Hyundai would win low price orders and cut margins from suppliers
Hyundai Rotem, a part of Hyundai Motor Group, has been placing orders to its suppliers with price written as zero in their contracts, TheElec has learned.
The practice has been customary with the company and its suppliers, people familiar with the matter said.
It forces suppliers to delivery parts first without knowing the final pricing for the products, while Hyundai Rotem will pay them months after it has received those parts, people familiar with the matter said.
Hyundai Rotem has been doing this for parts used in the manufacture of trains.
Payment is usually made three to six months after the parts were already delivered. Sometimes the payment could be made after a year since the parts were supplied in the past, a source at one of Hyundai Rotem’s suppliers said.
Hyundai Rotem’s major suppliers include Hankuk Fiber, which was acquired by fab equipment maker New Power Plasma in December. Most other suppliers are smaller companies that are not listed on the South Korean bourse. Hyundai Rotem’s customary order practice can be done as most of its suppliers are small companies without much power, another person familiar with the matter said.
Most of these suppliers, despite being aware of the unfairness of the transaction, accepts the orders as Hyundai Rotem has a dominating presence in South Korea’s train market.
The Hyundai affiliate, along with Dawonsys and Woojin Industrial Systems, wins most of the orders from Korea Railroad, Seoul Metro and other public companies.
Hyundai Rotem wins over 70% of the orders given by public companies, the people said.
It was only after Dawonsys and Woojin entered the market after 2015 that Hyundai Rotem had to cede some market share.
The railroad business accounted for 52% of Hyundai Rotem’s sales last year, contributing 1.452 trillion won. Defense and plant businesses accounted for 30% and 17%, respectively, in that year.
Most public companies place orders through bidding and looks for the lowest price. Hyundai Rotem would bid with the lowest price and protects its margins by being flexible with the price it offers to its suppliers through the zero price contracts.
Hyundai Rotem is led by CEO Lee Yong-bae, a known finance expert, who was named to the top post last year. He had promised not to seek low price orders, but the customary zero price contracts with suppliers is ongoing, the person said.
Hyundai Rotem declined to comment on the matter.
Hyundai Rotem’s largest shareholder is Hyundai Motor Company, which owns 33.77% of the company.