While Microsoft was finding a solution to escrow account reconciliations, Ford Motor Company was working with Chinese regulators on a new means of financing its Chinese businesses.

To support dealers and customers as it expanded rapidly in China, Ford needed efficient access to capital in that country. But none of the common options were appealing. They were either too expensive or unlikely to provide adequate liquidity. So Ford worked with banks that participate in its global corporate revolving credit facility to put together a subfacility focused on China. The company then worked with Chinese regulators to provide Ford's Chinese business units with access to this CNH-denominated revolving credit facility.

The project was complex, but it has paid big dividends. The project "gives us confidence that we can support Ford, grow our financing business, and participate in the rapidly expanding Chinese capital markets with the same robust liquidity framework that we use elsewhere in the world," says Sam Smith, Ford's assistant treasurer.

Caterpillar has also worked closely with Chinese regulators to streamline its operations there. As that company grew rapidly in China over the past two decades, regulations required it to open a plethora of local bank accounts. Caterpillar's Chinese entity ended up with more than 260 accounts across 17 banks.

Then a pilot program from China's State Administration of Foreign Exchange (SAFE) reduced the documentation restrictions around payment processing. Caterpillar joined the pilot and proceeded to consolidate its banking relationships and pull treasury activities from across China into a central shared service center.

Project management was key to success, as the initiative impacted everyone from senior managers to employees in the shared service center, as well as teams from tax, legal, government affairs, HR, and IT. "Every function that might potentially be impacted by the project was included in the communication plan and kept posted regularly on what was going on with the project," says Chee Huat Tiang, Asia Pacific treasurer for Caterpillar. The end result? A greatly streamlined treasury function and better utilization of excess cash.

All three of this year's winners built strong relationships—both internally, with other corporate functions, and externally with regulators and banks. Through these relationships they were able to pioneer some truly unique treasury structures in an environment that can be challenging in the best of times. Congratulations, Caterpillar, Microsoft, and Ford!

Accessing a Global Revolving Credit Facility from China

To say China is a growth market for Ford Motor Company would be a major understatement. "China is the largest automotive market in the world, and our business is growing rapidly," says Eric Boehm, formerly Ford's director of global banking and trading, and now the company's Asia Pacific treasurer. "We are expanding our vehicle lineup, our manufacturing footprint, our dealer body, and our financing operations. We expect this market to be a significant driver of Ford's growth globally."

Ford's finance company in China—Ford Automotive Finance (China)—is an important part of the growth equation. As Ford Motor Credit Company does around the world, Ford Automotive Finance (China) delivers strategic value to the enterprise by consistently supporting Ford's dealers and customers throughout economic cycles.

Having a wholly owned captive finance company in China makes great business sense for Ford. However, China's capital markets are still developing, which has presented some unique challenges in sourcing funding and liquidity.

"Globally, Ford Credit runs its liquidity framework in a very consistent fashion," explains Sam Smith, Ford's assistant treasurer. "For our operations around the world, we establish liquidity targets through scenario and stress testing, and maintain this liquidity through a combination of cash and committed bank facilities."

Traditional committed revolving credit facilities, like those found in the U.S. and Europe, are less common in China. Companies in China typically compensate by using uncommitted credit facilities—often short-term—or by holding excess cash. Unsatisfied with these higher-risk, higher-cost choices, Ford sought a more efficient alternative.

The first option was to continue to increase committed, bilateral lines of credit with domestic Chinese banks. However, these facilities are not the standard market convention, especially on multiyear terms, making this option unlikely to provide the desired liquidity.

Ford's second option was to set up a separate onshore revolving credit facility with the local arms of Ford's global relationship banks familiar with the structure of Ford's traditional credit facilities. That option came with its own obstacles. "There are limits to how much a lender can provide to a single borrower in China," Boehm explains, "and given the relatively smaller size of our global banks' Chinese operations, these limitations would restrict the size of an onshore facility."

In response to these constraints, Ford began pursuing a third alternative: using Ford's global corporate revolving credit facility to meet the funding and liquidity needs of Ford Automotive Finance (China).

