Major Chinese automakers, which have caused repeated cash bleed among parts suppliers due to ongoing price wars, announced that they would shorten payment deadlines for their suppliers to a maximum of 60 days. This move is expected to put a brake on the long-standing practice of 'squeezing parts suppliers' in the Chinese auto industry that has accumulated over the years. It follows measures by the Chinese government to alleviate price wars and stabilize the ecosystem for small and medium-sized enterprises, and the industry is watching the feasibility of actual implementation.
According to the Chinese economic media Caixin on the 12th, major state-owned and private automakers in China, including FAW Group, Dongfeng Motor, Guangzhou Automobile, Geely, and Changan, announced on the 10th that they would collectively shorten payment deadlines for suppliers to within 60 days. The following morning, on the 11th, BYD announced a similar policy, and thereafter, almost all major companies, including Shanghai Automotive Industry Corporation, Beijing Automobile, Chery, Xiaopeng, Li Auto, and Xiaomi Automobile, joined in. Beijing Automobile and Shanghai Automotive Industry Corporation went a step further, stating that they would abolish bills payment.
Chinese automakers have traditionally settled payments through bills. Because of this, parts suppliers have routinely faced cash flow pressures. Recently, as automakers engaged in a price war, demanding reductions in unit prices and delivery costs, parts suppliers found themselves under double and triple pressure, pushing them towards insolvency. An analysis of automakers' financial reports by Caixin revealed that the average payment deadline for these companies reached 120 to 150 days.
Not only small companies but also leading companies are facing shutdown or sale crises, prompting the Chinese government to take action. The government implemented the 'Local Government Ordinance on Payment Guarantee for Small and Medium Enterprises' starting from the 1st of this month. This ordinance stipulates that when large corporations place orders for products or services from small and medium enterprises, cash payment within 60 days is the principle, and it explicitly prohibits practices that delay payments by forcing non-cash payment methods such as electronic bills.
The industry response to the announcement of shortened payment deadlines has been mixed. An executive from a parts company told Caixin, "Payment within 60 days is common sense and the minimum standard. It is strange that this has not been adhered to until now." Another supplier representative pointed out that "there is a high possibility that this declaration will amount to just a 'show.'" The representative of an automotive-related information technology (IT) company based in Wuxi posted on social media, stating, "It is unclear whether the delivery standard refers to the release standard or the invoice issuance standard, and whether the payment method is cash or bills. Clearer guidelines are needed."
The issue of payment delays by automakers is not limited to automotive parts suppliers. The China Iron and Steel Association stated in a press release on the 10th that some automakers have been asking steel mills to lower prices for automotive steel sheets by more than 10% starting in 2024. The association also criticized that "some automakers only settle payments with bills months after receiving supplies and transfer their own procurement and operating expenses onto their suppliers." The association highlighted that, taking the negotiation-based long-term price adjustment system introduced by Toyota and Nippon Steel as an example, "the Chinese auto industry urgently needs not only to reduce costs but also to restore trust with the supply chain."
Experts advised that ultimately, subsidy policies focused on electric vehicles should be abolished to restore market balance. Wu Songqun, a senior expert at the China Automotive Technology Research Center, noted to Caixin that "overcapacity in brands, low market concentration, short-term subsidy inducement policies by local governments, and sales declines due to the transition to electric vehicles are intensifying the price wars among Chinese automakers," and emphasized that "it is urgent to eliminate tax and subsidy advantages for electric vehicles to achieve institutional balance with internal combustion engine vehicles and to revise the legal system for restoring supply chain order and ensuring liquidity for small and medium enterprises."