Supplier pressure forces BYD to abandon its internal payments platform

China’s electric car manufacturer BYD told some of its suppliers on Friday that it wants to stop relying on in-house financial notes to pay them. The initiative marks a shift from the firm’s practice that helped power its growth but has been criticized for disadvantaging its parts makers.

Reuters reported that the EV manufacturer now plans to transition to commercial paper or bank notes to pay suppliers rather than promissory notes issued on its electric platform, Dilian. The report didn’t disclose the scope of the shift, and the source also didn’t provide a reason for the change.

BYD’s Dilian system falls within regulatory guidelines

The change comes as the Chinese auto industry faces a brutal price war, battering parts suppliers who have complained about going unpaid for long periods and increased pressure from automakers to reduce prices. Chinese authorities have now been prompted to issue new rules that aim to shorten the payment lines and significantly boost industry practices.

A report from the China-focused Auto Business Review, conducted last week, revealed that BYD has started moving away from Dilian notes to bank notes or commercial paper over the past two weeks. The Chinese car manufacturer acknowledged that its Dilian system complies with regulatory guidelines, and it has also increased payments to suppliers this year. BYD also confirmed it did not address queries about the move away from in-house hotels. 

According to the report, the EV manufacturer uses Dilian to issue electronic IOUs, while other Chinese automakers generally use commercial paper or banknotes. The source also revealed that authorities do not directly regulate Dilian IOUs and are perceived to carry a higher default risk. Cashing in BYD’s electric platform IOUs earlier than the required payment date can often be more costly than using banknotes.

The source also acknowledged that BYD has tightly controlled costs. The report noted that the Chinese automaker, which sells the vast majority of its cars in Beijing, has successfully launched new car models at a rapid pace.

The source also believes that BYD does not need to rely heavily on external sources of funding, as the system allows the firm to maintain a large cash reserve. The analysts said the initiative reduces the automaker’s working capital costs. BYD’s shift from Dilian comes as the firm’s sales are slowing and its profits have dropped, while it still plans to invest heavily overseas.

According to LSEG data, BYD averaged around 127 days last year to pay its suppliers and short-term creditors. The Reuters report also revealed that some Dilian notes have specified that payment is not due for periods as long as a year. LSEG argued that China’s industry average was 108 days, while many global car manufacturers often pay their suppliers in less than 90 days, with others in less than 60 days. The source also noted that BYD suppliers cash in their notes early at a discounted rate of around 6% with its bank partners. 

A study by Hong Kong’s GMT Research in January found that BYD’s use of supply chain financing meant the firm‘s true debt as of June 2024 reached around 323 billion yuan ($45 billion). The figure varies from the 27.2 billion yuan the Chinese automaker reported in its earnings. 

BYD says suppliers can still use Dilian notes to settle payments

BYD’s suppliers can still use Dilian notes to settle payments to their contractors. The initiative allows the firm to increase its bargaining power when negotiating prices once it identifies those lower-tier suppliers.

Other companies widely outside BYD’s supply chain are also using Dilian vouchers. A Henan-based rivet manufacturer revealed it received Dilian vouchers as payment four to five times in the past two years despite not being a BYD supplier.

The Chinese auto industry received new rules in June from the country’s regulators, requiring car manufacturers to pay suppliers within 60 days. The new rules also specified that vendors are no longer required to accept non-cash payments, such as electronic IOUs or commercial paper.

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