China Parts Suppliers Are Wary of Carmakers' Bill Payment Pledge

Mint

5 hours ago

Chinese carmakers' pledge to make timely bill payments — an effort to appease officials' growing scrutiny of a long-running price war — has left many suppliers skeptical about how readily they'll follow through on their promises.
After meeting with regulators in early June about the need for better self-regulation, the industry's biggest names including BYD Co. and Zhejiang Geely Holding Group Co. said they'll pay suppliers within 60 days. While that represents a shift toward global industry norms, it's a major change for some carmakers, including BYD, whose payment cycles can stretch to hundreds of days.
Extended payment terms are such an ingrained feature of the industry that automakers may be motivated to figure out workarounds, according to interviews with parts manufacturers at an auto and supply chain exhibition in Hong Kong last week. That's put a damper on what many describe as a welcome change, they said, asking not to be identified discussing commercial operations.
One alternative is to issue promissory notes, which delay cash redemption for an additional period, according to a market development engineer from a maker of wiring and electrical parts. Out of the 17 Chinese automakers that committed to the 60-day bill payment period, only state-owned SAIC Motor Corp. and BAIC Motor Corp. said they wouldn't use promissory notes. The rest didn't specify what payment methods are included in their pledges.
Promissory notes and supply-chain financing are common in China's auto industry. BYD's Dilian system — or Dilink, in English — is one of the best-known examples and allows notes to be redeemed at a later time, traded with others or cashed out early for a fee. The platform had issued 400 billion yuan worth of notes as of May 2023, the last time BYD disclosed such information.
While some suppliers don't mind the practice because they can borrow against the money they're owed, the widespread use of delayed payments is indicative of the industry's stress as the price war squeezes margins. A report by accounting consultancy GMT Research puts BYD's true net debt at more than 10 times higher than what's on its books as of the end of June 2024, through delaying its payments to suppliers and other related financing.
The lengthy bill-payment periods have added to suppliers' cash flow difficulties and aren't good for the sector, the Ministry of Industry and Information Technology said in response to the automakers' payment pledges.
The strain is particularly acute for smaller firms, which in some cases wait at least half a year for customers to pay their bills, according to an executive at one company that makes parts for car lights used by major European and Korean brands. It's becoming increasingly difficult for small- to medium-size businesses to survive and grow in such a competitive industry, she said.
The move to speed up payments brings the auto sector in line with regulations that came into effect in June requiring government agencies and large corporations to pay their bills within 60 days. The rules also say smaller businesses shouldn't be forced to accept non-cash methods such as promissory notes or use these as ways to delay payments.
For the auto industry, it's unclear how far down the complex and intertwined supply chain the payment pledge will stretch. The executive said her company doesn't supply to carmakers directly, so it may not be included in the 60-day period, though she hopes the discussion leads to broader improvement in payment times.
While there's tentative optimism about the change, for many it's a case of wait-and-see as already cutthroat competition intensifies. Last year saw the market's first-ever consolidation among new-energy vehicle dedicated brands, with 16 exiting and 13 launching.
Some customers have already gone bust due to the intense competition, meaning they'll never pay their bills, according to the sales manager of an automotive chip supplier. It's possible to take legal action, but it's unlikely the debt can be fully recovered, she said.
The government policy to ensure timely payments to small and medium enterprises is a positive move and long overdue, but whether it'll take hold will depend on how effectively it's implemented, she said.
With assistance from Yasufumi Saito.
This article was generated from an automated news agency feed without modifications to text.