Can a 60-day payment term end the involution in the automotive industry? | Kr Auto

Author | Geng Chenfei

Editor | Song Wanxin

Ten days after the official announcement of the "60-day payment term", a procurement officer from a new energy vehicle startup told 36Kr that the company has just completed internal research and demonstration and will adjust all payment terms to 60 days, regardless of whether they are old or new accounts, and regardless of the type of suppliers.

This is not a decision that all automakers can make. For most automakers with tight cash flows, converting the existing payment terms to 60 days will directly trigger a debt crisis.

Meanwhile, on the supply chain side, multiple suppliers told 36Kr that they haven't felt any obvious changes in the month since the implementation of the "60-day payment term".

Their concerns still outweigh their expectations. A veteran in the automotive supply chain industry with 20 years of experience said that if the payment term only starts to be calculated from the date of invoicing, this regulation may not have much effect.

The "price war" has not truly ended, and now the "payment term war" has begun. The automotive industry chain, which is in the stage of industry consolidation, is entering a more intense adjustment period.

01 Who is to Blame for Automakers' Delayed Payments?

Taking eight A-share listed companies in the passenger vehicle industry and "NIO, XPeng, and Li Auto" as samples, it's not difficult to see that the lengthening of payment terms over the years is a common phenomenon in the industry.

Chart: Days Payable Outstanding of Some Automakers from 2021 to 2024. Data Source: Wind. Note: Accounts payable of eight A-share listed companies include notes payable.

The lengthening of payment terms is the result of pressure transfer, and the root cause is the "involution" caused by overcapacity in the automotive industry.

The price war that started in 2023 has continuously squeezed the profit margins of automakers. Data from the National Bureau of Statistics shows that the profit margin of the automotive industry was 8% in 2017, dropping to 4.3% in 2024, and further to 3.9% in the first quarter of this year.

The price war is due to both industry competition and demand-side factors.

The aforementioned procurement officer from a new energy vehicle startup said that in the early days, a certain model used many imported parts, but they were expensive and consumers weren't willing to buy. So, the automaker had to localize production and implement VAVE (Value Analysis/Value Engineering) to reduce costs.

With thinner and thinner profit margins, automakers are forced to look upstream for cost reduction opportunities and transfer the cost pressure to the supply chain. Lengthening the payment terms is one of the ways.

The key factor that has led to a vicious cycle is the oversupply of suppliers to automakers, resulting in a huge disparity in bargaining power between the upstream and downstream. In the supply chain, except for a few companies in an absolute leading position, most suppliers are often helpless in the face of the requirements of automakers and eventually have to make concessions.

"Competition among suppliers is already fierce. If you don't accept long payment terms, you may not even get any business." said Xu Fei, a senior industry insider. Supplier He Yu also agrees with this situation. "Suppliers have a submissive mentality towards harsh business conditions. They'll do anything to avoid being eliminated."

"Losing money in business is better than having idle production lines and resources. It can keep you alive for a few more days," said an industry insider.

Therefore, although involution is an inevitable result of the mature market stage, it has also inevitably led to the improper use of supply chain finance.

The dilemma of "having to accept long payment terms" has made the survival situation of suppliers even more difficult.

He Yu, a supplier providing testing services for automakers, said, "We are a R & D-based company, a specialized and innovative enterprise with invention patents. However, our profit and payment terms can hardly support continuous R & D investment."

"Now we rely entirely on the shareholders' own funds to prepay operating expenses. We don't dare to expand at all. It's already a blessing if we can just maintain our current situation," Supplier Li Zhou told 36Kr. In the price war, many automakers adopt the rule of lowest bid wins, forcing suppliers into a mutually harmful competition.

It should be noted that although supply chain finance, which has been overused to transfer financial pressure, has exacerbated the imbalance in the upstream and downstream ecosystem, as a key mechanism for industrial expansion in a market economy, it has natural advantages in terms of capital allocation.

On the one hand, supply chain finance can make up for the limitations of bank loans in terms of capital volume and liquidity. On the other hand, by improving the efficiency of capital flow in each link of the supply chain, supply chain finance can quickly drive the development of the industry.

02 Difficult to Implement

"A one-size-fits-all approach is difficult to implement," Xu Fei holds a reserved attitude towards the 60-day payment term.

The 60-day payment term seems to be a simple and direct solution, but in fact, there are many complex aspects in the actual implementation of payment terms, making it difficult to standardize with a unified standard.

