BYD Shifts from In-House Payment System to Improve Supplier Relations, Insider Sources Say
BYD Shifts from In-House Payment System to Improve Supplier Relations, Insider Sources Say
(Reuters) - BYD, the prominent Chinese electric vehicle manufacturer, has informed several suppliers of its decision to discontinue the use of in-house financial notes for payments, according to sources familiar with the matter. This significant change marks a departure from a practice that fueled BYD's growth but faced criticism for negatively impacting its parts suppliers.
The Transition from In-House Financial Notes
The company now intends to transition to commercial paper or bank notes for payments instead of the promissory notes issued on its Dilian platform, which was launched in 2018. While the extent of this transition remains unclear, sources who spoke on condition of anonymity have not disclosed the rationale behind this shift.
Challenges in the Industry
Industry challenges, such as an intense price war in the Chinese auto sector, have put pressure on parts suppliers, leading to prolonged payment delays and requests for price reductions. This situation has prompted regulatory authorities to introduce new rules aimed at significantly reducing payment times and enhancing industry practices. Last week, China-focused Auto Business Review noted that BYD had begun moving away from Dilian notes in favor of bank notes or commercial paper.
Regulatory Compliance and Supplier Relations
BYD confirmed to Reuters that its Dilian system complies with regulatory standards and that it has accelerated payments to suppliers this year; however, it did not address inquiries regarding the move away from its financial notes. Meanwhile, partner banks of BYD did not respond to requests for comments, and China's central bank, which oversees commercial paper and bank notes, also refrained from commenting.
The Implications of Switching Payment Methods
Utilizing Dilian, whose Chinese name means 'BYD supply chain,' the company issues electronic IOUs. In contrast, other Chinese automakers typically rely on commercial paper, bank notes, or cash. Sources indicate that Dilian IOUs lack direct regulation from authorities and are perceived to have a higher risk of default. Early cashing of these notes can incur higher costs than bank notes.
Benefits of the Dilian System
The Dilian system has allowed BYD to manage costs effectively, enabling it to rapidly roll out new models while retaining a substantial cash reserve, thus reducing reliance on external funding and working capital expenses. However, the shift away from Dilian comes at a critical time as sales have slowed, profits have dropped, and BYD is planning significant overseas investments.
Current Payment Practices
Data indicates that last year, BYD took an average of 127 days to settle payments to suppliers and short-term creditors, while the industry average in China was 108 days. Some Dilian notes have been tied to payment timelines of up to a year, while many global automakers typically settle with suppliers in under 90 days, with many even within 60 days. Additionally, suppliers who wish to cash their notes early with the banks partnered with BYD often face a discounted rate—some sources mentioned a 6% discount for certain BYD notes compared to under 2% for bank notes.
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