Countertrade: a new perspective for an old practice?
In times of rising uncertainty in financial markets and increased interdependency between firms, supply chain finance has been helping corporate treasurers to unlock value bound to working capital. Countertrade, including innovative forms of barter, potentially offers another methodology to manage and mitigate financial risks. Furthermore, it is another value-adding opportunity for treasury professionals, enabling the treasury function to become a proactive and strategic partner for trade and supply chain finance.
Recent years have highlighted the vast and growing interdependency and complexity of today’s economic environment. As a result, thought-leaders in academia and practice have shifted their perspective from the singular firm to become more process-oriented and integrative. Leading corporates have recognized that competition is becoming less “company vs. company” and more “supply chain vs. supply chain”. While firms of all sizes strive to leverage business relationships with an increasing number of suppliers and customers, they automatically face increasing operational and financial exposures towards these counterparties.
At the same time, uncertainty in the financial markets translates the increasing exposure into even higher risks to these firms. Natural hedging is often quoted as a potential measure to fundamentally manage and mitigate those risks. It is in this context that the oldest form of trade – bartering – is taking on new forms and helping companies leverage increased possibilities while managing the risks involved.
The traditional form of barter is a direct exchange of goods and/or services of equal value between two parties. More recent forms of barter, however, could be multilateral, longer-term, concern current or fixed assets, and also include a cash proportion. These arrangements are covered by the umbrella term ‘countertrade’.
Countertrade in action
The following hypothetical cases illustrate the use of countertrade in a supply chain setting:
A Swiss bicycle manufacturer with considerable sales in the US imports the metal frames for the bicycles from a supplier based in Germany. In a countertrade agreement, the bicycle manufacturer extends its reach backwards in the supply chain and exchanges the US dollar-traded metal used for the production of the frames plus a processing margin against the processed metal frames. Both the bicycle manufacturer as well as its supplier potentially benefit from such a buy-back structure by a reduction of financial risks (e.g., natural hedge USD-CHF/USD-EUR) as well as operational upside potential (e.g., raw material quality control).
Another setting includes a European wind turbine manufacturer and an offshore wind-park operator. In a countertrade agreement, the wind turbine manufacturer agrees to accept a share of the electricity output of the delivered and installed turbines as a means of payment for the capital investment of its customer. Also in this case, the potential benefits of this buy-back structure include a hedge against market risks (e.g., natural hedge against price of electricity for the manufacturer) and also include operational upside potentials (e.g., turbine maintenance assurance for the operator).
Value-adding opportunity for corporate treasury
Now, why would either of the involved parties agree to sign such a deal and, more to the point, why should a corporate finance and treasury professional take a second look?
Countertrade agreements can be used to install a natural hedge against FX, interest rate, or commodity price risks. The bicycle manufacturer achieved a higher correlation of US dollar in-/out-flows. The wind turbine operator gained access to a capital investment with a lower interest rate exposure as compared to a full credit financing. And the wind turbine manufacturer achieved a natural hedge against rising electricity prices, just as the bicycle frames manufacturer reduced its exposure towards the market price of metals.
Besides these benefits from a financial market risk perspective, reports suggest that firms use countertrade to achieve a variety of objectives ranging from market strategy and sales to operations.
Sometimes, necessity is the mother of invention, but an increased recognition of collaborative solutions in supply chains helps firms not only mitigate and manage financial and operational risks but also opens a new space for growth opportunities. From a corporate treasury perspective, it is a further opportunity to actively add value to the company.
It will be exciting to follow the next developments in this area and to help corporate treasury professionals take a proactive approach and lead the innovation process in supply chain finance, including natural hedging and countertrade.