Lifecycle Engagement with New Economy Businesses

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Lifecycle Engagement with New Economy Businesses

At present, China’s “trio of new growth drivers”, comprising new industries, new business formats and new commerce, continues to steam ahead. Statistics released on the 6th of this month on the website of the National Bureau of Statistics showed the economic added value of the trio in 2020 was equivalent to 17.08% of the country’s GDP in the same year.

The trend was echoed at the 4th World Artificial Intelligence Conference recently held in Shanghai, which featured the theme “Intelligent Connectivity, Inspirational Cities” and explored the new frontiers of technological innovation and industrial applications of artificial intelligence, seen by many as an important engine to propel the digital transformation of cities and ensure high-quality development of the digital economy and the new economy industries.

It is worth noting, nonetheless, that “new economy” businesses, powered at the core by the information and modern technology revolution, are prone to costly investments in human capital and technologies, stacks of intangible assets and higher risk exposure. This requires banks to support the development of the real economy in new ways as part of their pledge to help forge an innovation-driven economy. “The good news is banks are now aware of the specific needs of new economy players and are working proactively to support their growth with innovative products and services.” said Joseph Ma, Executive Vice President (designate) and Country Head of Commercial Banking, HSBC China, “As an international bank, we aspire to leverage our expertise and global connectivity to eventually cover the full lifecycle of new economy businesses by introducing upgrades and improvements to our offerings on an ongoing basis. This will be the next milestone for HSBC China.”

New financing landscape for new economy businesses

As start-up activities in the new economy space continue to upsurge, the number of innovative tech businesses is rapidly rising in China. Statistics show that from 2015 to 2019, businesses in the information transmission, software and ICT services sectors increased by 170.1% as vast amounts of capital poured into the new economy space.

On the secondary market, tech innovators enjoy easier access to funding made available through the Science and Technology Innovation Board (STAR Market) and the registration-based China Growth Enterprise Market (or China GEM). With the rise of registration-based IPOs as a percentage of overall IPOs in the market, new economy businesses now represent a strong and growing force in China’s capital market.

With investments in the new economy in full swing on the primary market, the portfolio businesses in the new economy space are taking up greater chunks of the market in terms of their number and investment value. Of all equity investments made by institutional investors in China’s non-listed businesses from 1999 to 2020, portfolio businesses in the Internet information services sector represent 24% of the total number of investees and 24.9% of the total investment value.

However, the financing needs of new economy businesses at different stages of development are far from being fully met even at the current scale. According to Ma, new economy businesses are distinct from traditional ones in that most of them are early-stage start-ups running temporarily in the red. Instead of losses from operational missteps as in the case of traditional businesses, their losses are typically strategic in nature as they go through high-speed growth, which is nevertheless a sign of mismatch between their fund-raising needs and banks’ traditional risk assessment model.

While banks would traditionally zoom in on borrowers’ profitability and exposures when making risk assessments, it is difficult to pinpoint the risks and returns associated with new economy businesses.

“We need to distinguish between the two and factor in all elements as we unpack the financing needs of loss-making businesses in the new economy space instead of taking a one-size-fits-all approach.” said Ma.

Informed by numerous company visits and interviews with institutional investors, HSBC China has launched a host of solutions that, instead of mandating profitability, pledges or guarantees, foresee the turnaround prospect of the borrowers based on industry specificity and operational data, and provide loans with flexible tenors based on actual needs.

At the same time, HSBC China provides new economy businesses with lifecycle solutions and one-stop financial services that are designed to meet the operational and financial needs of business model innovators and tech innovators in China.

“To better support the new economy, we need to shoulder greater responsibilities and take broader strides instead of staying in the narrow lane of providing accessible and affordable funding for start-ups.” According to Ma, although much remains to be done, positive changes are already underway.

Closer and smarter engagement across a lower-tier segment

Ma describes the lifecycle of a business through three stages.

  • The first stage is the start-up stage, including the angel round, Series A round and pre-Series B period;
  • The second stage is the rapid growth stage, covering Series B through Series E;
  • The third stage is the maturity stage, in particular pre-IPO and post-IPO periods.

Typically, bank clients are mainly those in their mid or late rapid-growth stage or the maturity stage. However, HSBC China has decided to take it to the next level. “To better serve the new economy means to target and reach out to more SMEs on lower tiers further down the pyramid.” Ma said.

The next step is targeted service upgrading, which, according to Ma, is predicated upon a better understanding of new economy industries and businesses, including their stand-out features, pain points and risk exposures.

New economy businesses fit broadly into two categories: they are either business model upgraders or independent R&D houses.

To illustrate this point, Ma said that businesses digitalising certain service deliveries and transaction scenarios are typical business model upgraders. These businesses tend to prioritise productivity, cost-cut and consumer perception. R&D businesses, on the other hand, value enhanced product quality, cost reduction and market expansion, as the development of new products or technologies requires huge capital investments.

In order to serve new economy industries, it is imperative for banks to acquire industry-specific expertise. Otherwise, we risk misjudging a company’s circumstances and potentials, and won’t be able to set internal expectations for its growth. The only way for banks to nurture expertise in the new economy space is by committing resources, manpower and time. Only with sufficient knowledge of the varied pain points of different industries can banks be well-placed to offer tailored products and solutions.

Joseph Ma | Executive Vice President and Country Head of Commercial Banking, HSBC China

Secondly, banks need to switch from a “third party” perspective to a more immersive “first person” role, meaning closer engagement to discover a company’s capital and development needs across all stages of its lifecycle in addition to putting its spreadsheet performance under scrutiny vis-a-vis projections.

For example, HSBC China offers lines of credit adjustable in real time based on the client’s credit standing and actual needs, available in multiple currencies for different borrowing entities as appropriate. “To create maximum value for the businesses, banks shall never be just lenders in the first place.” Ma said.

Furthermore, it’s about getting faster and smarter.

According to Ma, new economy businesses face a multitude of challenges in terms of cash flow management, finance team competencies and cost control as they enter a stage of rapid growth with accelerated expansion of business and staff count. Accordingly, they have a pressing need, more so than traditional industries, for digital financial services and tools to bolster productivity and cut costs.

Therefore, in addition to financing support, HSBC also provides digital services, including a series of tools and solutions, for new economy businesses. For example, standard host-to-host (H2H) solutions are seen as cumbersome for new economy businesses due to prolonged implementation processes and immense investments in human resources and infrastructure. As a result, HSBC has launched a faster, easier-to-implement and lightweight H2H solution for new economy businesses that delivers efficiency gains in financial management and cost savings in daily operations.

Moreover, at some point, new economy businesses will also face challenges associated with the need for collecting payments from online and offline sources. That’s where HSBC comes in with its Omni Collect to offer diversified collection options across platforms and channels with increased ease of account reconciliation.

On the outlook of new economy businesses, Ma said “As an emerging force in China’s economy, new economy businesses are driving innovation and transformation by creating new technologies, business formats and models. As a member of the banking community in China, HSBC will work with our peers to evolve our service concepts and business practices in support of the growth of new economy businesses.”

Under China’s dual circulation model, how can financial services boost the new economy?

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