March 24, 2011
Though Japan seems much closer to post-earthquake/post-tsunami stability than just one week ago, especially where nuclear plant radiation levels are concerned, production in the world's third-largest economy remained at a standstill. Though some speculated this could be a boon for select U.S. manufacturers in areas such as technological component and automotive parts production, that appears unlikely to be the case.
A restart of production at the critical manufacturing plants north of Tokyo for corporations such as Toyota, Honda, Suzuki, Fuji Heavy Industries and Toshiba appears to have been tabled again, with the new goal for opening this coming weekend. Others including Mazda, Canon and Nikon appear less certain, or possibly more forthcoming, about when their operations will resume normal activity because of concerns ranging from a lack of parts to uncertainty over the availability of power. All of this will continue to feed a substantial ripple effect on global manufacturing, said Josh Green, CEO of Panjiva, an intelligence platform for the global trade industry.
"It's almost cliché but fair to point out that the human tragedy is much bigger than the consequences supply chains face. But, as far as supply chains go, the industries most impacted are automobiles and high-end electronics," Green told NACM. "These are important industries for Japan. My hunch is we'll see short-term disruptions in the availability of key components and end products. That's a real impact that we'll see over the next couple of months."
As such, U.S. companies dependent on these products and/or with strong ties to Japan may struggle as a result. Green noted that those likely to benefit from the production shutdowns are companies based in South Korea or China—there simply are not a lot of major players for the auto and tech parts and components sectors basing a significant portion of operations in the United States.
"There has been speculation that U.S. carmakers will benefit from a weakened Toyota," Green noted. "But most American car companies have supply chains that in some shape or form will reach Japan."
Long term, recovering from the lost production from a standpoint of business-to-business credit, where the company asking for terms is based in or has large exposure to another company based in Japan, could mean tighter terms or slower approval timetables for a while. Green likened it to the credit departments' and financial institutions' reactions after markets collapsed in 2008 when, for a time, "everyone looked around and said, ‘I don't trust anybody and need to see more proof that you're financially sound.'"
Another potential long-term impact could be a return to more elevated inventory levels internationally. Events, such as those in Japan, can force many companies down the line that are not even based there to suddenly halt production when dramatic unforeseen circumstances hit.
"Operating in a 'just in time' manner reduces costs, but it also introduces risk," Green said of the post-recession trend of companies' keeping very low inventory rates. "I think you'll see the pendulum swinging where people are willing to incur a little more in the way of cost so that they can reduce their risk. All in all, I think that translates into higher cost structures, but the upside is more resilient supply chains."
Brian Shappell, NACM staff writer
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Lawmakers aiming to buoy the still-tepid economic recovery, while simultaneously cutting the deficit, have put government contracting fraud in their crosshairs.
A new bill, the Small Business Contracting Fraud Prevention Act (S. 633), would aim to combat continued government contracting abuse by providing the Small Business Administration (SBA) with a new comprehensive oversight framework within which to execute effective certification, surveillance and monitoring of federal contractors. The legislation would also increase the criminal penalties for businesses awarded contracts through fraudulent means.
The Act comes in the wake of a hearing in the Senate Committee on Small Business and Entrepreneurship that highlighted the SBA's deficient oversight efforts. According to the SBA's Inspector General, 26 contractors have been recommended for suspension or debarment since fiscal year 2009, but the SBA has suspended only three of them. The Government Accountability Office (GAO) has also reported extensive fraud within the agency's programs, citing instances in which 14 ineligible firms had received $325 million in sole-source and set-aside contracts.
"When ineligible firms are awarded federal government contracts through fraudulent means, this reduces the number of opportunities available to honest, qualified small businesses," said Sen. Mary Landrieu (D-LA), chair of the Senate Small Business Committee and a co-sponsor of the bill. "Government contracts are perhaps one of the easiest and most inexpensive ways the federal government can help immediately increase sales for America's entrepreneurs, giving them the tools they need to keep our economy strong and create jobs. This legislation gives the SBA and the Inspector General the tools necessary to combat fraud. We intend for the SBA to hold firms accountable."
"With our nation facing record debt and deficits, it is absolutely critical that taxpayer dollars are used judiciously to ensure that small business contracting programs benefit the rightful recipients," said Sen. Scott Brown (R-MA), a member of the Senate Small Business Committee and one of three Republicans signing on to support the bill, the others being Sen. Mike Enzi (R-WY) and Sen. Olympia Snowe (R-ME), who originally introduced the bill and serves as the Small Business Committee's ranking member. "This bipartisan legislation is a strong step toward ensuring that our contracting programs are operating effectively and efficiently."
