Overview of payment practices
Taiwan’s ICT/electronics industry appears to have been hit harder by late payments than the domestic chemicals/pharma and textiles/clothing industries. However, the percentage of late payments reported by ICT/electronics was lower than the industry average for Asia, which may be partly due to a reportedly wider use of factoring than in the region. Apart from factoring, the industry shows a similar approach to
trade debt management as regional peers, involving either the retention of customer credit risk in-house, or the use of credit insurance. Cost containment and safeguarding of liquidity levels are areas the industry plans to focus on going forward. Its outlook for the coming months anticipates business growth driven by a resilient global demand for its technology products.
ICT/electronics has greatest percentage of late payments among local sectors
Compared to the chemicals/pharma and textiles/clothing industries, the ICT/electronics industry in Taiwan was the hardest hit by late payments over the past 12 months. However, when compared to industry peers across Asia it appears to have been less impacted by payment defaults than the regional average (42% of all B2B invoices, compared to 47% in Asia). Moreover the industry wrote off 3% of the total value of receivables as uncollectable (compared to a 4% average for the industry in Asia).
This of course highlights that the ICT/electronics businesses experienced lower pressure on cash flow than their industry peers in Asia. This may be a reflection of greater use of factoring (71% in Taiwan, compared to 61% in Asia). outside this, trade debt management appears to be more uniform between ICT/electronics
businesses in Taiwan and Asia. retention and management of customer credit risk internally through self-insurance is undertaken by nearly 70% of the sector in Taiwan and Asia alike.
Of course, the downsides of this approach include the potential to block-up liquidity in bad debt reserves, thus increasing administrative costs. This may be why the industry in both Taiwan and Asia also makes great use of credit insurance (as reported by 65% of businesses in Taiwan and 63% in Asia). The industry average DSo is 107 days in Taiwan, and 110 days in Asia. This suggests a similar level of success in collecting over due invoices, especially long-term overdue invoices, more than 90 days overdue.
Industry export-driven mindset to support business growth over the coming months
Looking ahead, more businesses in Taiwan expressed concern over containment of credit management costs (32%) than their industry peers in Asia (24%). More ICT/electronics businesses in Taiwan than Asia are also worried about safeguarding cash flow levels over the next months. When asked about the outlook for their business performance (sales and profits) over the coming months, more businesses in Taiwan (63%) than in Asia (53%) anticipate no change, while improvement is expected by more businesses in Asia (42%) than in Taiwan (33%).
36% of businesses polled in Taiwan believe that an improvement in business performance will be driven by a rebound in the domestic economy (regional average: 46%). Fewer businesses in Taiwan’s export reliant
economy believe that improvement will come from increased exports (25%), but this is still a greater percentage than their industry peers in Asia (15%).
Better business performance as a result of a combination of increased exports and improved conditions of their domestic economies is expected by almost the same percentage of respondents in Taiwan and Asia alike. Against this backdrop, a greater proportion of the industry in Taiwan (36%) than in Asia (26%) believe that trading on credit will not increase over the coming months. Where trade credit is used, however, businesses in both Taiwan and Asia largely agree that this will be widely used as a short-term financing tool for customers.
There are far fewer late payments in Taiwan’s chemicals/pharma industry than Asia’s industry average. This is likely to be due to the strong safeguards on liquidity levels and credit management cost containment practised by many of the businesses we polled.
Industry respondents indicate this
approach will be maintained over the coming months and appear to be in favour of an increased use of trade credit, as an aid to the sale of goods and services. The majority of businesses we spoke to suggested that an improvement in business performance would be driven by the growth of the domestic economy.
Stronger focus on cash flow management in Taiwan’s industry than in Asia
Overdue invoices comprise an average of 27% of the total value of all B2B credit sales in Taiwan’s chemicals/pharma industry. This is significantly lower than the 54% average for the same industry in Asia. The same pattern can be seen with uncollectable invoices, with just 1% of the total value of receivables classed as write-offs in Taiwan, contrasting with 7% in Asia. Such differences are likely to be due to varying approaches to trade debt management. 60% of the survey’s respondents told us they use factoring (regional average: 48%).