First, Ford treasury recruited banks to participate in a renminbi (RMB) subfacility within its US$13.4 billion global revolving credit facility, creating a new source of offshore yuan (CNH). The corporate facility includes 59 banks, 20 of which participated in the RMB subfacility. "These are the lenders that are really focused on Asia or that find Ford Automotive Finance (China) to be a good fit for their lending and business footprint," Boehm says. At the time of its execution in spring 2015, this was the largest CNH syndication executed by an industrial corporation.

The next stage was to find a way to create access to this facility for Ford Automotive Finance (China) which, as a Chinese non-bank financial institution, faced restrictions on access to offshore financing. Working closely with the regulators, the Ford treasury team established an intercompany facility between Ford Credit and Ford Automotive Finance (China) that would be compatible with China's newly expanded cross-border financing rules. Under this facility, Ford Automotive Finance (China) obtained access to offshore CNH, and in July 2016 became the first automotive finance company to borrow offshore under the new rules.

Smith emphasizes that this is one of several areas in which Ford Automotive Finance (China) is participating in the continued development of the Chinese capital markets. "In addition to this transaction, we've also launched and expanded our use of the asset-backed securities and unsecured bond markets. Our aim is to be a strong partner on all of these initiatives," Smith says.

Another area in which Ford leveraged longstanding relationships was in getting banks comfortable with the new facility. "We were treading new ground," Boehm says. "While there had been some other multicurrency tranches in other corporate facilities, we needed to get ourselves and the bank group comfortable with a number of unique operational considerations. There's a mutual trust and confidence in our banking relationships, and that's what really enabled this innovation."

Cultivating strong bank relationships has always been a priority for Ford, and its growing business in China highlights the importance of its local bank relationships. "It's been rewarding to increase the engagement with our banks in China." Boehm adds. "In fact, this year we hosted our inaugural China bank relationship meeting in Shanghai."

These relationships have paid off. Ford Automotive Finance (China) now enjoys access to multiyear committed backstop liquidity, on terms consistent with the rest of the company's global revolving credit facility.

"The real benefit of this transaction is that through its unique structure—and, of course, the support of regulators and our banks—we gained access to the sort of term liquidity that otherwise would have been challenging to source locally," Smith says. "That gives us confidence that we can support Ford, grow our financing business, and participate in the rapidly expanding Chinese capital markets with the same robust liquidity framework that we use elsewhere in the world."

Making Treasury a Trusted Adviser

Microsoft is a company in transition. As it pivots at the corporate level to a cloud-first and mobile-focused strategy, the software giant has been undergoing a great deal of organizational change. Nowhere is that change more apparent than in its China operations.

"Microsoft has put special focus on some of the emerging markets," says Ashish Bhardwaj, group credit manager for the company's Asia-Pacific region. "One thing that is peculiar about doing business in these markets is that the governments strictly regulate certain aspects of commerce. For continued success in China, local data hosting is a must, but tax and legal regulations prohibited Microsoft from operating its own data center in China."

Corporate management considered the alternatives and decided to partner with Chinese data center provider 21Vianet to deliver cloud services in China. 21Vianet set up its own version of the Microsoft cloud. Its platform is a replica of Microsoft's global cloud offering, but 21Vianet manages the Chinese version and sells subscriptions to it.

In this new business model, Chinese regulations forbid Microsoft from having any kind of direct relationship with the end customers of this arrangement. Customer payments flow into an escrow account that sits in the middle of the partnership. 21Vianet owns the bank account. No funds can leave the account unless both 21Vianet and Microsoft sign the check, but Microsoft cannot view payment detail about the customer payments that comprise the inbound cash flows. This arrangement creates challenges for Microsoft management.

"Microsoft is a U.S. company, and although 21Vianet is listed on the Nasdaq, 95 percent of its operations take place in China, with local leadership," Bhardwaj says. "The two companies had completely different ways of operating. Microsoft is very structured in its approach to sales, marketing, finance, and treasury. But because of the regulatory restrictions, 21Vianet has to handle all billing and collections in China, then split revenues with Microsoft."