Jacob Barron, NACM staff writer
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In addition to featuring late-breaking credit news stories, NACM's Credit Real-Time blog now hosts the CICP Road Diary, a documentation of one NACM staff member's journey through the FCIB International Credit and Risk Management Online Course and the process of attaining the Certified International Credit Professional (CICP) designation.
The diary provides an insider's look into what the course requires of potential CICPs and reflects on the current state of international risk management, including the benefits of continuing professional education.
The most recent entry by Jacob Barron, NACM staff writer, is included below. You can also click here to read this entry, catch up and check back for future posts!
CICP Road Diary: Entry #2
"Neutral, relative and necessary."
If you read those three words out loud, dramatically and in a deep voice, they could almost sound like the tagline to a new political thriller or legal drama, possibly one that takes place in Switzerland, or during an especially captivating arbitration proceeding. I don't think such a film exists, but rest assured that if it gets made in the next few years, I'll be suing whoever made it.
In any case, those three words are culled directly from a lesson in the CICP course. At the beginning and end of every module, and sometimes at the beginning or end of a lesson (modules are the big chapters, and they're divided into lessons), the instructor offers some valuable, broader, more philosophical tips and summaries, and this one caught my eye. The thing that the course says is neutral, relative and necessary is risk. Whether it's political, financial, documentary, or interest rate-, acceptance- or foreign exchange-related, risk is a neutral, relative necessity in the world of commercial credit.
Now, this may be something that all credit professionals keep in mind at all times, but it still struck me as a remarkably powerful assessment of what risk is. I've written article after article about how to mitigate risk and reduce it, treating risk like it's a bad thing—the enemy of commercial credit extension, both domestic and international.
This is hardly the case though, and while I still stand behind those articles I wrote and believe risk mitigation is something that creditors do on a daily basis, it's important to remember that risk just...is. It's not an enemy or a friend, nor is it something to be combated or cultivated, it just...is. I'd imagine that recognizing this fact, that risk is something a credit department lives with, but can't do without, is one of the first steps toward becoming a great risk manager, and looking at it this way certainly affected the way I viewed the credit function as a whole. Credit departments and credit professionals aren't meant to eliminate risk; they're meant to make it manageable, and profitable, to be comfortable with something that's kind of uncomfortable by definition.
The idea that risk is "neutral, relative and necessary" speaks to credit's role not just as a financial buffer but as a revenue generator. Another line I wrote down from the course, not from the same lesson, is that credit should be viewed as "an investment in receivables." An extension of credit isn't just giving someone something for free and then hoping they pay back; it's an investment in the company and the company's future. I've probably written as many articles on risk mitigation as I have on credit's reputation as "sales prevention," which is something the CICP course recognizes and addresses with thoughts like this. Risk as a necessary constant, and credit as an investment.
Just something that struck me, I guess. Back to work now. For those of you keeping track, I'm almost caught up, and should be 100% before week's end.
Till next time,
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Face-to-face contact is still king in business credit, and a phone conversation isn't exactly out of style either. However, ignoring social media under the auspices that you're more "traditional" or "old school" about conducting business could mean you've equipped yourself with one less tool than many professionals...100 million of them, to be exact, and counting.
LinkedIn, widely regarded as the most business-appropriate social media platform, reached 100 million users, CEO Jeff Weiner claimed on March 22. It's worth noting that executives from every member company in the Fortune 500 presently operate a LinkedIn account. Additionally, the repsective annual growth rates for the platform in Brazil and India, two of the nations demonstrating the strongest economic growth and potential worldwide, were 428% and 76% at last check, according to LinkedIn officials.
"Our site is currently used in over 200 countries and territories around the world, with more than half of our users coming from outside the U.S.," said Weiner. "You no longer have to live in the same city—or even the same country—to build and strengthen relationships that can help you succeed and grow professionally and fundamentally transform the trajectory of your career path."
Fellows Inc. Corporate Credit Manager Curt Rothlisberger, CCE, CICE, told NACM he believes LinkedIn has been helpful in building better collaborative business relationships, especially with global colleagues, as well as finding or considering potential staff.
"When contemplating a hire, for example, I expect to see a presentable profile of a candidate on LinkedIn," said Rothlisberger, a panelist at FCIB's I.C.E. Conference in Chicago next month. "If not, it's a red flag to me perhaps indicating the person is not 'with the times.' It also helps confirm one's background when comparing with a resume."
