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Working capital management: all tied up - Review of working capital performance across regions - EY - Global

Working capital management: all tied up

Review of working capital performance across regions

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The leaders in terms of WC performance were Latin America, Australia and New Zealand, with C2C dropping each by 16%.

A review of the WC performance of the largest companies across six main regions and countries reveals significant variations overall and for each metric. These variations would have been even bigger had the metals and mining industry and the oil and gas industry been excluded from our calculations.

Factors behind the WC performance variations

Industry bias. For some regions and countries, results are heavily skewed toward the WC performance of certain industries. For example, the metals and mining and oil and gas industries represent as much as 42% of total sales of our sample of companies for CEE, but only 7% for Japan. Electric utilities and telecommunications services account for 24% of sales in Latin America, but for only 8% in Australia and New Zealand.

Payment practices. Payment practices (payment terms and behaviors, payment usage, legal frameworks and cash collection effectiveness) vary widely across and within regions and countries. Payment terms, for instance, are generally longer in Asia, CEE and Latin America than they are in the US.

For Australia and New Zealand and Canada, terms are comparable to those applied in the US. With regard to payment usage, there is a strong preference for cash payments in Brazil, China, India and Russia.

Supply chain infrastructures. Infrastructure performance (in terms of quality, quantity and pricing) varies dramatically across these regions and countries, resulting in substantial differences in local supply chain costs, service levels and risks, as well as in WC performance (notably in the form of inventory levels and cash and costs trade-offs).

Focus on cash and process efficiency. Marked differences in the degree of management focus on cash and process efficiency can be observed among these regions and countries. These partly reflect variations in the commercial and industrial strategies deployed, as well as differences in the degree of process maturity among companies, as they seek to respond in different ways to distinct economic and financial conditions and opportunities.

WC comparisons among industries across regions and countries

An analysis of WC performance by industry across regions and countries, and in comparison with the US and Europe, reveals substantial variance, exacerbated by the impact of factors that are specific to each local industry.

  • In the case of telecommunications services, the performance by region and country is largely influenced by the fixed-line/mobile and prepay/post-pay mix, local payment practices, payment methods and levels of capital expenditure.
  • Topping WC performance, for example, is Asia, which carries a negative C2C figure, benefiting from high payables (on the back of large capital expenditure requirements) and low receivables (due to the importance of mobile revenues, combined with a high proportion of prepaid subscribers).
  • For the oil and gas industry, the high level of C2C seen in Japan reflects the weight of refiners in that country (refiners carry much higher WC requirements than the integrated and exploration and production companies).
  • For the metals and mining industry and the steel industry, performance is varied across regions, partly due to differences in business models, with companies operating at various points of a complex, sometimes vertically integrated value chain. Interestingly, machinery makers present similar levels of WC across all regions and countries, reflecting the global nature of this industry.
  • Compared with the US and Europe, the WC performance of food producers in other regions and countries is much weaker, exhibiting poor results in each area of WC. As well as lacking the benefits of size, many deal with a dispersed customer base and operate comparatively inefficient supply chains.

Change in WC metrics in the past five years

Four regions and countries out of six (excluding the US and Europe) managed to report an improvement in C2C performance over the past five years.

The leaders in terms of WC performance (excluding the metals and mining and oil and gas industries) were Latin America and Australia and New Zealand, with C2C dropping each by 16%. These strong results were driven by electric utilities in both regions, as well as by telecommunications operators for the former and by retailers for the latter.

Converging WC performance between and within other regions and countries

A certain degree of convergence in WC performance between and within other regions and countries can be expected given the global footprint of corporations, increased impact of globalized and intra-regional trade, industry consolidation and concentration of demand. Common WC leading practices have also been spreading steadily.

Intra-regional trade is booming, as a result of greater horizontal and vertical integration, fostered by foreign direct investment and the search for low-cost production economies. For Asia and Latin America, for example, intra-regional exports now account for about one half and one quarter of total exports, respectively.

Inter- and intra-regional M&A activity is also growing steadily, driven by consolidation activity, market deregulation, the need to diversify internationally and gain access to new markets, as well as, in some cases, by the search for a more efficient use of surplus corporate cash.


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