China is currently the world's second-largest market forpharmaceuticals behind the United States, and it continues to growat a very strong pace. Pfizer is well-positioned to take advantageof this growth; China represents one of the company'sfastest-growing markets around the globe.

“Our business in China has done extremely well in recent years,”says John Sweetman, Pfizer's treasury director for the Asia-Pacific(APAC) region. “We're very excited about our growth prospects infuture years as well.”

Many of the products Pfizer sells in China are manufacturedin-country. However, the company's Chinese business units import asignificant volume of pharmaceutical ingredients and raw materialsfrom Pfizer entities abroad, as well as some finished products forlocal distribution. In the past, these intercompany transactions,worth more than US$1 billion annually, were always settled in U.S.dollars (USD), which was the only viable option prior to theinternationalization of the renminbi.

“The preference throughout Pfizer's global supply chain networkhas always been to invoice in local currency,” Sweetman says. “Wehave a number of supply companies in Europe that source the productother Pfizer entities need and then sell it on to the distributionentity in that entity's functional currency. That isolates our FXexposures in those select supply companies, and our centralizedin-house bank hedges the FX risk.”

But in the past, government regulations prohibited cross-bordertransactions from settling in renminbi. Pfizer decided that allintercompany transactions involving a Chinese entity would bedenominated in U.S. dollars. If a business unit based in Europe,for example, sold materials to a business unit in China, it wouldissue an invoice in dollars. Because the Chinese entity soldlocally in onshore yuan (CNY), it would have to buy dollars to payfor the intercompany transaction.

Thus, Pfizer's Chinese business units retained significantcurrency risk. The company's finance team in China would sendglobal treasury an offline monthly spreadsheet showing theirgroup's FX exposure; the treasury team would then execute thehedges on their behalf. This process protected against FXfluctuations, but Pfizer continued to evaluate ways of improvinghow it was mitigating the FX risk arising from its intercompanyshipments. As the People's Bank of China (PBOC) began looseningcurrency restrictions over the past five or six years, Pfizertreasury saw an opportunity to bring its Chinese entities' currencyrisk management more in line with the rest of the organization.

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

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

Although changing the invoicing currency might seemstraightforward, 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'sCNY transactions into the company's centralized settlementstructure. Next, the project team delineated all the parts of thecorporate supply chain that would be impacted by the move from USDto CNY. In addition to the import of materials, the Chinesebusinesses had a small export component that also needed to beconsidered.

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

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

Meanwhile, treasury had to make sure corporate systems couldaccommodate the necessary currency risk management activities. Theyneeded to continue handling the runoff of legacy USD-CNY hedges. Atthe same time, the corporate FX execution team in Dublin needed toprepare for risk hedging in the new environment. They conductedextensive sensitivity analyses of the CNY-CNH relationship andfound the two currencies to be highly correlated. “There wasn't alot of materiality in difference between using one vs. the other,”Sweetman says. The FX execution team decided to save on FXconversion costs and resources by using USD-CNH hedges to mitigatethe European supply entities' new currency risks.

Throughout these processes, the treasury team chaired regularcalls and provided frequent email updates to stakeholders, asissues were brought forward and resolved. “The project managementwas arguably the most difficult aspect of this transition,”Sweetman says. “Treasury was looking at our view of the world andseeing that Pfizer was running up losses because our affiliates inChina were having to buy dollars to pay down invoices. The problemwas treasury-specific. But when we came to resolving it, we had toget buy-in from groups across the company. We had to talk to peoplein inventory, in our supply chain, in our manufacturing sites. Wehad to bring in colleagues in commercial finance in China and inEurope, colleagues in shared services, and our global financialsolutions group in China, in addition to tax and transfer pricingteams.

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

Now when a foreign Pfizer business unit ships goods to a Chineseentity, the invoice is denominated in CNY and issued with Pfizer'sstandard intercompany credit terms. The next day, corporatetreasury sees the transaction in SAP and purchases a CNH hedgebased on both the amount and settlement date of the invoice. Theimpact of this transition on the business has been remarkable. “NowChina looks a lot more like any other G-20 country in terms of ourintercompany netting processes,” Sweetman says.

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

The new approach to mitigating FXrisk has reduced volatility on the company's income statement. “Interms of P&L saving, this totaled several million dollars injust the first fiscal year,” Sweetman reports. “It's been hugelyimpactful.”

Another long-term impact lies within the relationships thisproject fostered between treasury and other areas of the company.“In treasury and finance, we speak the same language,” Sweetmansays. “But when we spoke with the people outside of finance, theconversation sometimes led in unexpected directions. The otherstakeholders might end up saying, 'I've always wondered how wehandled that.' Likewise, because we now have contact with some ofthese other folks across the organization, we have developed moreof a well-rounded knowledge of Pfizer's operations than we couldsee just sitting within the finance silo.” And that vision ispreparing the treasury team to support Pfizer as it continues togrow in China—and around the world.

2017 Alexander Hamilton Awards — Best Practices inRestricted/Emerging Markets

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