Evolving for the future
Since its IPO, Alibaba has grown from a China-centric e-commerce company to a global MNC. This expansion has brought challenges for the Alibaba treasury team, which they have successfully addressed by building a next-generation cash management infrastructure and creating innovative new processes, products and services. The team leverages everything from virtual bank account pooling, blockchain and APIs, to new M&A integration processes and FX products.
Alibaba is the well-deserved winner of this year’s Mastering Strategic Change award. Since its IPO in 2014, the company has accelerated its evolution from a China-centric e-commerce company to a multinational firm with a global footprint with revenues growing 11-fold to over $100 billion in 2020-2021. For the treasury team, this rapid increase in size and complexity over a short period has resulted in some significant obstacles.
For one thing, effective daily cash management is challenging for Alibaba, which has over 2,000 legal entities working with more than 100 financial institutions. In addition, the company has undertaken more than 400 M&A deals since its IPO, leading to treasury integration challenges.
In recent years the treasury team has embarked on multiple initiatives to enhance its operations. Alibaba Group Treasury Vice President Randy Ou points out that the firm’s efforts differ from typical treasury transformation projects, highlighting that such projects at other firms typically can assume the existing business environment is stable and predictable – “You know where your business expands into, and it is growing at a steady rate, so you think about how to prepare your infrastructure in advance.”
Alibaba’s situation is quite different. “Even though we knew we needed to conform with trends like digitalisation, we also had to fix the challenges that arise from a fast-growing business, and from handling many treasury integrations in a short period,” says Ou. Therefore, the treasury adopted an approach that Ou describes as a delicate balance between traditional treasury solutions and embracing new technology-driven opportunities – all the while distinguishing between genuinely practical and sustainable advances, and those that could be described as ‘hype.’
Something old, something new
One area in which Alibaba has successfully achieved this balance is in the pursuit of next-generation cash management. In the company’s innovative virtual account (VA) cash pooling solution, a physical account acts as the pool header, with one VA for each participant, and multiple VAs underneath. The structure is expected to help reduce the number of bank accounts used over the next couple of years, alongside a 35%+ shift of resources spent in offshore bank account management.
“Virtual accounts in and of itself is not an unusual product in the industry,” comments Ou. “And neither is cash pooling. But by combining them as a virtual account cash pooling solution with added flexibility and user-defined functionalities, we believe we have gained some additional advantages.” Likewise, a digital wallet account cash pooling solution discussed in a previous EuroFinance article has enabled Alibaba to minimise idle cash, optimise cash allocation and generate $10 million annually in additional interest.
Rising to the real-time challenge
Another area of focus is real-time cash visibility and payments. The team has incorporated host-to-host connectivity alongside SWIFT for Corporates, API, and blockchain. This approach enables information transmission, tracking, reconciliation, and payment processing to be completed in minutes.
Incorporating blockchain required considerable innovation, with Alibaba embarking on a pilot project to explore a possible approach. The pilot initially focused on Alibaba’s intercompany flows, but has since been extended to external counterparties in a selected number of countries and currencies. “When we started working on this, we had a vision with a few key criteria,” explains Ou. “Firstly, the structure had to be legal – in other words, it had to work within the context of regulation. Second, it had to be scalable. I didn’t want a solution that would only work for certain limited transactions, but one that could benefit other companies and industries in the future.”
The third requirement, Ou adds, was that the solution needed to be real-time – “meaning that the entity that receives a real-time payment can use it. In other words, I didn’t want a solution where A could pay B in seconds, but B could only use that same cash three hours later. B needed to be able to use the cash straight away.” While the solution is still in pilot mode, Alibaba has already seen impressive results.
Ou acknowledges that many traditional companies may not yet see the argument for real-time payments – “But I will argue it’s coming. The future customer and corporation will be more demanding when it comes to wanting products or services at the time they want, and in the way they want.”
From M&A to FX
Alibaba’s other achievements include creating a structural management model to optimise the post-M&A integration process. Working with other departments, including finance, HR, and legal, the team developed an integration model that is a hybrid of centralised and decentralised approaches. Using this model, the treasury has successfully managed integration without material treasury risk incidences, gained visibility over 90% of the controlling-stake subsidiaries’ cash balances and bank accounts. In comparison, average idle daily cash balances have decreased by 5%, resulting in annual savings of $4 million.
Also of note is the company’s cross-bank pair trading initiative. This involved structuring the company’s trading techniques to match FX transactions in opposite directions across the group and its subsidiaries – thereby eliminating FX risk at the consolidated level, while reducing the bid/ask spread and slippage by 95%. For example, Entity A might be looking to buy $100m and sell CNH, while Entity B needs to make the opposite trade. Even if the two trades have to be carried out using different banks, or even in other markets, the company can align with banks at the same benchmark rates for trade execution, without requiring exposures and paired transactions to be executed or booked under the same entity.
Seeing the big picture
For Ou, the pursuit of innovative new solutions is not just about fixing isolated problems for Alibaba. Instead, he is keen to move treasury forward in a way that will enable industry peers to benefit as well.
Essential to embracing innovation is understanding the associated regulatory risks – although Ou points out this is not only an important topic for companies in China. He adds that while some might feel regulators tend to take some time to respond to the latest technology, “we need to work with them and help them understand how these new technologies can help organisations like corporations and banks run better.”
Last but not least, Ou argues that part of moving things forward is accepting that not every initiative will succeed. “Maybe in five years, we’ll find that our current pilot project didn’t work that well,” he concludes. “Maybe we’ll find that other companies go for a different approach. I have no problem with that, because our efforts may have played a role in helping our peers move forward.”
Alibaba will be presenting at the 30th anniversary International Treasury Management Virtual Week from Sept 27 – Oct 1. Registration is free for corporate treasurers. Click here to find out more and reserve your place.