(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 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, and sources, who spoke on condition of anonymity, have not disclosed the rationale behind this shift, 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 BYD had begun moving away from Dilian notes in favor of bank notes or commercial paper. BYD confirmed to Reuters that its Dilian system complies with regulatory standards and that it has accelerated payments to suppliers this year, yet did not address inquiries regarding the move away from its financial notes. Partner banks of BYD did not respond to requests for comments, while China’s central bank, which oversees commercial paper and bank notes, also refrained from commenting. Utilizing Dilian, whose Chinese name means ‘BYD supply chain,’ the company issues electronic IOUs, while 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. The Dilian system has allowed BYD to manage costs effectively, enabling it to rapidly roll out new models while retaining a substantial cash reserve, 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. Data from LSEG shows 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. Furthermore, if suppliers wish to cash their notes early with the banks partnered with BYD, it is often at a discounted rate\u2014some sources mentioned a 6% discount for certain BYD notes compared to under 2% for bank notes. GMT Research reported in January that BYD’s reliance on supply chain financing inflated its true net debt as of June 2024 to an estimated 323 billion yuan ($45 billion) as opposed to the 27.7 billion yuan reported in its earnings. BYD did not respond to inquiries about GMT’s claims. NEW RULES AND LOOPHOLES Suppliers can utilize Dilian notes to pay their own contractors, thus allowing BYD to track lower-tier suppliers and enhance its bargaining position in negotiations. Reports indicate that Dilian vouchers have circulated beyond BYD’s supply chain. A rivet manufacturer from Henan, unconnected to BYD, stated that it received Dilian vouchers as payment multiple times in the last two years. New regulations enacted in June require automakers to settle payments with suppliers within 60 days and prohibit mandating the acceptance of non-cash payments such as electronic IOUs or commercial paper. While BYD and its competitors have committed to these new regulations, suppliers have pointed out loopholes, such as the potential for automakers to delay payments by taking extended time to acknowledge receipt of goods. Moreover, in a separate but relevant development, China’s financial regulators announced in April that they will tighten their oversight of supply chain financing. Issuers of electronic IOUs like Dilian notes are allowed a two-year grace period to enhance <\/p>\n","protected":false},"excerpt":{"rendered":"
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