Interestingly, in-house retention and management of customer credit risk through self-insurance is also commonly used in the industry,
(reported by 75% in Taiwan and 70% in Asia). Actively avoiding credit risk concentrations was reported by 75% (regional average: 50%), as well as adjusting payment terms to reflect the credit risk profile of the customer (70% of respondents in Taiwan, 58% in Asia). Businesses also reported slowing down invoice payments to their suppliers to safeguard liquidity levels. The stronger focus on cash flow management practised by Taiwan’s chemicals/pharma industry will have been a primary contributor to keeping the average DSo stable at a 124-day average over the past 12 months, even though this is longer than the 95-day industry average for DSo for Asia.
Containment of credit management costs worries industry
42% of Taiwan’s businesses in the chemicals/pharma industry expressed concern over containment of credit management costs than their industry peers in Asia (21%). Protecting cash flow to avoid liquidity shortages was cited as a key focus area by businesses in Taiwan and Asia alike. When asked about the outlook for their business performance (sales and profits) over the coming months, 70% of businesses in Taiwan anticipate no change, twice as many as those reporting the same in Asia. However, of those expecting to see business growth, 60% told us they
believe this will be driven by the domestic economy (regional average: 43%.) The remainder expects better business performance to come from a combination of increased exports and improved export flows. no change in the role of B2B trade credit is anticipated by far more businesses in the industry in Taiwan (45%) than in Asia (21%). Businesses in the industry in both Taiwan and Asia anticipating a greater role for trade credit agree that this will be driven by the need to boost demand.
Businesses in Taiwan’s textiles/clothing industry appear able to weather late payments better than their industry peers in Asia. However, following recent concerns over an unexpected resurgence of Covid-19 cases, local businesses expressed pessimism concerning an
improvement in their business performance over the coming months.
However, what worries them more than their peers in Asia are potential bank lending restrictions that could hamper their financial flexibility and their ability to access cash to weather fluctuations in their business activity.
Credit insurance and self-insurance widely used
With overdue invoices amounting to just 23% of total B2B credit sales, businesses in Taiwan’s textiles/clothing industry appear to be significantly less impacted by late payments than their industry peers in Asia, which reported 50%. The same pattern can be seen with a 4% average of write-off rate for the industry in Taiwan, versus 7% Asia. This is likely to be due to differences in trade debt management. The majority of businesses opted for selfinsurance, with 84% of businesses in Taiwan taking this approach, far more than in Asia (78%). Although this includes the need to absorb losses and late payments themselves, many of the businesses self-insuring reduced reliance on single customers to avoid credit risk concentrations (reported by 63% of respondents in Taiwan and 52% in Asia).
Interestingly, of the local businesses opting for selfinsurance, more in
Taiwan (63%) than in Asia (54%) told us they delayed payments to suppliers to improve cash flow and reduce the need for external financing of working capital. When delaying payments generated insufficient cash flow, many told us they accessed alternative sources of funds, including bank loans, to fulfil their cash requirements. However, 68% of industry respondents told us also they strengthened credit risk management over the past 12 months, through the use of credit insurance (regional average: 55%). This approach helped the industry keep DSo stable over the past 12 months.
Although businesses that self-insured told us they often offered discounts for early payment to speed up cash inflows and contain DSo. The average DSo for the industry is 105 days, much longer than the average 81 days for the industry in Asia. reportedly this is largely due to sales fluctuations, rather than to cash flow issues.
Businesses express concern over potential bank lending restrictions
More Taiwan’s businesses in the industry (30%) than in Asia (10%) told us they are concerned about a likely introduction of bank lending restrictions that could hamper their financial flexibility and their ability to access cash to weather fluctuations in their business activity over the coming months. 21% are concerned about containing credit management costs in the coming months, (regional average: 16%).
It is worth mentioning that four times as many respondents in Taiwan than in Asia overall are worried about future increases in geopolitical trade tensions negatively impacting their export flows. Amid concerns over a recent unexpected resurgence of Covid-19 cases, local businesses in the industry are way more pessimistic than their Asian industry peers about the likelihood of an improvement in their business performance over the coming months. In the instances
where businesses did predict growth, 60% said they believed the improvement would come from both a rebound of the domestic economy and increased export trade flows, a much higher proportion than for the region where just 32% said the same thing. However, for the time being most respondents in Taiwan (63%, far higher than the 37% average for Asia) do not expect to see changes in their business performance over the coming months.
Consistent with this, 47% believe that trading on credit will not become more widespread over the coming months (more than the 23% that expressed the same in Asia). Should increased credit trade occur over the coming months, businesses in the industry in Taiwan agree with those in Asia that this will be primarily aimed at supporting customers by allowing them more time to pay.