrasting scenarios – a few SME suppliers were stuck with unsold inventory worth millions, while others struggled to meet expectations of their buyers who were producing essential goods.

All supply chain forecasting models went for a toss within no time…

In such a scenario, SME suppliers like you needed urgent credit lines.

Banks had to step in here. It was all about empathising with you, and rising to this unique occasion, to assist you in these unusual times.

Supply chain finance is an evergreen topic. We, at HSBC, have been at the forefront of enabling finance across the entire ecosystem through innovative solutions. 2020 added a few fascinating stories. Here, I would like to share case studies of your colleagues from 2 industries – Tea and Rubber, captured at different times of COVID-19.

March-May 2020 – No manpower

Post pandemic outbreak, labourers rushed to their hometowns. As a result, tea plantations struggled to find labour to harvest tea.

Tea is consumed every day and has a steady demand. Sudden drop in manpower at the far end increased tea prices in B2B wholesale market. Guwahati tea prices rose from Rs 134/kg in May 2019 to Rs 216/kg in May 2020. Siliguri tea prices rose from Rs 148/kg to Rs 188/kg in the same period.

Amidst the growing uncertainty, there were 2 primary requirements:

1. Tea companies wanted to secure inventory to guard against further rise in price.
2. Tea plantations wanted to make best use of the price rise, and agreed to offload their inventory in bulk to tea companies. However, their working capital was already stretched and they were not able to offer any credit period to the buyers.

We stepped in here. We leveraged our existing strong relationships with the large tea companies to extend assistance to tea plantations. We offered our Unsecured Bill Discounting (UBD) facilities to them. This reduced the strain on their working capital. The buyers, i.e., larger tea firms also benefited thanks to locking in of prices and a comfortable credit period from us.

September-October – In the fast lane

 After struggling for months, the auto sector witnessed a huge spike in demand in the last quarter of 2020. What were the implications? In supply chain, there is a concept called as ‘bullwhip effect’. A sudden change in demand at the last leg, i.e., the consumer, translates into a much higher pressure further down the chain, i.e., suppliers’ suppliers.

Industry estimates suggest that the automotive tyre industry consumes half of the overall rubber produced in the country. A higher demand for cars translated to higher demand from tyre manufacturing companies, who in turn demanded higher supplies from rubber manufacturers. 

What was the problem in meeting the demand?

 There were a few obstacles to overcome

1. Rubber manufacturing is scattered in SME belts across states of Kerala, Tamil Nadu, Andhra Pradesh, Assam and Tripura.
2. Rubber is a seasonal commodity. The SME manufacturers need to pay small dealers and farmers on sight. To meet this particular demand, they had to procure goods in bulk, which strained their working capital.
3. Rubber imports which form a % of supplies had become very uncertain due to travel restrictions. So almost the entire pressure to meet the demand fell on Indian rubber manufacturers. 

SME rubber suppliers needed a nimble working capital funding option that ensured they are paid on the same day of invoice.

To address this, we offered a Usance Bill Discounting (UBD) programme to address their specific needs. They received immediate liquidity to pay off their vendors and continue production. The corporate tyre manufacturers also benefited with better management of their payments and collections from their buyers, the car manufacturers.

We thus made a small contribution in putting the auto sector back in the fast lane.

 The technology behind the scenes

Supply chain transactions are complex because numerous firms of various sizes, and spread across geographies are involved. Time is of essence if we want buyers and suppliers to reap maximum benefits. 

Our objective has always been to offer full scale digitisation at each stage of the journey. This was even more critical during the lockdown.

Here is how we aim to provide a seamless experience to buyers and sellers in the supply chain ecosystem:

 A)     Pre-Transaction

 B)     During Transaction

C)     Post Transaction

We thus try to help the stakeholders, in our own small way through a 3-point solution

Supply chain financing – Design principles

Needless to say, there is always a scope to make it better, and we are improving with your feedback. The end state would be Zero touch points, minimum number of hops, lowest possible TAT and best customer experience in the end-to-end journey.

Way forward

Uncertainty is likely to continue in 2021 and beyond. A resilient supply chain is critical for any industry. Each industry has its own seasonal cycles of supply and demand. Flexibility is key, and banks would need to continuously raise the bar and offer curated solutions to industries. I believe we will see a lot of innovation in various areas such as:

1. Faster and more intelligent verification and transaction processing
2. New age modes of financing tailored to specific sectors
3. Taking a more holistic and dynamic view while assessing SME supplier risks
4. Utilising internal and external data for better actionable insights
5. Wider adoption of new age technologies such as AI, robotics, blockchain for wider use cases
6. Smoother cross border supply chain and financing

We, at HSBC, are learning various nuances across industries, and are very eager to learn your and your ecosystem’s story. We look forward to discuss with you the best way ahead, as we step into 2021.

Let’s battle it out together…

Wishing all a very happy new year!

(with inputs from Chockalingam Murugaiyan, SME Supply Chain Financing lead, Abhishek Garg, Senior Product Manager, Trade Finance solutions, Shekhar Lele, Business Innovation Lead)