Key Takeaways
- China’s auto sector faces severe financial strain due to overcapacity and a fierce price war, prompting government intervention.
- New regulations require automakers to settle payments to suppliers within 60 days, with many companies exceeding this period.
- Despite challenges, BYD improved its profit margin significantly, while competitors Nio and Xpeng continue to operate at losses with extended payment periods.
Sector Turmoil Amid Price Wars
China’s automotive industry is experiencing significant distress, grappling with overproduction and an ongoing price war that began in 2023. This turmoil has caught the attention of regulators and industry leaders who warn it jeopardizes the sector’s long-term sustainability. Recent commitments from top Chinese officials aim to enhance regulation of aggressive pricing stratagems and facilitate the gradual retirement of outdated production capabilities.
Data from LSEG concerning 33 listed automakers in China reveals a troubling trend in financial health over the last six years. Notably, the average time for these companies to clear payments to suppliers has increased, reaching 108 days in 2024 compared to 99 days in 2019. To address this issue, new mandates that took effect on June 1, 2024, stipulate that large enterprises must settle payments within 60 days of receiving goods or services.
Joerg Wuttke of DGA-Albright Stonebridge Group emphasized that this regulation will create a more equitable environment, preventing manufacturers from utilizing their suppliers as financial assets.
Among leading brands, BYD, a prominent player in the electric vehicle market, saw its payment period to suppliers extended to an average of 127 days in 2024, up from 81 days in 2019. However, BYD reported a slight decrease in its payment duration when accounting for different financial obligations. Meanwhile, Geely’s payment cycle lengthened to 193 days in 2024, also reflecting upward trends.
Contrary to these patterns, Great Wall Motor Co successfully reduced its payment time to 94 days from 115 days.
The industry’s inventory levels have also surged, more than doubling to 370 billion yuan ($51.55 billion) in 2024. This increase occurs as dealers express dissatisfaction with automakers dumping vehicles to achieve ambitious sales goals. Alongside rising inventories, total debt in the sector has escalated by 56% compared to 2019, now standing at 959 billion yuan, with a notable 21-percentage-point rise in the median debt-to-equity ratio.
Profit margins have also suffered; the median net profit margin fell drastically from 2.7% in 2019 to 0.83% in 2024. In contrast, BYD managed to enhance its margin from 1.7% to 5.4%, attributing this improvement to a greater share of automotive-related revenue.
On the other hand, renowned EV manufacturers Nio and Xpeng reported some of the longest supplier payment periods—223 days and 237 days, respectively. Both companies continue to experience financial losses, though they have improved their negative margins. Nio has pledged commitment to paying suppliers within the stipulated 60 days, while Xpeng indicated a focus on enhancing its cash liquidity and meeting similar commitments shortly.
The content above is a summary. For more details, see the source article.
