In 2015, Corning Incorporated began communicating to theinvestment community about its new Capital Allocation Framework, astrategic plan designed to reduce the cash on the company's balancesheet and increase the returns it was earning on invested capital.Previously, Corning had about $5.5 billion worth of cash on itsbooks worldwide. The Capital Allocation Framework aimed to reducethat by more than half.

"In order to do that, we needed to be able to access all ourcash globally, wherever it was," explains Steve Propper, Corning'svice president and corporate treasurer. "The more fungible our cashis, the more liquidity we have on a global basis."

A significant amount of excess cash was stuck in Asia, whereCorning generates nearly one-third of its global revenue. "Becauseso many of our legal entities are offshore, it's crucial for us tobe able to manage that liquidity effectively," says Stephen Fowler,director of liquidity and investment management for Corning. "Chinais a key part of that puzzle."

When new regulations in the Shanghai Free Trade Zone allowed for moreflexibility in cash management, Corning formed a large domesticcash pool to support business operations within China. "It'stechnically not cash pooling the way that you'd think of it inother locations," Fowler says. "It's actually a series ofentrustment loans, where the legal entity puts money on depositwith the bank and the bank lends it to a delegated entity."

This structure is more complex than a Western cash pool. "Youhave to have all the legal entities on board, opening their bankaccounts; understanding the structure; and coordinating with tax,treasury, and shared services," Fowler says. Still, development ofthe domestic-China pool-like structure improved the company'sin-country liquidity.

Once the Chinese structure was in place, Corning wanted to beable to move those funds cross-border to entities in the UnitedStates or other regions. "We wanted to make that cash moreavailable to the rest of the company, to support investments andgrowth opportunities around the world," Propper says.

To achieve that goal, the company would need to connect itsChina cash pool to its European cash pool. This wasn't an optionwhen the company's Capital Allocation Framework launched, but inlate 2017, the Chinese government began allowing legal entitiesestablished in the Shanghai Free Trade Zone to implementcross-border cash sweeps. Corning's regional headquarters, whichacts as the pool header for its China cash pool-like structure, islocated in the Shanghai Free Trade Zone, so the treasury team sawtheir opportunity.

Fowler and Propper launched an initiative that would linkCorning's Chinese and European cash pools. Their first step was toconsult with leaders in several other key internal functions. "Oneof the first groups we engaged with was our tax group, to make surewe were not doing ourselves any disservice in the way we structuredthe transaction," Fowler says. "There was also some complication interms of how to get the right interest rate for the poolstructures." Corning's technical accounting team weighed in.

The project team also worked withrepresentatives of all five of the company's business segments andwith Corning's Shanghai and Budapest shared service centers. "Theshared service centers do the actual accounting for thesetransactions," Fowler says, "so we had to have conversations withthem around the accounting entries, how frequently we would bookthe accounting, and how we could do all of this in a construct thatwould be compliant with our internal policies and governmentregulations."

A highly collaborative corporate culture laid the groundwork forthe success of the project. "Then the Capital Allocation Frameworkgave us all a common objective," Propper says. "We made sure allthe other groups understood that our motivation was to make surecash would be available where it was needed, when it was needed, sothat the company could make critical investments. We alsocommunicated that another goal was to relieve the businesses ofsome of their treasury responsibilities. We wanted them focused ondelighting customers, as opposed to managing cash."

On top of the extensive internal coordination, the project teamworked with external service providers—most notably, Corning'srelationship banks. "Our regional banking partner, StandardChartered Bank, served as a liaison between Corning and PBOC[People's Bank of China], SAFE [State Administration of ForeignExchange], and other regulatory bodies," Fowler says. "The banklets us know what they're hearing from regulators, as well as whatthey're seeing with other clients in terms of what's being acceptedand what's not being accepted. It's really important to have apartner that has access to the regulators, that can float ideasback and forth and can help you make sure your structure isn'tgoing to collapse in three months because it doesn't actuallycomply with the regulations."

Corning had an in-house bank based in Budapest, which was thehub for its international liquidity. When Chinese regulationschanged in 2017, Corning worked with Standard Chartered Bank tolink the header account from its China cash pool to the in-housebank in Budapest. Funds moving in both directions flow through anaccount located in Hong Kong. "China deposits the money into theHong Kong account and then the Hong Kong account moves that moneyover to our in-house bank," Fowler explains. "You need that accountbecause that is where SAFE monitors all foreign currencytransactions."

Initially, due to concerns about cross-border flight of capital,China expected the pooling structure to have a zero balance everyquarter. That meant every yuan moved offshore had to move backwithin three months. "That rule lasted for a little while," Fowlerreports, "then they got a little more liberal and moved it to sixmonths. Now it's out to a year."

Because of this regulation, accurate cash flow forecasting is anecessity. "Once you link the pool headers and have the ability tomove capital between geographies, you need to really understandwhere you're going to need capital, and which groups will haveexcess cash and when," Fowler adds. "Rigorous cash flow forecastingis necessary to ensure that we are able to get flat once ayear."

See also:

• Reducing Leverage by Leveraging CashForecasts
• How Treasury Can Support 'Unprecedented'Growth

The treasury team developed a process by which the finance teamsin all the company's legal entities could share their currentprojections of how cash flows would evolve over the next 12 months.They also created a position within treasury that is completelydedicated to cash flow forecasting. That individual manages a veryshort-term, 10-day forecast to understand the immediate liquidityneeds of business units around the world, as well as a rolling90-day forecast.

In part because of the forecasting improvements and the abilityto move funds across China's borders, Corning met its CapitalAllocation Plan goal of reducing the cash on its balance sheet to$2 billion. "Going forward, we anticipate that we will be able toexpand on this concept by linking our legal entities in Taiwan andSouth Korea to the European cash pool," Propper says. "These areboth regulated markets, so there are some hoops we have to jumpthrough, but the payoff will be further increasing our ability toeffectively move cash as needed."

The treasury group will also continue to maintain a network ofconnections to keep updated on China's ever-evolving regulatoryenvironment. "We have relationships not just with multinationalbanks, but with large Chinese banks as well, one of which is partof our global revolving credit facility," Fowler says. "Thoserelationships give us insight into what the regulators are tellingthe banks. We cultivate relationships with the regulators, too, asthey solicit feedback. And we often hear discussions of potentialregulatory changes from our tax colleagues. Having multiple pathsto get this type of information is really important."