Key takeaways
- Merck KGaA needed to find a way to mitigate risk and navigate import market practices that delayed invoices from being paid for up to six months
- J.P. Morgan Payments sought support from the central bank in China to allow Merck KGaA to pay internal company invoices directly when items ship and submit customs documentation later
- Merck KGaA now receives payments immediately, which frees up cash to be invested, reduces administrative burden and mitigates risk
About
Different markets present different challenges, but the simplest solution is often best. Merck KGaA, a German pharmaceutical manufacturing company, faced invoicing settlement delays in China and needed a way to improve the process and receive payments faster.1
The challenge
When making payments between different company entities, Merck KGaA expects invoices to be paid on the same day to its central, in-house bank, Merck Financial Services.2
According to the Head of Risk Management at Merck KGaA, Luis Lopes, offshore payments took place up to six months after Merck KGaA sent invoices to its Chinese entities. Because of market practices, the company had to wait for shipments to arrive in China and submit customs paperwork before its Chinese entities could process payments to Germany. The Head of Cash and Risk Management at Merck KGaA, Jörg Bermüller adds that, in some cases, the total wait was between three and six months.
To effectively manage risk, Merck KGaA wanted to maintain the same net-zero intracompany payment terms that it uses in unregulated markets.2 Together with J.P. Morgan Payments, Merck KGaA came up with a simple solution: to seek support from the central bank in China. “We are constantly asking ourselves: Is the way we are doing things still valid or are we doing them this way because we always have?” says Lopes.
The solution
J.P. Morgan Payments approached China’s central bank on behalf of Merck KGaA to ask if the company’s Chinese entities could pay its invoices in advance and present customs documentation electronically afterward.1 Merck KGaA’s excellent track record of presenting high-quality declarations proved that this new process would be sustainable.2
The approval and implementation process of the solution—which included Merck KGaA opening a J.P. Morgan account in China and preparing its systems to make payments—took only two months.2 Now, Merck KGaA’s Chinese entities pay invoices upon shipment from this new account, which has permission to transfer the money to Merck Financial Services directly.1
Merck KGaA now receives payments from its Chinese entities up to six months faster, which it can then invest in other parts of its business.1 It also mitigates risks and saves on foreign exchange hedging costs, all while reducing administrative burden.2
"The talks between local authorities and J.P. Morgan Payments, opening an account with J.P. Morgan Payments, then preparing our systems to make payments was completed within two months."
Luis Lopes
Head of Risk Management, Merck KGaA
The results
Merck KGaA is taking what it learned from this experience and finding ways to apply it in other regions. While the external processes will be unique for each country, Merck KGaA expects that the internal processes it developed for its Chinese shipments can be adapted to more situations.2
To learn more, visit https://www.jpmorgan.com/payments/solutions/treasury/liquidity-and-account-solutions
Disclaimer
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