60-day payment term: Four controversial issues and explanations

After the initiative of "60-day payment term" was proposed, car manufacturers not only responded one after another but also claimed that "we've always been using a 60-day payment term".

In the firm responses of major car manufacturers, words with obvious implications such as "continuously implement" and "as always" frequently appeared. It seems that the 21st century may not necessarily be the century of biology, but most likely the century of Chinese language.

If we observe the financial reports of various car manufacturers, it's likely that there's a problem with either modern Chinese or modern accounting.

The "60-day payment term" sounds simple, but actually there's a lot of room for interpretation in many aspects. For example, does the "60 days" refer to the 60 days from the time of delivery to receiving payment, from the time of invoicing to receiving payment, or from the time of invoicing to receiving the invoice? Is it 60 days on Earth or 60 days on Mars?

We've listed 4 relatively important questions and will explain them to you as professionally and simply as possible:

Can the 60-day payment term ensure that suppliers receive payment within 60 days?

Let's start with the conclusion: It's quite difficult.

Business transactions between enterprises aren't "cash on delivery". Generally speaking, there are many steps between the supplier's delivery of goods/services and the purchaser's payment, and the interval caused is the payment term.

Generally, to be consistent with tax regulations, most companies use the invoicing date of the supplier as the starting point of the payment term. However, in practice, this process can be very complicated.

Let's assume there's a vehicle manufacturer called "Donkey Motors" that purchases tires from Linglong Tires. From the time Linglong ships the tires from the warehouse to the final invoicing, the following three steps are involved:

First, the tires are transported to Donkey Motors' warehouse; second, Donkey Motors completes the tire inspection, returns or scraps defective products, and then issues a receipt for the qualified tires; finally, Linglong gets the receipt and issues an invoice to Donkey Motors.

In this case, the "invoicing - payment collection" period is the payment term recorded in Donkey Motors' financial report, while the "delivery - payment collection" period is the real payment term for Linglong Tires. Seeing that major car manufacturers are responding to the 60-day payment term initiative, Linglong Tires may well be thinking about these questions:

① Is the receipt calculated based on the three-party warehouse or upon entry into the factory? ② Is the payment term calculated from the time of receipt or invoicing? ③ Is the invoice issued in the current month or the next month? ④ Is the invoicing month included in the payment term?

For suppliers, their real payment term starts from the time of delivery - that is, all costs have already occurred. But during this period, vehicle manufacturers have a lot of leeway.

For example, Donkey Motors may claim that the inspection process requires the cooperation of multiple departments, so the issuance of the receipt will be postponed; or it may say that it "has internal procedures" and that it won't issue invoices in the month when the inspection is completed, but will issue them uniformly on the 5th of the next month. All these methods will extend the real payment term of the suppliers.

If all the above issues are resolved and Linglong's accountant gives the invoice to Donkey Motors' accountant, then the asset side of Donkey Motors' balance sheet will increase by inventory, and the liability side will increase by accounts payable. Meanwhile, the asset side of Linglong's balance sheet will correspondingly increase by accounts receivable. Only at this time does the payment term (days payable outstanding) in the financial report start to be calculated.

Let's assume an extreme situation: Linglong delivered the goods to Donkey Motors' Shanghai warehouse in March 2023, but due to various unspoken reasons, the inspection and invoicing process wasn't completed until September.

In this case, if Donkey Motors makes the payment in November, it can meet the 60-day payment term in the accounting sense. But in reality, Linglong's real payment term is as long as 8 months, and they'd probably have set up tents and held banners by then.

On the other hand, even if Donkey Motors strictly adheres to the real payment term, Linglong may not receive cash on schedule because Donkey Motors is likely to pay in the following three ways:

① Bank acceptance bill: The bank will make the payment without reason upon maturity, but a corresponding amount needs to be mortgaged, usually in the form of a large - scale time deposit.

② Commercial acceptance bill: Donkey Motors will make the payment without reason upon maturity. Although no mortgage is required, a certain proportion of margin is usually deposited to enhance liquidity.

③ Electronic accounts receivable vouchers: Issued by Donkey Motors' supply - chain finance company "Donkey Chain", there's neither the obligation of unconditional payment upon maturity nor the need for collateral.

For Linglong Tires, they can't use these things to pay their employees' salaries no matter which method is used.

Therefore, Linglong Tires still needs to find a way to convert these bills into real cash. Since the credit rating and liquidity of these three methods decrease step by step, the later the method, the greater the loss when Linglong goes to the bank for discounting.

Taking vouchers with a face value of 1 million each as an example, Linglong may get 990,000 for a bank acceptance bill; 970,000 for a commercial acceptance bill; and for Donkey Chain, it may need to pay an interest of 3% and can only get half of the money because the latter is equivalent to Linglong applying for a mortgage loan from the bank[1].

In the financial report, if Donkey Motors pays with a bank acceptance bill or a commercial acceptance bill, it's considered that the payment obligation has been fulfilled and the payment term ends. It can be simply understood that bills represent a financial relationship rather than a business relationship.

If Donkey Motors pays with Donkey Chain, the payment term (days payable outstanding) in the financial report doesn't end because Donkey Chain only endorses the accounts receivable but doesn't transfer Donkey Motors' payment obligation.

Looking at the days payable outstanding in the real world, domestic vehicle manufacturers with longer payment terms have a lower proportion of bills, while those with shorter payment terms usually have a higher proportion of bills. That is, those with slow payment use supply - chain finance companies, and those with fast payment use bills.

