How One of the World’s Largest Conglomerates Brought FX Under Control

Hitachi, Ltd. is one of the world’s largest conglomerates. The company operates approximately 600 entities in more than 70 countries, providing customers with IT solutions, energy and transportation systems, and a wide array of other products ranging from mass-produced industrial equipment to home appliances to highly specialized tools such as electron microscopes custom-built for use in semiconductor manufacturing.

Several years ago, each business unit and group company managed its own currency risk. “Some would reach out to corporate treasury by telephone or email to request FX [foreign exchange] trades,” explains Kayoko Mikami, treasury project manager with Hitachi. “But some would hedge their risks on their own, with their own counterparties. And all the different divisions managed their FX exposures and hedges in spreadsheets.”

This severely limited corporate treasury’s visibility into companywide exposures. “We didn’t know how much exposure we had as a whole,” Mikami says. “It also sometimes led to unnecessary transactions. One Hitachi company might need to buy U.S. dollars, while another Hitachi company needed to sell U.S. dollars, so both might reach out to their banks to hedge.” The increased transaction volume led to higher costs. And, perhaps most problematic, the lack of corporate-level visibility meant Hitachi’s FX gain/loss swings were sometimes larger than necessary.

The Hitachi treasury team launched an initiative to centralize and modernize currency risk management. They wanted to collect FX exposure data in one place, for all jurisdictions that allow such consolidation; optimize natural currency offsets; hedge exposures, where appropriate, through streamlined trade processes; negotiate better trade pricing; and manage counterparty risk at the corporate level.

“We wanted to centralize FX exposure reporting and hedging for our Japanese companies and business units through corporate treasury in Japan, and to centralize all other group companies’ FX management through our global treasury center in Singapore,” Mikami says. “So corporate treasury worked with our domestic treasury groups on a needs assessment, while the global treasury center engaged with regional treasury teams around the world to identify where we had opportunities to improve.”

As a result of this process, Hitachi decided to build out FX risk management capabilities in a centrally managed SAP treasury system, as part of a broader SAP S/4HANA rollout. “We leveraged as much functionality as possible within SAP’s new FX risk management module,” explains Subhrajit Dutt, a senior manager with Deloitte Advisory who was Hitachi’s solution architect for this project. “But we had to do some customization related to gathering cash forecasts and reporting out the cash flow FX exposures that need to be hedged. So we built a Cash Flow Forecast and FX Hedging tool. We also built a Project Exposure Hedging tool. In the background, both tools use all the standard SAP functionalities of FX risk management.”

The Hitachi treasury team launched a pilot of their new currency hedging processes, starting with the companies that were already integrated into Hitachi’s cash pool structure. Central treasury reached out to the group companies with the largest FX exposures, holding discussions and workshops to gain buy-in for the new approach. They also introduced policies that recognize and reward compliant business units.

“Every Hitachi company provides a cash flow forecast to SAP once a week,” Mikami says. “And for business units in our FX pilot, the Cash Flow Forecast and FX Hedging application automatically determines the foreign currency exposures in those cash flows, utilizing settings predefined for the business unit. The forecasts extend out three months to one year. In addition, project leadership submit currency exposures for one-off capital expenditure [capex] projects so that those can also be hedged. The treasury management system gathers all this information in a hedging cockpit.”

Periodically, after the cutoff time for forecast submissions, the Cash Flow Forecast and FX Hedging system automatically creates internal FX trades between the treasury centers and the group companies, leveraging market data from Bloomberg to determine the rates. This helps centralize currency risk in the treasury centers, enabling Hitachi to achieve natural hedging offsets and reducing the number of external FX trades the company executes with banks.

Information on internal trades flows automatically into the hedge management cockpit. The central treasury team monitors the cockpit on a daily basis, reviewing data around open exposures, hedged exposures, target quota for hedging, and net open positions, as well as the Cash Flow Forecast and FX Hedging tool’s recommendations for external FX trades to hedge net corporate exposures. Having easy access to this information enables treasury staff to efficiently identify Hitachi’s net hedging needs, then execute weekly FX trades through an automated interface between the SAP treasury management system and Bloomberg FXGO.

Meanwhile, Hitachi’s custom-built Project Exposure Hedging tool automatically routes information about capex-related FX exposures to the hedge management cockpit. The system directly transfers exposures to Hitachi’s treasury centers, which execute external FX trades using the Bloomberg FXGO interface.

Once trade requests are executed in FXGO, confirmation comes back into the SAP treasury management system, where trade requests are reconciled and the external trades are captured as contracts. Then the system automatically executes back-to-back trades with the group company whose exposure was hedged.

Business unit treasury teams use the hedge management cockpit to view the FX exposures they submitted in their cash forecasts and see what proportion of those exposures are hedged. The corporate treasury group and the Singapore treasury center use the cockpit to understand what risk was transferred to them via internal transactions, as well as how they have hedged those positions with external FX deals.

The streamlining of FX hedging has resulted in a 30 percent reduction in Hitachi’s volume of cash flow hedges. This has significantly reduced FX transaction and hedging costs among participating companies, as well as FX losses for Hitachi. “This project has also helped us reduce Hitachi’s number of bank accounts because our business units no longer feel they all have to have external bank accounts and currencies for FX hedging,” Mikami says. “Further, because the group companies and business units no longer have to deal with external hedging, they have more capacity to concentrate on their business.”

For central treasury, the huge improvement in visibility to FX exposures has enhanced decision-making. “This benefit will grow as we continue to incorporate more group companies into the solution,” Mikami says. “It was important for this project to start small, with a subset of our business units, because if we had tried to roll this out across all of Hitachi at one time, I don’t think we would ever have finished. But now that we have been successful with the pilot project, we can point out the benefits of the pilot to bring other Hitachi companies on board.”

Dutt agrees, and attributes the project’s success to careful up-front planning. “The most important part of building out the FX hedging tools was the design phase,” he says. “We had to create a global template, then customize it to accommodate the unique needs of the different companies in Hitachi.” He adds that Mikami, as project manager, and the business units “had to provide a lot of inputs on variations between companies based on the industries they operate in. Then the development team looked at the nature and recent history of each company’s operations to understand how it forecasts, and created a template for collecting exposures to provide the right levels of breakdown and consolidation.

“Another factor in development of these tools was Hitachi’s long-term vision to use in-house banking and cashless settlement of FX transactions between headquarters and companies within the group,” he continues. “The integration of the FX with the cash flow forecasting and in-house banking was the most complicated part of the design.”