In China, competition is fierce, and in many cases suppliers do not get paid on time. Rather than improving, the situation appears to be deteriorating.
BYD Co, the world’s largest electric vehicle manufacturer by production volume, has gained notoriety for its harsh treatment of suppliers, raising concerns about the long-term sustainability.
The case also highlights the decline of China’s business environment, and the growing risk of a cascading wave of corporate failures.
BYD generally does not follow China’s Negotiable Instruments Law when settling payments with suppliers. Instead the company has created its own proprietary supply chain finance system called the “D-chain,” through which it issues “e-debt certificates.”
Suppliers can either redeem the certificates upon maturity or transfer them to others within BYD’s supply chain network.
However, such digital instruments are simply bilateral credit agreements between BYD and the supplier.
So how long does it take to get paid? BYD typically follows a net 30 to 60 payment cycle, with the D-chain system adding an additional six to eight months to that period. In practice, that stretches the total payment period to between eight and 10 months.
That approach greatly reduces BYD’s financial pressure, but is to the considerable disadvantage of its suppliers.
By tying its suppliers to the D-chain platform, BYD can integrate them into its own financial ecosystem, tightening control over its supply chain.
The model also allows BYD to circumvent traditional financial oversight, as it avoids issuing regular commercial paper and standard banking transactions.
Last year alone, the D-chain platform accumulated more than 400 billion yuan (US$55.64 billion) in interest-free payables, enabling BYD to save substantially on interest expenses.
However, if a supplier requires early payment, it has to offer an interest rebate to BYD — often as high as 5 to 10 percent — further squeezing supplier profit margins.
The issue of long days sales outstanding (DSO) has long been a problematic factor in doing businesses in China. It has worsened amid the ongoing economic slowdown in China.
China’s average DSO rose to 141 days last year — an increase of eight days from the previous year — compared with an average of about 70 days in Taiwan and the US, trade data showed.
Despite being the world’s largest automaker by production volume, BYD relies on cutthroat tactics to sustain its growth — such as selling “zero kilometer used cars,” which are registered, but never driven, at discounted prices to boost sales.
As BYD’s output continues to expand, the financial grip of its D-chain platform on suppliers would only tighten. The situation inevitably recalls the financial crisis of China’s Evergrande Group, which relied on the excessive use of “commercial acceptance bills,” leading to widespread financial damage among its suppliers just a few years ago.
Honda Chen is a senior researcher at the Taiwan Academy of Banking and Finance.
Translated by Eddy Chang
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