Carmakers vow to ensure timely payments for suppliers

China's top industry regulator voiced support on Thursday for domestic automakers' commitments to shorten payment terms for suppliers. The move is believed to have great significance in curbing destructive cutthroat competition and promoting the healthy development of the automotive industry.

Prolonged payment terms and mounting cash flow pressures faced by some auto part suppliers are detrimental to their technological innovation and the healthy, sustainable development of the whole industry, and therefore should be halted, said the Ministry of Industry and Information Technology.

The statement came as nearly 20 major Chinese automakers, starting on Tuesday evening, have pledged to shorten payment terms to their suppliers to within 60 days.

The auto heavyweights said the move was a response to the newly revised regulation on ensuring timely payments to automotive suppliers. The regulation was issued by the State Council, China's Cabinet, and took effect on June 1.

According to Dong Yang, former executive vice-chairman of the China Association of Automobile Manufacturers, addressing payment period issues serves as a key step in curbing destructive cutthroat competition.

"Some automakers have long relied on the excessive use of financial instruments to delay payments to suppliers and dealers, using these withheld funds to fuel aggressive price-cutting strategies," Dong said.

He said that shortening payment terms for supply chain enterprises will have a significant impact on the cash flow of these automakers, limiting their ability to engage in price wars.

"Reducing payment terms strikes at the very root of such disorderly price wars," he added.

Dong's view was echoed by Zhang Hong, a new energy vehicle industry expert at the China Automobile Dealers Association, who said the new payment rules will greatly help to boost fair competition by easing the financial burdens of small and medium-sized enterprises.

"Prolonged payment periods have left many SMEs under severe financial strain, forcing them to rely on costly short-term loans or bill discounting just to stay afloat," Zhang said.

The expert added that some suppliers may previously have even faced a payment cycle as long as nine months, and ensuring payment within 60 days of delivery can effectively prevent automakers from undercutting prices at the expense of the upstream supply chain.

In this regard, the ministry called for automakers to fulfill their payment commitments through concrete moves and to promote a sustainable industry ecosystem.

The top regulator's move is part of the country's broader efforts to counter cutthroat competition.

Earlier, the China Association of Automobile Manufacturers and the China Iron and Steel Association both called on the auto sector to abandon unsustainable price-cutting practices and make technological progress the core driver of competitive advantage, a move backed by the ministry's pledge to curb rampant competition and safeguard a fair, orderly market environment.

"Driven by destructive price wars, cutthroat competition risks pushing automakers to prioritize short-term gains at the expense of long-term innovation and research and development investment," said An Tiecheng, chairman of the China Automotive Technology and Research Center.

As a result, with increasing product homogenization, the industry could fall into a cycle of low-end and repetitive price cuts, undermining efforts to build global competitiveness, An said.

Both traditional industry players, such as BYD, China FAW Group and Geely Auto, and emerging NEV manufacturers, including Xpeng, Xiaomi Auto and Nio, have so far vowed to adopt the new payment cycle.

Contact the writers at lijiaying@chinadaily.com.cn