What Microsoft was able to do was help 21Vianet set up credit and collections processes that aligned with Microsoft's global best practices. For credit checks, "we realized that China is prone to fraud," Bhardwaj says. "But Microsoft WOCS [Worldwide Online Credit Services] did an analysis that determined fraud is rare for purchases worth less than 51,000 RMB. We shared this analysis with 21Vianet and made some suggestions on how they could handle credit management more efficiently."

21Vianet heeded Microsoft's advice. For purchases made via an online payment system, 21Vianet now requires review by a member of the credit risk team only if the value of the transaction is above 51,000 RMB. Online payments lower than that amount are processed automatically. For contracted purchases, 21Vianet initially wanted to perform a complete credit check on every customer. However, Microsoft WOCS once again came back with a data analysis that suggested a different approach.

"For these enterprise deals, we found that a lot of the accounts already have an established relationship with Microsoft in other parts of the world," Bhardwaj says. "We told 21Vianet that we couldn't share customer payment details with them, but we could tell them whether the customer's payment history with us is good, and what size of deal should be flagged for review rather than receiving an automated credit approval."

Microsoft also helped 21Vianet plan its collections processes and set up its collections team. WOCS supported 21Vianet in creating its own corporate resource library based on Microsoft best practices. WOCS also provided advice on when to send dunning notices to customers; when to make phone calls; when to escalate issues; and how to determine the timelines for when to take the step of a bad-debt write-off, a reversal, or a credit freeze on the account. Moreover, "we shared how we handle customers that are having financial difficulties," Bhardwaj says. "We shared our payment-plan scenarios, how we negotiate, and how we can turn that kind of adversity into an opportunity."

The success of this approach is indisputable. "We're now three years down the line," Bhardwaj says. "We have been experiencing fantastic growth; our cash collections increased sevenfold from Q3/2014 to Q1/2016. But we still have not suffered a single loss from customer nonpayment."

Still, managing a joint venture in China has required creative thinking on the part of finance and accounting. For one thing, the Chinese regulation prohibiting Microsoft from accessing data about 21Vianet customers stymied Microsoft's ability to manage cash and reconcile account balances on the shared escrow account. "We need to make sure that 21Vianet's book of accounts matches Microsoft's book of accounts," Bhardwaj says. "Chinese law required us to find a unique way to do reconciliations for the escrow account."

Microsoft first tackled the problem by developing a custom software tool called TFS Tracker. Anytime something unexpected happens with a cloud-customer payment in China—for example, a dispute, a write-off, a credit to a customer account, or a request to change the customer's credit limit or payment terms—21Vianet enters that information in TFS Tracker.

Microsoft then negotiated an exception to corporate policy that lets Accenture, Microsoft's global collections service provider, access the TFS Tracker system, as well as accounting data associated with the escrow account. Using this information, Accenture prepares reconciliation statements for Microsoft showing how much cash has been received into the escrow account, how much needs to be retained for tax purposes, how much should go to 21Vianet, and how much should flow to Microsoft. The Microsoft finance operations function then compares those numbers against the WOCS team's models of how much cash should be coming in, how much cash will be disbursed, and what the escrow account's balance should be at specific points in time.

When there are discrepancies, the Microsoft cash application team works with 21Vianet to uncover the reason. "They might identify that on a payment of $100, the payment was only $80 because of a dispute," Bhardwaj says. "We won't receive the customer details, but they can share which line items a dispute affects. Then we can keep those line items open on our books and use a structured approval process between Microsoft and 21Vianet to handle the $20 balance."

After working through any discrepancies, "we work with operations finance to make sure everything is tallied," Bhardwaj says. "Then we have to get approval from the compliance team. Microsoft treasury will sign release notices, which the finance team in China will review and countersign. Then we will send it to the bank."

