“The preference throughout Pfizer's global supply chain network has always been to invoice in local currency,” Sweetman says. “We have a number of supply companies in Europe that source the product other Pfizer entities need and then sell it on to the distribution entity in that entity's functional currency. That isolates our FX exposures in those select supply companies, and our centralized in-house bank hedges the FX risk.”

But in the past, government regulations prohibited cross-border transactions from settling in renminbi. Pfizer decided that all intercompany transactions involving a Chinese entity would be denominated in U.S. dollars. If a business unit based in Europe, for example, sold materials to a business unit in China, it would issue an invoice in dollars. Because the Chinese entity sold locally in onshore yuan (CNY), it would have to buy dollars to pay for the intercompany transaction.

Thus, Pfizer's Chinese business units retained significant currency risk. The company's finance team in China would send global treasury an offline monthly spreadsheet showing their group's FX exposure; the treasury team would then execute the hedges on their behalf. This process protected against FX fluctuations, but Pfizer continued to evaluate ways of improving how it was mitigating the FX risk arising from its intercompany shipments. As the People's Bank of China (PBOC) began loosening currency restrictions over the past five or six years, Pfizer treasury saw an opportunity to bring its Chinese entities' currency risk management more in line with the rest of the organization.

“The liberalization of the renminbi regime now allows companies to pay and receive renminbi outside the country via offshore settlement centers such as Hong Kong,” Sweetman says. “We watched this progression for a couple of years, we spoke to other corporates, we spoke with our banking partners, and we did a bit of benchmarking. We observed that more and more businesses were moving into the [offshore renminbi] CNH market, and Chinese authorities were clearly happy to see companies moving in this direction.”

Around the same time, Pfizer implemented a single global instance of its SAP ERP system. “Once we rolled out SAP to our supply companies a few years ago, treasury started getting an automated data feed every night that showed their [foreign exchange] FX exposures,” Sweetman says. “This sequenced nicely with the PBOC's liberalization of its currency policies. So we made the choice to move those exposures out of the Chinese entities and onto the balance sheet of our supply companies in Europe.”

Although changing the invoicing currency might seem straightforward, it actually entailed a number of complex steps. First, Pfizer treasury worked with the company's regional bank, JPMorgan, to understand its capacity to integrate all of Pfizer's CNY transactions into the company's centralized settlement structure. Next, the project team delineated all the parts of the corporate supply chain that would be impacted by the move from USD to CNY. In addition to the import of materials, the Chinese businesses had a small export component that also needed to be considered.

The company's global pricing team, based in the United States, managed the technical details of the transition. They worked with the company's logistics group in China to communicate to Chinese tax and customs officials the rationale behind the change. They also negotiated with these authorities around which USD-to-CNY exchange rate the company would use for setting CNY prices, as well as how frequently it would re-evaluate that rate.

The pricing team also engaged with key stakeholders in Pfizer China to understand local issues that could arise. They circulated the new CNY prices for products imported into and exported from China. Once these prices were approved, the team loaded them into the company's global inventory system and ran tests to ensure the CNY prices would integrate smoothly into the ERP system.

Meanwhile, treasury had to make sure corporate systems could accommodate the necessary currency risk management activities. They needed to continue handling the runoff of legacy USD-CNY hedges. At the same time, the corporate FX execution team in Dublin needed to prepare for risk hedging in the new environment. They conducted extensive sensitivity analyses of the CNY-CNH relationship and found the two currencies to be highly correlated. “There wasn't a lot of materiality in difference between using one vs. the other,” Sweetman says. The FX execution team decided to save on FX conversion costs and resources by using USD-CNH hedges to mitigate the European supply entities' new currency risks.

Throughout these processes, the treasury team chaired regular calls and provided frequent email updates to stakeholders, as issues were brought forward and resolved. “The project management was arguably the most difficult aspect of this transition,” Sweetman says. “Treasury was looking at our view of the world and seeing that Pfizer was running up losses because our affiliates in China were having to buy dollars to pay down invoices. The problem was treasury-specific. But when we came to resolving it, we had to get buy-in from groups across the company. We had to talk to people in inventory, in our supply chain, in our manufacturing sites. We had to bring in colleagues in commercial finance in China and in Europe, colleagues in shared services, and our global financial solutions group in China, in addition to tax and transfer pricing teams.

“It was a really diverse group of people,” he adds. “We were coordinating across multiple time zones and language barriers. But once everybody understood what we were trying to do, and the positive impact this would have on the P&L, they bought in.”

Now when a foreign Pfizer business unit ships goods to a Chinese entity, the invoice is denominated in CNY and issued with Pfizer's standard intercompany credit terms. The next day, corporate treasury sees the transaction in SAP and purchases a CNH hedge based on both the amount and settlement date of the invoice. The impact of this transition on the business has been remarkable. “Now China looks a lot more like any other G-20 country in terms of our intercompany netting processes,” Sweetman says.

Renje Kuo, who at the time of the project was the senior manager of Pfizer's Asia treasury center, agrees. He has since taken on a different role within corporate treasury, but says, “During my time in Singapore, we went through a lot of small steps toward moving the Chinese entities into more of a standard Pfizer framework for managing liquidity and foreign exchange. This project represented a big step toward that goal.”

The new approach to mitigating FX risk has reduced volatility on the company's income statement. “In terms of P&L saving, this totaled several million dollars in just the first fiscal year,” Sweetman reports. “It's been hugely impactful.”

Another long-term impact lies within the relationships this project fostered between treasury and other areas of the company. “In treasury and finance, we speak the same language,” Sweetman says. “But when we spoke with the people outside of finance, the conversation sometimes led in unexpected directions. The other stakeholders might end up saying, 'I've always wondered how we handled that.' Likewise, because we now have contact with some of these other folks across the organization, we have developed more of a well-rounded knowledge of Pfizer's operations than we could see just sitting within the finance silo.” And that vision is preparing the treasury team to support Pfizer as it continues to grow in China—and around the world.

2017 Alexander Hamilton Awards — Best Practices in Restricted/Emerging Markets

• Gold: Honeywell | Opening the Credit Umbrella in China
• Bronze: World Vision International | A Treasury with Global Vision