Taking the settlement process as an example, according to Li Zhou, automakers generally follow several steps for settlement: contract signing, execution, acceptance, invoicing, and payment. Different automakers have different settlement methods. Some settle in stages, such as 3:4:3, while others only settle after 100% completion of the work.

The aforementioned procurement officer from the new energy vehicle startup also said that there are various situations for payment terms. Before the commitment of the 60-day payment term, indirect procurement always had a 90-day cash payment term, while the payment term rules for parts procurement were somewhat different.

First of all, most automakers have not clearly defined the start and end time of the 60-day payment term.

In Xu Fei's view, if the 60-day payment term regulation can be implemented, the cash flow of suppliers will be greatly alleviated. However, in reality, it's still up to the automakers to decide from which day to start calculating.

In reality, for suppliers, the payment term starts as soon as the goods are delivered. But in terms of specific operations, to be consistent with tax regulations, the invoice date of suppliers is used as the starting point of the payment term.

Li Zhou told 36Kr that the greatest uncertainty in suppliers' payment collection comes from the acceptance stage before invoicing.

"The acceptance stage is the most troublesome and the most difficult to measure objectively," Li Zhou said. "Usually, after the work is completed, we submit an acceptance application. First, the business department reviews it, then it's handed over to a department similar to the control or internal audit department within the automaker for further review, and then we are notified to issue an invoice. This acceptance stage will face various challenges from different people, and many people need to sign. A simple delay can last for a month."

"If the payment term still starts to be calculated from the date of invoicing, it won't have much impact on us," Li Zhou said.

Another concern of suppliers comes from the abuse of supply chain finance.

Currently, among the automakers that have publicly promised a 60-day payment term, only SAIC Group and BAIC Group have clearly stated that they will not use commercial acceptance bills and other settlement methods. Therefore, in terms of payment methods, most automakers will probably still "pay" through bank acceptance bills, commercial acceptance bills, or electronic accounts receivable vouchers (X-chain) instead of cash.

Supplier He Yu revealed that for a domestic automaker he serves, the acceptance period after receiving the goods is more than 3 months, and for domestic business, a "chain" that will arrive 6 months after payment within one month after invoicing. Therefore, the time from delivery to actual payment collection for him is more than 10 months.

That is to say, the 60-day payment term promised by automakers and suppliers actually receiving the money within 60 days are two different things.

03 Pressure on Automakers

It's still unclear whether the "60-day payment term" can change the situation of suppliers, but some automakers will obviously be the first to be affected.

Wind data shows that in 2024, the accounts payable and notes payable in the automotive industry exceeded 1 trillion yuan. This means that once the payment term is shortened, it is very likely to trigger a debt crisis for automakers.

The core indicator to judge whether an automaker can withstand the pressure of the 60-day payment term is whether the monetary funds/cash reserves on the balance sheet can cover the total amount of accounts payable and notes payable.

If the existing accounts payable are uniformly implemented with a 60-day payment term, taking the eight A-share listed companies in the passenger vehicle industry and "NIO, XPeng, and Li Auto" as samples for analysis, only GAC Group and the four automakers of "NIO, XPeng, and Li Auto" are above the safety line.

Chart: Monetary funds/cash reserves and accounts payable and notes payable of some automakers in 2024. Data Source: Wind, Company announcements.

Based on this, it is speculated that in response to the requirement of the 60-day payment term, most automakers are more likely to implement the 60-day payment term only for new accounts, while the existing debts will still be handled according to the original agreement to balance the financial pressure.

Compared with traditional automakers, the pressure on new energy vehicle startups in the middle and lower tiers is more significant under the influence of the new payment term regulations.

Xu Fei told 36Kr that traditional automakers can complete the process from production to the vehicle reaching the 4S store within 60 days. At this time, the 4S store needs to pay the automaker. Although the vehicles are still actually backlogged in the 4S store, the automaker has completed the closed-loop of capital turnover.

New energy vehicle startups adopting the direct store model show different performances. Leading brands represented by Xiaomi can complete the sales conversion within 60 days, while brands with weak market performance and slow sales find it difficult to achieve a closed-loop of sales within the same period.

"For non - profitable automakers, strictly implementing the 60-day payment term is difficult to ensure cash flow safety," Xu Fei said.

According to data reported by The Wall Street Journal in 2018, there were more than 487 electric vehicle companies in China. But now, only about 40 remain.

The originally orderly price war in the automotive industry has gradually slipped towards the edge of being out of control in recent years. The "60-day payment term" emerged to curb the price war, but whether it can truly guide the industry into a virtuous cycle remains to be seen.

(He Yu and Li Zhou in the article are both aliases)

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