A New Era in Chinese Auto: How Faster Payments Stabilize Supply Chains and Reward Investors

The Chinese automotive industry is undergoing a quiet revolution. Once notorious for punitive 120- to 200-day payment terms that strained suppliers to the brink, major automakers like BYD, Geely, and state-backed giants such as FAW and Dongfeng are now enforcing 60-day payment cycles by law. This shift, mandated by Beijing's SME Payment Regulation, is more than a regulatory compliance move—it's a strategic pivot toward sustainable competition. For investors, this signals a critical inflection point: automakers prioritizing supply chain stability will outperform peers mired in destructive price wars, while EV leaders like BYD emerge as clear winners in this new paradigm.

The Problem: A House Built on Shaky Foundations

For years, Chinese automakers leveraged their market power to demand staggeringly long payment terms, often using non-cash instruments like corporate promissory notes to delay settlements further. Steel suppliers, for instance, saw profit margins plunge to 0.71% in 2024 as automakers squeezed prices by over 10% while delaying payments. This created a vicious cycle: suppliers struggled to reinvest in quality, leading to supply chain disruptions, while automakers faced rising costs from unreliable partners.

The data underscores the severity: in 2024, 50% of automotive suppliers reported ultra-long payment delays (over 180 days), with 80% of such debts uncollectible. Meanwhile, Days Sales Outstanding (DSO) for the sector rose to 141 days in 2024, up from 133 days in 2023, reflecting deteriorating cash flow management. Automakers like Nio, with a Q1 2025 net loss of RMB 6.75 billion, faced scrutiny over whether they could adapt to shorter payment terms without crippling liquidity.

The Solution: Regulatory Enforcement Meets Market Realities

Beijing's intervention is no accident. The SME Payment Regulation, effective June 2025, enforces 60-day terms as a legal requirement, banning non-cash payment mechanisms. This has forced automakers to recalibrate. BYD, which historically stretched payments to 275 days in 2023, now leads the charge, while state-owned firms like FAW and Geely have publicly pledged compliance. The result? A structural shift toward healthier supplier-automaker relationships, where margins stabilize for both parties.

For suppliers, shorter terms reduce working capital strain, enabling reinvestment in quality and R&D. For automakers, this averts costly disruptions—a win-win that could finally curb the sector's chronic overcapacity. As China Iron and Steel Association data shows, steel prices have stabilized since automakers began negotiating fairer terms, reducing input cost volatility for carmakers.

Winners and Losers in the New Order

1. BYD: The EV Pioneer with Execution Discipline
BYD's early adoption of 60-day terms aligns perfectly with its leadership in the new energy vehicle (NEV) market. With a robust cash balance (RMB 42 billion as of Q1 2025) and a vertically integrated supply chain, it can afford to prioritize supplier partnerships over short-term cost-cutting. Investors should note that BYD's stock has outperformed peers by 27% over the past year, a trend likely to continue as its supply chain gains efficiency.

2. State-Backed Automakers: Cash Reserves as a Shield
Firms like GAC, Dongfeng, and SAIC Motor benefit from government backing and strong balance sheets. Their compliance with 60-day terms signals fiscal prudence, reducing risks tied to supplier defaults. For example, GAC's 2024 free cash flow of RMB 18.7 billion provides a buffer to navigate shorter payment cycles without sacrificing growth.

3. Caution: Beware of Margin Strained Laggards
Companies like Nio, with negative shareholders' equity, face a steeper climb. While forced compliance may improve supplier relations, their ability to manage cash flow under tighter terms remains questionable. Investors should favor automakers with proven liquidity and supply chain control.

Risks Still Lurk: Overcapacity and Trade Uncertainties

The sector isn't out of the woods yet. Over 50% of respondents still anticipate tariff risks post-2025, and global light vehicle sales remain vulnerable to macroeconomic slowdowns. Additionally, automakers must avoid substituting short-term payment discipline with new cost-cutting tactics, such as squeezing R&D budgets. The key metric to watch: DSO trends. A sustained decline to near 60 days would confirm the shift's success.

Investment Strategy: Focus on Stability and Innovation

Investors should prioritize automakers with:
- Strong cash reserves (e.g., BYD, GAC).
- Vertical integration reducing reliance on external suppliers (BYD, Chery).
- Government support (state-owned firms with NDRC backing).

Avoid names with high leverage or negative equity (Nio, Li Auto). The sector's volatility is easing, but selectivity is key. BYD's stock, currently trading at 25x 2025E EV/EBITDA, offers a compelling entry point, while state-backed firms like FAW provide a lower-risk play.

Conclusion: A New Blueprint for the Auto Industry

The 60-day payment rule isn't just regulatory—it's a market-driven evolution. By stabilizing suppliers, automakers reduce operational risks and enable sustainable margin growth. For investors, this is a call to back companies that embrace this new normal. BYD's leadership and state-backed firms' resilience make them the cornerstones of this transition. In an era where supply chain stability is the ultimate competitive advantage, these names are set to outperform through 2025 and beyond.

The message is clear: in the race to sustainable profitability, speed isn't just about electric vehicles—it's about paying the bills on time.