Bhardwaj attributes the project's success to two factors. First, he says, an initiative like this needs to include a wide array of stakeholders from the start. "As a member of the treasury team, sometimes if I need to draft a new process, I might go off and work in a silo," he says. "I may go to roll it out and just tell everyone, 'This is our new process.' That's when I get into the hiccups, the customer issues, the noncompliance issues." But this project was different.

"We knew right from the beginning that launching such a complex project was not going to be an easy task," Bhardwaj says. "That's why we included so many different internal teams from the very beginning. We included legal, finance, and tax in all the conversations as we planned the new processes. Once we had those teams' blessings, we would take our process proposals to the business excellence and quality teams, to make sure they met Microsoft's high quality standards. Then they would pass through operations finance, to make sure everything was compliant with Microsoft policies and processes. And finally we'd take new processes to sales and marketing, to be sure they'd act as sales enablers, not sales blockers.

"This approach has resulted in processes that are compliant with the legal and tax framework in China, that act as sales enablers, and that follow Microsoft policies and processes," Bhardwaj reports. "So one of the major lessons I learned from this initiative is that starting to work with your key stakeholders right from the start of the process will make your life easier and make the process airtight and compliant."

The other key success factor, Bhardwaj says, was the effort that the WOCS team put into building trust among the 10 to 15 internal teams involved in the project. "You need to have a thorough understanding of what can be done and what cannot be done," he says. "You want to give them confidence that you're taking a solution approach to improving your process—in other words, you're looking at all the different options and making sure that the solution of choice is compliant with all the relevant internal teams. That attitude really starts building trust, and people start looking at you as a trusted adviser."

A SAFE Path to Efficient Treasury in China

Since the 1990s, Caterpillar has been expanding rapidly in China. But as it set up new manufacturing facilities and research and development centers, its banking infrastructure grew complex over time.

"This was mainly a result of the fact that we needed to have a local bank account in every geographic location where we had a business entity," says Sara Lupien, who was a Six Sigma Black Belt on Caterpillar's Alexander Hamilton Award-winning project and is currently a contract and revenue manager. "One reason was that processing foreign-currency payments involved someone actually carrying paper documents to their local banks for processing. Because of this requirement, Caterpillar China ended up with more than 260 bank accounts at 17 different banks."

When China's State Administration of Foreign Exchange (SAFE) invited Caterpillar in 2012 to apply for a pilot program around currency-exchange reforms, the manufacturer saw this project as a great opportunity to streamline its treasury operations in China.

"The pilot program standardized processes for checking supporting documents, which allowed us to start using scanned copies rather than paper copies," Lupien says. "This enabled Caterpillar entities across China to do business without having a bank account down the street. We decided to centralize a lot of our banking activities in China with one primary bank."

The SAFE reforms presented the opportunity to centralize cash management and create a China foreign currency cash pool, something the company hadn't previously been able to do. And by facilitating the consolidation of bank accounts, and streamlining foreign currency payment supporting document requirements, the reforms also made it possible for Caterpillar to centralize payments processing for its China operations in a shared service center in Tianjin.

Caterpillar treasury immediately embarked on a transformative project. Step one involved evaluating how AvantGard Trax, which Caterpillar uses for payments processing in the rest of the world, could be adapted to the Chinese environment. The treasury team identified the standard file formats that they would need their banks in China to be able to handle, and they determined that the area in which Trax would require the most customization would involve allowing Chinese characters.

After laying this groundwork, Caterpillar treasury initiated a request for information (RFI) and request for proposals (RFP) process to guide consolidation of banking relationships across China. Over the course of six months, this process enabled Caterpillar to finalize its selection of two corporate banks, both of which were determined to be critical to its success in China.

Treasury began to simultaneously prepare for implementation of a new banking structure, a shared service center for treasury and payments, and the new-to-China payments platform. "We had to move in parallel with these projects," Lupien explains. "There were detailed requirements-gathering sessions for the payments platform, and we needed to open the new bank accounts at the same time. We did road shows, where we went to the business units that were going to be participating in the shared service center and explained why we needed to centralize. This really helped us get their buy-in and support for the project."

