Photo of Kim Kwang Hyun and Soo See Tan, Hankook Tire Singapore Pte Ltd, Ivone Hodiny, DBS and Thomas Aubry, Citi.
Prior to Hankook Tire Singapore’s establishment, China and Indonesia factories procured raw materials directly from third-party suppliers in US dollars with long-terms. Tackling the mismatch between each factories’ purchase and sales currency, lowering the cost of issuing letters of credit on each trade and managing over long-terms saw a major centralisation and standardisation programme rolled out. It has been a success.
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Kim Kwang Hyun
Hankook Tire Singapore is a subsidiary of Hankook Tire Co Ltd, one of the world’s largest tyre companies. Headquartered in South Korea, the group boasts a number of production facilities, R&D centres, subsidiaries and distributors globally. Hankook Tire Singapore was founded in 2012 to streamline the company’s supply chain and tap into Singapore’s lower finance costs.
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The power of centralisation discovered
Prior to Hankook Tire Singapore’s establishment, China and Indonesia factories procured raw materials directly from third-party suppliers in US dollars with a usance period of 180 days. Using usance as a payment method was costly due to the high interest rate in China and Indonesia compared to Singapore. Sales were made in currencies other than USD. This execution led to the mismatch between factories’ purchase and sales currency, creating risk. The payment method of issuing letters of credit (LCs) to suppliers incurred high expenses for the companies. Working capital and cash flow was far from optimal.
Hankook Tire Singapore is now positioned as a regional procurement hub for factories in China and Indonesia, replacing the former practice of contacting over 80 suppliers. It also acts as an intermediary for the sales of tyres, controlling payment terms to improve cash flow and working capital, procuring from Indonesian factories and selling to Malaysia, Thailand and India sales entities.
Singapore took over FX management, tackling currency issues between the China factories and the regional sales entities, reducing the short FX position of China factories while transacting forward contracts.
The payment method was changed from LC to open account to curb high costs. Negotiations with entities also extended days payable outstanding (DPO). Hankook Tire Singapore deployed a supply chain finance programme to enhance working capital management and standardise payment methods. Other measures include Singapore becoming a centralised payment factory for other entities globally, specifically as a centralised FX control centre.
Best practice and innovation
To reduce the high cost arising from LC opening, Hankook Tire encouraged suppliers to adopt the OA payments. Cooperation enabled clear improvement results. To further reduce costs, with the flattening of the gap between one-month Libor and six-month Libor, a mixture of both was adopted as the reference rate for trade financing loans.
Where factories and sales entities faced a mismatch in their purchase and sales currency, it created FX exposures in each of the entities. With Singapore as the reinvoicing party to purchases, invoicing in functional currency, FX exposures were more easily and effectively hedged, using forward hedging.
As reinvoicing agent, Singapore also took control of payment terms to sister entities by analysing each of their cash positions and determining optimal payment terms.
Through the supply chain finance programme, working capital and cash flow was improved by enabling the extension in payment terms from suppliers. Also, widespread standardisation has improved efficiency in several work processes. Initiatives include creating a processing centre for inter-company balance settlements; setting up an APAC host-to-host banking platform to improve visibility on cash position;, and introducing supply chain financing that allows payments to be processed directly by the bank to suppliers. A standard loan application form, generated from the ERP, is now reducing human error and improving efficiency.
Improved bargaining power and economies of scale.
Enhanced standardisation and automation of finance/procurement finance.
Reduced human error, increased efficiency and lowered business risks.
Good partnership maintained with bankers, suppliers and government.
Procuring through Singapore gives cumulative savings of US$8.3m from 2012 to 2018.
Working capital improved by US$99m (at December 2017).
Average payment terms reduced by 29 days.
Saved about 39% of interest expense through evolution of financing solutions.
Managed FX exposure in various local currencies (RMB, THB, MYR and INR) equivalent to US$80.7m through billing in local currency.