BYD shifts away from in-house payment system that strained suppliers, sources say
News Summary
China's electric vehicle giant BYD is reportedly informing some suppliers of its intent to stop using financial notes issued on its in-house "Dilian" platform, opting instead for commercial paper or bank notes. This move signals a significant shift from a cost-control model that has long been criticized by suppliers for its extended payment cycles and high discount rates for early cashing. This change comes amidst an intense price war in China's automotive industry and regulatory pressure. Authorities have introduced new rules requiring automakers to pay suppliers within 60 days, and financial regulators are tightening oversight on supply chain financing. While BYD stated its Dilian system complies with regulations and payments have been expedited, it did not directly address queries about abandoning in-house notes. Analysts note that Dilian helped BYD maintain large cash reserves and lower operating costs, but the current shift could pose financial challenges as the company faces slowing sales, falling profits, and substantial overseas investment plans.
Background
BYD's "Dilian" system, launched in 2018, involved issuing electronic IOUs (promissory notes) to suppliers. Unlike commercial paper, bank notes, or cash generally used by other Chinese automakers, Dilian IOUs were not directly regulated and perceived to carry higher default risks. This system allowed BYD to effectively control costs, maintain substantial cash reserves, and reduce reliance on external funding, thereby supporting its rapid pace of new model rollouts. However, the system also led to suppliers facing exceptionally long payment periods, averaging 127 days, with some notes stipulating terms as long as a year. Cashing these notes early incurred high discount rates, reportedly 6% for some, significantly higher than the typical sub-2% for bank notes. These practices intensified pressure on suppliers amid the fierce price war. In response, Chinese regulators issued new rules in June 2025, mandating automakers to pay suppliers within 60 days and prohibiting forced acceptance of non-cash payments. Furthermore, financial regulators announced in April a tightening of oversight on supply chain financing, granting issuers of electronic IOUs a two-year grace period for "self-regulation."
In-Depth AI Insights
What are the underlying strategic motives behind BYD's shift, beyond mere regulatory compliance? - While regulatory compliance is the stated reason, the timing of this shift suggests deeper strategic considerations. BYD's aggressive cost control through Dilian may have reached its limits, potentially impacting supplier relationships and product quality amidst intensifying competition. This move could be a proactive step by BYD to mend supply chain relations, ensure quality, and stabilize a critical ecosystem, especially as it expands overseas and faces slowing domestic sales. - It might also be a calculated response to broader state efforts to de-risk supply chains and promote fairer business practices, aligning BYD with national strategic goals beyond mere EV dominance. How might this change impact BYD's financial structure and competitive positioning in the medium term? - The Dilian system effectively provided BYD with interest-free working capital. Shifting to commercial paper or bank notes will undoubtedly increase its working capital costs and reduce its "true" cash reserves, as highlighted by GMT Research's re-evaluation of its net debt. This will put pressure on its profitability, particularly during periods of slowing sales and squeezed margins. - Despite potential short-term cost increases, improved supplier relationships and healthier cash flow management (through more standardized financial instruments) could enhance BYD's supply chain resilience and stability in the mid-to-long term. This would help BYD build a more trustworthy partner network in overseas markets, boosting its global competitiveness, albeit at the cost of some short-term financial flexibility. What are the broader long-term implications of this regulatory action for China's overall supply chain finance practices and the automotive industry landscape? - This regulatory push, including the 60-day payment rule and restrictions on non-cash payments, is not just targeting BYD but aims to rectify payment irregularities across the entire industry. It will compel all automakers to re-evaluate and optimize their supply chain finance practices, thereby improving the financial health of their suppliers. - In the long run, this could lead to a modest increase in supplier bargaining power within the sector, particularly benefiting small and medium-sized suppliers by easing their cash flow pressures. For companies heavily reliant on internal notes or extended payment terms, working capital costs will generally rise, potentially accelerating industry consolidation or driving healthier cash flow management and more transparent supply chain financing models.