As the initiative came together, Caterpillar treasury developed not only a detailed project plan, but also a robust communication plan, according to Chee Huat Tiang, who is Caterpillar's Asia Pacific treasurer: "We had steering committees and held regular project updates and meetings with all the key stakeholders and the business managers. We also made sure lines of communication were always open with employees in the shared service center, in tax, legal, government affairs, HR, and IT. Every function that might potentially be impacted by the project was included in the communication plan and kept posted regularly on what was going on with the project."

Soon Caterpillar began closing many of its 260-plus bank accounts. The treasury operations team based in Beijing partnered with one of the company's global relationship banks to serve as its primary bank in China. They formed a cash pool with a header account under an entity called Caterpillar China. "This is a tax-efficient liquidity structure," explains Tiang. "Entities that are short of cash can borrow from entities that have a surplus of cash, but these lending/borrowing relationships are created only on an as-needed basis. Excess cash sweeps into the China pool only when it's needed to cover funding requirements of one of the entities involved."

This structure has accelerated access to liquidity for Caterpillar business units across China, boosted corporate efficiency, and greatly improved Caterpillar treasury and finance teams' visibility into cash flows nationwide. Moreover, by working mostly with a bank that understands the company's global business, "anytime we have issues or need help, they immediately understand where we're coming from," Tiang says. "That relationship helps a lot."

The cash-pooling structure also aligns with Caterpillar's global cash management strategy, allowing Caterpillar to utilize cash from its China operations to support global needs (e.g., growth) as needed. Cash repatriation out of China is subject to certain regulatory requirements. In the past, China set cross-border funds transfer limits for each business unit individually. But the SAFE pilot program calculates these limits at the holding-company level. "A lot of our businesses in China are generating cash, and this pilot allows us to better utilize that excess cash," Tiang says.

Caterpillar also moved much of its payment activity in China—and all foreign-currency payments—into the Tianjin shared service center. The company standardized processes and moved payments onto the Trax platform. A custom-built interface between Trax and an SAP ERP system enables the shared service center to deliver ISO 20022 XML payment files to Caterpillar's remaining banks in China, and to receive bank statement files in the SWIFT MT940 format for automated reconciliation.

"We've made good progress on consolidating our banking relationships," Tiang says. "Realistically, we may end up with a handful of business entities needing to keep accounts in a different bank. There are some valid business reasons for that, but this is something we will continue to monitor and change as opportunity arises. We would ideally like to centralize our banking in China with our two primary banks, and by the end of this year we will have achieved around 95 percent of what we set out to do."

Project management was crucial to Caterpillar's success in this transformational initiative. The company took very seriously the Six Sigma concept of identifying and overcoming roadblocks. "This was a pretty broad project in terms of scope, so before we even kicked it off, we approached some of the senior managers around China to explain the rationale of what we were trying to do and the potential benefits," Lupien says. "Anywhere we anticipated we might face some resistance to change, we would have one-on-one sessions to talk through their concerns and why the project was strategically the right thing to do."

In addition, they engaged in regular project-status discussions with their banks. "The idea was that as issues arose in the project, everyone would be aware of what was going on," Tiang says. "That enabled us to work on issues as early as possible to mitigate any further downstream challenges. All the issues that arose were resolved to our satisfaction. This communication channel also meant we had a lot of support from our banking partners, all the way to the very senior level of the organization."

Ultimately, this project enabled Caterpillar to leverage regulatory reforms as a catalyst for dramatic improvements in internal processes. "Change management was a key component for this project," says Tiang. "When this pilot project came along, we recognized that although our treasury processes in China were working well, there was room for improvement. We saw that if we took treasury to the next level, then as we continue to grow in China, adding more business entities, our new liquidity structure will make treasury processes more manageable in terms of cash visibility, payments, borrowing and lending, and so forth," says Tiang. "Overall, this project highlighted the teamwork and collaboration among the different business units within Caterpillar and our banking partners.

"It also highlighted the Chinese regulators' focus on reforms. Beijing SAFE played an instrumental role, and their support has been a key ingredient to our project's success," Tiang added.