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Double redundant—Standard Chartered discusses supply chain duplication and deep-tier financing

Over the last two years, supply chains have been discussed more widely than ever before.

People hardly put any thought into the long and arduous journey taken by produce on grocery store shelves. 

At least not until the COVID-19 pandemic started to disrupt that seemingly reliable facet of modern society.

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As store shelves lay bare and toilet paper was nowhere to be found, many people began to hear much more about the supply chains that power our lives in the background.

While the world has largely emerged from the grips of pandemic lockdowns, several other macroeconomic and geopolitical factors have taken the role of supply chain disruptors.

To learn more about the changing nature of global supply chains, Trade Finance Global (TFG) spoke with Standard Chartered Bank’s Kai Fehr, global head of trade and working capital, and Samuel Mathew, global head of flow and financial institution trade, at Sibos, held in Amsterdam this October.

Supply chains are becoming redundant—and that’s a good thing

The landscape is currently very complex coming out of the COVID-19 pandemic. Factoring in additional challenges such as geopolitical tensions, inflation, and energy prices, it can be particularly difficult for some businesses to navigate. 

The amalgamation of all these factors has led to large delays in the market for nearly everything. People building houses are struggling to get their hands on supplies and appliances to get the job done.

For many companies, overcoming these hurdles means building resilience in their supply chains.

Fehr said, “You must have contingencies so that you can be certain that departments within your supply chain are still able to provide in a number of scenarios.”

Geopolitical tension has the capacity to divide the world, with the pandemic putting cities in lockdown. These are all events that can happen, and supply chains need to be ready to address them.

One of the main themes coming out of global supply chains today is a growing amount of friendshoring, which is when companies bring their supply chain closer to a friendly nation.

This is becoming particularly prevalent in the energy and technology industries, given a lot of the geopolitical tensions that are disrupting these markets globally.

While friendshoring is becoming more popular, firms still struggle to escape China’s massive gravitational pull.

It is becoming more and more apparent with Standard Chartered clientele that the global market is important for them, but the Chinese market is critical. 

With this in mind, businesses are increasingly building two independent supply chains, one catering to the domestic Chinese market and the other using friendshoring processes throughout the rest of the supply chain.

While this phenomenon is occurring, it is unlikely to manifest itself in the short term.

This is because changing supply chains is a considerable process requiring supplier and environmental due diligence. This is expected in addition to the actual moving of products and setting up the manufacturing facilities.

Fehr added, “That is a multi-year project, not a multi-month project. 

“Therefore, if we are reviewing this in a year’s time, I predict we will see some change, but the real permanent change will not be visible for another three to four years.”

Digitalisation to help deep-tier financing

Digitalisation is often widely hyped as a tool that will solve countless problems within the trade and supply chain finance spaces.

In some instances, however, this buzz comes about without a clear and tangible understanding of what is actually happening behind the scenes. 

Often, technology is only providing visibility into the transactions at hand without actually being in a position to change the underlying reality. 

While visibility is a key first step, these solutions don’t solve many of the end-to-end problems in the supply chain.  

On a different note—although still within the realm of digitalisation—is the idea of deep-tier financing, which has tremendous potential to help solve the trade finance gap.

Often in large multinational supply chains, the tier-one suppliers are generally already quite financially strong and could achieve financing from any number of sources. 

Advancements in digital technologies, however, can allow the financial strength of the corporation to travel further down the chain.

Standard Chartered is able to use technology to tokenise trade assets and let the token travel deep into the supply chain. 

Fehr and Mathews noted how in one scenario, the bank had reached level eleven, while the normal depth is level three to four.

Fehr said, “I’m not talking about digitalisation as a theoretical idea—this is a reality for us.”

This happens because the technology allows tokens to be fractionalised at each level of the chain and portions of the whole passed on to each supplier level in a manner that represents the physical reality of the supply chain. 

By layering on pricing components, these tokens can allow the financial prowess of large multinationals to trickle down many tiers to a small local farmer who otherwise may struggle to get financing despite the fact that their products are ultimately sold to a financially stable firm.

By easing the barriers to small business financing, more of them will receive financing, reducing the trade finance gap in the process.

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Published 23 November 2022