Here's why China's EV makers have a good reason to delay paying bills

By David Fickling 

What if the soaring sales and investment of China’s electric-vehicle industry was mainly a matter of hidden debt? 

That’s the argument made about BYD Co. by GMT Research, a Hong Kong-based financial analyst business known for its forensic short-seller-style investigations of Chinese companies’ accounts. 

 

The biggest producer of electric cars last year was a “high accounting risk” because of the “unprecedented scale” of financing from its supply chain, analyst Nigel Stevenson wrote in a report this month. A fair estimate of net debt is about 209 per cent of equity, Stevenson wrote — quite different from the official numbers, which show it holding more cash than debt. That means there’s a risk the company may need to raise money from shareholders, he added. 

 

GMT isn’t wrong about what’s happening here. In recent years, BYD has been taking longer and longer to pay its suppliers — in effect getting an interest-free loan from them for the period when the bills remain unpaid. It’s also been clearing money owed by its customers from its balance sheet more quickly, probably because it’s selling on invoices from car dealers to third-party investors in return for cash, and also to settle payments with its supply chain.

 

That’s now reached the point where the EV maker is, in effect, taking in cash before it pays for what it’s selling — the prized negative working capital position that you’ll sometimes encounter among the most efficient supermarkets, but rarely in a manufacturer.

 

BYD is notoriously tough with suppliers, so it would hardly be surprising if the company was leaning on them to flatter its financials. The question is whether this aggressiveness is getting it into hot water. 

You could actually broaden GMT’s argument to take in much of China’s EV industry. Across the board, the automakers spending longest to pay suppliers run on electricity rather than gasoline.

 

It helps to understand what’s happening here if you think about the bargaining that goes on between the accounts departments of a manufacturer and supplier. 

If a company looks to be days away from bankruptcy, its business partners will almost certainly be demanding payment upfront — and if it wants to keep trading, it will have to accept those terms. If it’s established and stable, the same partners will be a lot more relaxed about it taking time to settle up: The median payables period among members of the S&P 500 Index is 51.68 days. 

 

What if the company looks like it’s on the brink of inheriting the earth, however? It’s not unreasonable to think that such a company would be able to drive a harder bargain. Suppliers who put up with the late payments will be hitching their businesses to a juggernaut that could be bringing in handsome revenues for years to come. Those who bail out to find a more prompt customer will find plenty of rivals happy to take their place.

 

That’s in practice what we often see. Mega-corporations can be so stingy to their supply chain that being delinquent about your bills almost looks like a badge of pride. Apple Inc., Microsoft Corp. and Amazon.com Inc. all take more than three months to clear accounts payable, as do Inditex SA, General Electric Co., Johnson & Johnson, and LVMH. Novo Nordisk A/S, the maker of the blockbuster diabetes medication Ozempic, appears to have started stiffing its partners the minute the US Food & Drug Administration granted it approval to be used as a weight-loss drug in 2021, sending the stock soaring. 

It might feel rough that a trillion-dollar company is dragging its feet on paying what it owes, but when the alternative is not being a supplier to that trillion-dollar company then most firms will agree to just suck it up. That’s even the case if what they’re doing is the same thing BYD’s suppliers are doing: effectively providing their customer with an interest-free loan until they settle their account.

 

The risk in all this is that such supply-chain finance is opaque and volatile. If bad news for China’s EV industry stiffens the spines of BYD’s suppliers, it could find itself short of cash both from sales, and from partners reversing their previously indulgent attitude. Investors would do well to be aware of those risks. At the same time, it’s worth considering that the nature of supply-chain finance is that suppliers have themselves become investors of a sort.

 

It’s true, as GMT argues, that BYD’s long-payment terms are a form of soft finance from its supply chain. They are offering that soft finance, however, because they’re confident that BYD is a solid long-term bet. From one perspective, a 134-day payment delay can look like a sign of a company treading on thin ice. From another, it seems like the evidence that it’s joined the ranks of blue-chips.

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Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper