• CASH MANAGEMENT, FLOW CASE STUDY, DOSSIER SUSTAINABLE FINANCE

    Treasury transmission

14 July 2021

An internship with BMW led ElringKlinger’s treasurer, Matthias John, to the automotive component manufacturer, where he centralised its treasury systems and improved free cash flows. He tells flow’s Graham Buck about the importance of giving back

While the revenue contraction resulting from the Covid-19 pandemic has been felt most by the retail and travel sectors, the auto industry has not escaped unscathed. In 2020, new motor registrations fell by about 25% across Europe’s five largest car-buying countries, with a 19% decline in Germany surpassed by steeper drops in the UK, France, Italy and Spain.1

81
patented ideas applied for in 2019 alone
(ElringKlinger Sustainability Report 2019)

A three-point turn in its fortunes in 2021 would be good news for German automotive parts manufacturer ElringKlinger AG, a supplier to many of the industry’s big names. The company’s Q3 2020 interim report notes the pandemic impact. “Lockdowns and interruption to production at customer sites led to a substantial downturn in business in the second quarter,” it states. However, Q3 saw “significant business upturn on the back of recovering markets”.2

e-mobility transition

The “broad range of innovative premium-quality products for vehicles powered by any type of drive system” (in the company’s own words) includes lightweight components, battery and fuel cell technology, electric drive units, gaskets, shielding systems, transmission control plates, dynamic precision parts, components made of high-performance plastics, tooling technology, and development services. While combustion engines currently dominate, the gradual transition to hybrid and full electric models to reduce CO2 emissions and combat climate change in the long term is under way. Investment in battery and fuel cell technologies (as well as project time allocation) has been ramped up as ElringKlinger adapts existing operations and infrastructure to meet changing demand.3

The Q3 2020 report also highlights how the company’s fuel cell technology was “propelled forward by two strategic partnerships”; namely Airbus, “to redefine hydrogen-based fuel cell for the aviation sector”, and one with French automotive supplier Plastic Omnium “in a concerted effort to evolve the market for fuel cell vehicles”.4

ElringKlinger supplies battery systems for solar vehicles made by Sono Motors

Engine power

ElringKlinger’s genesis goes back to the 19th century and Paul Lechler, a businessman, social reformer and philanthropist who founded the company in 1879, declaring his belief that “faith must not simply be a matter of ideology; it must be lived out through our actions”. Initially trading in gaskets and technical products, it subsequently began manufacturing gaskets in 1914.5

Six years after the Lechler business was established in Stuttgart, Richard Klinger set up an engineering workshop in Vienna. The first Lechler cylinder-head gaskets were produced in 1924 and the Klinger plant followed suit in 1930.

Fast forward to the mid-1960s and production and distribution of Lechler gaskets was consolidated within Lechler Elring Dichtungswerke. Expansion outside of Germany began in 1971, when Elring acquired shares in the Spanish company Guma S.A., now ElringKlinger, S.A.U.

A South Africa joint venture, Elring Gaskets (PTY) Ltd, followed in 1983 and a South Korea joint venture, Jeil Elring Co. Ltd, was added in 1990. Three years later, the company expanded into China through its joint venture Changchun Elring Gaskets Co. Ltd.

In 1994, the automotive divisions of Richard Klinger GmbH and Elring GmbH then merged to create ElringKlinger GmbH, which was still based in Dettingen/Erms. By October 2000, the company had united with its parent ZWL Grundbesitz- und Beteiligungs-AG and adopted the new name ElringKlinger AG.

Passionate about finance

Matthias John, ElringKlinger’s Corporate Treasurer, saw the opportunity to develop his project management skills in operations-based finance when he joined the company five years ago. A keen volleyball and football player, he also reveals “a passion for finance” that developed from an early age (he was already studying the stock market and corporate news pages in his teens). “I dreamed of a role in corporate finance and my studies in finance and management led to an internship with BMW through its MBA programme,” he recalls.

This early experience in the motor manufacturing sector meant that a proposal from ElringKlinger’s CFO, Thomas Jessulat, to join the company as a project manager and work on the centralisation of its treasury operations immediately caught his eye.

Initially there were a number of options as to how the project would progress and what its ultimate goal would be. “The central task was to oversee the implementation of treasury management system (TMS) software, and we looked at which activities could be better handled by having a centralised treasury function,” John explains.

Since then, while still a project manager, John has also become treasury manager. He is now in the process of improving the company’s corporate banking structure, reporting directly to Jessulat, with a focus on electronically connecting to the core banks.

“We’ve progressed to the maintenance stage and are looking at what payment formats need to be changed and how,” explains John. “Rationalising our bank structure makes everything much easier. For transaction banking, we now have just three relationship banks but have retained slightly more for our financing. We’re still in the midst of the centralisation process and having completed Europe, we’re well on track in the US–Mexico–Canada region. Our next challenge is Asia.”

Treasury has grown in line with the company’s expansion through a combination of organic growth and acquisitions. As a supplier, ElringKlinger has locations close to the main car production plants, minimising environmental impact by keeping supply chains short. Several of these subsidiaries have very straightforward finance structures and it made sense to bring these together. “Five or 10 years ago, head office was the source of as much as 50% of total income, but as we’ve steadily grown and expanded it made sense to centralise,” adds John.

Pandemic resilience

Outside of Germany, ElringKlinger has production units in European countries such as the UK, Spain, Hungary, Romania and Turkey, while further afield it operates in countries including the US, Canada, Mexico and Brazil. It also has units in Asia’s two main economies – China and Japan – as well as South Korea, Indonesia, Thailand and India.

