Chinese carmakers pledge timely supplier payments amid price war

Shanghai — Chinese car manufacturers have pledged to make payments to suppliers within 60 days, responding to a recent outcry from steelmakers over lengthy payment times and regulatory pressure as the backlash to a punishing price war grows.

Chinese authorities issued new rules in March that require big companies to settle most payments with suppliers within 60 days, which became effective June 1. However, suppliers had been worried there were loopholes for the rules to be circumvented.

Automakers issuing pledges on Wednesday included BYD, Chery and state-owned automakers BAIC and SAIC as well as smaller firms such as Xpeng and Xiaomi.

In its statement, Chery said it would strive to speed up the turnover of capital in the supply chain. But like other automakers, it did not mention how much of an improvement that would represent.

The pledges come after China’s industry ministry summoned automakers to a meeting last week where they were told to put an end to the price war and excessive competition — factors that have placed much pressure on the industry's supply chain.

Even so, the China Iron and Steel Association published a statement on Tuesday that steel companies were struggling with low profit margins and mounting liquidity pressure as some automakers have been asking for price cuts of more than 10% since last year and delaying payments by months.

The association also asked Chinese automakers to learn from the steady and healthy partnerships that Japanese automakers have with their suppliers, which leave a certain amount of profit for suppliers and ensure product quality and innovation.

Tension has been high in China’s auto industry as the price war which began in early 2023 has shown few signs of abating.

In May, Great Wall Motor chair Wei Jianjun spoke out on the deepening price war. He even said the industry had its version of Evergrande — the property developer that was liquidated last year after a huge debt crisis — though he did not mention a specific auto company.

Chinese auto dealers have called on automakers to stop offloading too many cars on dealerships, saying the intense price war was damaging their cash flow, driving down their profitability and forcing some of them to shut.

Yang Hongze, the chair of Autolink, a supplier of intelligent vehicle technologies, said he welcomed the automakers’ pledges.

“It is a pleasant but difficult change for the industry to move towards a healthy development and grow together,” he said.

He added he would like more clarity from automakers on whether payments would be made in cash or commercial paper, and what would be considered the start date for the 60-day period to pay.

In their pledges, BAIC and SAIC vowed not to pay suppliers with commercial paper.

It was not immediately clear from their statements how often they had used commercial paper as a form of payment. The companies did not immediately respond to requests for comment.

Commercial paper has been commonly used in the property sector, popular among developers because it is not categorised as interest-bearing debt. It promises suppliers a payment on a fixed date, usually within one year, though the suppliers sometimes sell the paper before maturity at a discount in the secondary market.

Reuters