Granted, as noted in the April 2010 Business Credit feature "Deleted, De-Friended," there are pitfalls to using social media haphazardly in a business context by people who don't view it in perhaps the safest manner: that it's the online equivalent to a business meeting or function. Still, in breaking the 100-million threshold at LinkedIn, not to mention Facebook's assertion that it hosts a user total at least five times that, the argument for using social media in business, including the credit world, appears to be strengthening.
Said Hazel Walker of the Referral Institute of Indiana in a 2010 NACM interview about social media, "You have to go where people are; if your colleagues are on social networking sites, why would you not be there?"
Brian Shappell, NACM staff writer
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A prominent group of senators this week called on China to open up its economy to U.S. agricultural exports, which they say are unfairly discriminated against by the Chinese government.
A report from the International Trade Commission (ITC) that detailed the extent of China's trade prejudices was referenced by Senators Max Baucus (D-MT), Orrin Hatch (R-UT) and Chuck Grassley (R-IA) as further proof that China needed to reduce its trade barriers, and do so quickly. Among the report's most damaging revelations was a finding that the elimination of China's tariffs and non-tariff barriers could result in an additional $3.9 to $5.2 billion in U.S. ag exports to the country. The report also found that while China is the world's largest market for U.S. ag products, its imports focus primarily on soybeans and cotton, while supporting policies that prohibit imports of U.S. beef, strawberries and potatoes, and significantly restrict imports of other U.S. products like pork and apples.
"Today's ITC report notes China's inconsistent and unpredictable adherence to the rules-based global trading system. Citing alleged food safety concerns, China has opted to outright ban U.S. beef and impose significant restrictions on other U.S. agricultural products, including pork," said Hatch. "Such unjustified claims impede access to the Chinese agricultural market—a major destination for American commodities—and, ultimately, hurt American farmers and ranchers. It is imperative that China drop these barriers and further open its market to American agricultural goods."
Baucus and Grassley originally requested the ITC report nearly a year ago, when they were chairman and ranking member, respectively, of the Senate Finance Committee. Hatch has since replaced Grassley as ranking member, but Grassley remains a senior committee member.
"In joining the World Trade Organization (WTO), China committed to adhering to international trade rules," said Grassley. "These rules include eliminating non-tariff trade barriers that have no basis in science or that exist just to prop up a domestic industry at the exclusion of trade partners. This report shows China's policies harm exports of U.S. products."
The report also found that the Chinese government's support for its domestic agriculture sector boosts its competitiveness against U.S. products, and that the country's tariff rate quotas put major limits on imports of U.S. rice, wheat and other products. China also imports more food than it exports, since demand, driven by rapidly rising per capita income, is expected to outpace increases in domestic production, and yet these barriers to U.S. products remain in place.
A full copy of the nearly 300-page report is available here.
Jacob Barron, NACM staff writer
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As part of a commitment to help small businesses access credit and, ultimately, increase activity and staffing, the U.S. Department of the Treasury is extending funds to three states to the tune of more than $50 million. The states in question and the Obama administration suggest the investment will spur more than a half-billion-dollars in total future small business activity and lending in those states.
Treasury officials announced Tuesday that the department approved State Small Business Credit Initiative (SSBCI) applications from Connecticut, Missouri and Vermont. The states will receive $13.3 million, $26.9 million and $13.2 million, respectively, said Treasury officials.
"These critical funds will help small businesses access the capital they need to expand their operations, create new jobs and continue supporting our nation's economic recovery," said Treasury Secretary Tim Geithner. "Public-private lending partnerships, such as the State Small Business Credit Initiative, have a proven track record of success, and I'm pleased that this funding is on its way to support economic growth in these states."
Among the uses of the money will be supporting Connecticut's Capital Access Program to encourage private investment to small businesses and Vermont's similar Financial Access Program as well as establishing the "hi-tech" Missouri IDEA (Innovation, Development and Entrepreneurial Advancement) Seed and Venture Capital Funds program. Vermont also will be spending money, the vast majority in actuality, on a commercial construction loan program and a technological advancement program in the state.
Funding for the Treasury/SSBCI comes from allocations included in the Small Business Job Act, inked by President Obama late last year. The cornerstones of the bill included an array of tax cuts and the establishment of the $30 billion lending fund now providing capital to small, "viable" community banks to increase lending to smaller firms. The fund is designed to be performance-based and would incentivize those lenders that extend new credit by decreasing the dividend rate banks pay as they increase lending. Most Republicans, largely shunned from the crafting of the effort and potentially suspicious of the timing just before the November elections, argued against the measure as government intrusion on free markets and another costly measure on top of previous efforts.
Brian Shappell, NACM staff writer
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