For John, managing risk effectively is the key to sustainable profits, and absorbing the US dollar foreign exchange (FX) risk is key for an industry that sources its raw materials from major commodity companies. “As we produce locally, we’re close to our customers and sell to them in the local currency, so the dollar fluctuation risk can impact on prices,” he says.

FX risk is largely handled through natural hedges, which is mainly a controlling exercise with the ability to pass on much of the impact of fluctuations through price-changing clauses. Any leftover financial risk is hedged through derivatives, most of which are cross-currency swaps.

The company’s recent quarterly reports have noted how its free cash flow has provided it with resilience during the pandemic, and John admits that it has proved even better than he was anticipating. Key to this success has been harmonisation, he explains. “We have reduced our bilateral loans to diversify our funding portfolio with a promissory note loan (Schuldscheindarlehen) and a syndicated loan, which is the backbone of our financing.”

Even before the rapid spread of Covid-19 across Europe last spring, the treasury’s cash strategy was to pay down debt, so in early 2020 the firm was “well positioned and able to sit through the crisis fairly comfortably”, to the extent that the treasury team was able to focus on its investment and cost-efficiency programmes.

Game changer

John Matthias“We established a central point of information, so that treasury effectively acts as the gatekeeper”
Matthias John, Corporate Treasurer, ElringKlinger AG

John says that his role as Treasurer has expanded as various processes have been transferred to head office and developed organically. “By implementing the TMS we established a central point of information, so that treasury effectively acts as the gatekeeper,” he explains. “It means that the finance managers in our local companies come to us first before they approach the banks. 

“So, as Treasurer, you are also the gatekeeper and position yourself within the workflow. The role – and that of the treasury department – has grown thanks to central financing and also through compliance with the banks’ know-your-customer processes. From the perspective of project management, which still accounts for 50% of my time, we can respond promptly, as we did when Hungary recently announced changes to its electronic invoicing requirements.”

John also appreciates Deutsche Bank’s FX4Cash, which provides an automated platform for handling global cross-currency payments. The service is, he believes, a “game changer” and something that would be good to have from every bank. “It has given us full transparency for the first time as we know both the bank fee and the applicable margin,” John adds. “You can’t look at every single FX transaction, but you do want to have a system in place that enables you to know what’s going on. Too often, fees aren’t fully transparent.”

ESG in action

With an increasing focus in recent years on corporates’ environmental, social and governance (ESG) performance, ElringKlinger walks the all-round walk, rather than relying on its fuel cell and battery technology to demonstrate a commitment to clean mobility.

The long-standing connection between ElringKlinger and the Lechler Foundation goes back to its founder and his son, Paul Lechler Jr., who in 1928 set up the foundation that now bears his name and – through his trading company – for ElringKlinger AG. To this day, the Lechler family, which owns the majority of ElringKlinger AG’s shares, has maintained the tradition established by Paul Lechler of donating a part of its income to charitable causes through the Lechler Foundation.

John reflects on the overall culture of supporting people who face disability and learning difficulty challenges in Dettingen/Erms, where the company has its headquarters. Right across the street from the office is the BruderhausDiakonie. ElringKlinger AG has a business relationship with the workshop to assist disabled people, and the two foundations cooperate on various other projects. “I was born locally, so doing good work at this company is a source of great pleasure, and the company adds a second bottom line through its social responsibility,” he says.

And if there is any positive legacy to come from the pandemic, he adds, it is the way in which everyone – and not just the pharmaceutical companies developing vaccines – has worked together in response to the crisis. “You think about your suppliers and you value them. In a time of crisis like this that’s great to see.” He likens the response to a huge chain of people joining hands. “In the end you all want to make a profit, but you are all dependent on each other,” John says, a belief that’s reflected in the Lechler Foundation’s motto that “Doing good brings us together.”


Sources

1 See https://bit.ly/2ZOiCbN at europe.autonews.com
2 See https://bit.ly/3ks9BhR at felringklinger.de
3 See bit.ly/3uuE0kd elringklinger.de
4 See endnote 2
5 See https://bit.ly/3zNdLbh at elringklinger.de

Stay up-to-date with

Sign-up flow newsbites

Choose your preferred banking topics and we will send you updated emails based on your selection

Sign-up Sign-up

Subscribe Subscribe to our magazine

flow magazine is published twice per year and can be read online and delivered to your door in print

Subscribe Subscribe

YOU MIGHT BE INTERESTED IN

TECHNOLOGY

Recharging personal transportation Recharging personal transportation

More than a decade after Tesla launched the first mass-produced electric vehicle, the end of the road is approaching for the conventional internal combustion engine. flow’s Graham Buck and Janet Du Chenne report on how an all-electric future is to be achieved
Recharging personal transportation More

CASH MANAGEMENT, TRADE FINANCE, FLOW CASE STUDIES

Delivering the world Delivering the world

While the Covid-19 pandemic has stimulated international delivery demand, fulfilment has been tough within a dislocated transportation network. flow’s Clarissa Dann reports on how Deutsche Post DHL Group has stepped up, walks the sustainability walk – and optimises its treasury

Delivering the world More

FLOW CASE STUDY, CASH MANAGEMENT, TRADE FINANCE {icon-book}

On the right track On the right track

When Jeremy Hamon took Primetals Technologies into a four-year ESG-aligned FX hedging commitment, the finance and treasury function brought the entire steel engineering business on board to ensure it performed to agreed criteria. flow’s Clarissa Dann explores the remarkable journey

On the right track More