Ultimately, the days payable outstanding in the financial report and the number of days it takes for suppliers to receive payment are two completely different things.

Will shortening the payment term crush vehicle manufacturers?

Let's start with the conclusion again: If the 60 - day payment term is strictly enforced and payment is made in cash, many vehicle manufacturers may face a cash - flow crisis.

Assume that Donkey Motors currently has 10 billion in cash on its books and 15 billion in unpaid goods. If the policy is implemented immediately, it will undoubtedly go bankrupt. Whether a vehicle manufacturer will be crushed by the payment term can be most intuitively judged by whether the monetary funds on the balance sheet are more than the total of accounts payable + notes payable.

Based on the latest disclosed data, Tesla, GAC Group, and Li Auto are on the safe side. XPeng, Seres, and Xiaomi basically don't have much of a burden either. Additionally, Xiaomi has a wide range of business lines, so its financial report can't reflect the situation of its automotive business alone.

This assumption has a pre - condition, that is, the existing accounts payable of vehicle manufacturers are also subject to the 60 - day payment term. If that's really the case, the sound of domestic vehicle manufacturers defaulting on their debts may get louder and louder.

Therefore, it's not hard to guess that most vehicle manufacturers' implementation of the 60 - day payment term should apply to "newly purchased goods". That is, "old debts are handled in the old way, and new debts are handled in the new way".

From this, a new question may arise: How much buffer time should be given to major vehicle manufacturers to settle their old debts and smoothly transition to the 60 - day payment term?

It should be noted that corporate profit and debt - repayment funds actually have no direct relationship because a company's income statement is based on the accrual basis of accounting, while cash flow is the result of the cash basis of accounting. That is to say, a company having a profit doesn't mean it has money. Otherwise, Evergrande wouldn't have defaulted on its debts.

Therefore, it's more meaningful to use the net cash flow from operating activities in the cash - flow statement as a standard to judge how long it will take for the above companies with a capital gap to settle their old debts by selling cars.

In this context, vehicle manufacturers such as SAIC and Xiaomi basically only need a buffer period of less than a year. Of course, the special situation of Xiaomi has been mentioned before. Although BYD and Great Wall often have disputes, their financial situations are also relatively safe.

For other vehicle manufacturers, you can make your own judgments by referring to their financial information and corresponding indicators.

Why do supply - chain finance companies emerge?

In the discussion about payment terms, a core controversy is why supply - chain finance companies like "Donkey Chain" emerge. But the fact may be surprising. The emergence of such companies is, to some extent, the result of policy encouragement and brings many benefits.

In October 2017, the State Council issued the "Guiding Opinions on Actively Promoting the Innovation and Application of Supply Chains", encouraging core enterprises in the supply chain to develop supply - chain finance models such as online accounts receivable financing[2]. Since then, supply - chain finance platforms of vehicle manufacturers have been established one after another.

The intention of the policy is easy to understand because supply - chain finance companies can indeed inject liquidity into upstream enterprises.

The automotive supply chain is very long. Assume that Donkey Motors' T1 supplier gets a "Donkey Note" from Donkey Chain. The T1 supplier may use this Donkey Note to pay the upstream T2 supplier for the goods. The T2 supplier can then repeat the operation with its upstream suppliers.

The essence of the Donkey Note is a credit certificate endorsed by Donkey Motors. In this process, there's no need for actual capital transactions between various links in the supply chain, which can indeed improve efficiency. And the acceptance of the Donkey Note just reflects the suppliers' recognition of Donkey Motors' operational ability.

However, on the other hand, it also represents the extension of the downstream vehicle manufacturers' influence in the supply chain. For example, BYD's Di Chain has a "cash discount" product. Suppliers submit an application on the Di Chain platform, and after passing the review, they can get cash at a discount based on the face value of the note. The discount rate is usually determined by the length of the time to maturity[3].

BYD is not an exception. Supply - chain finance companies are already well - known in the automotive industry. According to statistics, at least 8 out of the top 10 domestic vehicle manufacturers have publicly operated their own supply - chain finance platforms[3].

In addition to the automotive industry, leading companies in various industries basically have their own supply - chain finance platforms. According to statistics, there are currently more than 500 supply - chain information service platforms in China, with an annual cumulative confirmed issuance scale between 4 trillion and 5 trillion[4].

The particularity of vehicle manufacturers lies in that they can use supply - chain finance platforms to rapidly expand their production capacity, and BYD is a typical example.

Di Chain reached its first 10 - billion - yuan scale in August 2020, which took about 2 years, and then began to grow explosively after 2021: It exceeded 50 billion in 2021, 200 billion in 2022, 400 billion in 2023, and the data for 2024 was not disclosed.

2021 was also the starting point for BYD to expand its balance sheet. That year, its total assets increased by nearly 100 billion net, and in the following three years, BYD's asset scale expanded by nearly 500 billion again.

Correspondingly, in the past four years, BYD's production capacity has expanded from 608,500 vehicles to 4.3041 million vehicles; its sales volume has skyrocketed from 162,900 vehicles to 4.2721 million vehicles, and it has replaced SAIC as the domestic sales champion.

From a financial perspective, there's a mismatch between BYD's asset side and liability side. The reason is that the land, factories, and equipment involved in capacity expansion all belong to long - term assets, which should theoretically be matched with long - term capital (long - term liabilities + equity), but in reality, they are basically operating capital (accounts payable and other payables).

There are two key factors for the above