*

Some suppliers told that BYD now prefers CP or bank notes

for

payments, sources say

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There has been regulatory pressure on automakers to

shorten long

payment times, improve practices

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Suppliers get less if they cash in BYD promissory notes

early

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BYD says it has shortened payment times for suppliers

Nov 14 (Reuters) - China's BYD has told some

suppliers it wants to stop using in-house financial notes to pay

them, people briefed on the matter said - a seismic shift away

from a practice that helped power its rise but has been

criticised for disadvantaging its parts makers.

BYD, one of the world's biggest electric vehicle makers, now

wants to use commercial paper or bank notes to pay suppliers

rather than promissory notes issued on Dilian, an electronic

platform it launched in 2018, the people said.

Reuters was unable to learn the scope of the shift and the

sources, who declined to be named due to the sensitivity of the

topic, did not provide a reason for the change.

But a brutal price war in the Chinese auto industry has

battered parts suppliers who have complained about increasingly

long periods before being paid and pressure from automakers to

cut prices. That in turn has prompted authorities to issue new

rules that seek to greatly shorten payment times and improve

industry practices.

DILIAN NOT DIRECTLY REGULATED

China-focused Auto Business Review also reported last week

that BYD has, over the past two weeks, started to move away from

Dilian notes to bank notes or commercial paper.

BYD said in a statement to Reuters that its Dilian system

falls within regulatory guidelines and it has sped up payments

to suppliers this year, but it did not address queries about the

move away from in-house notes. Banks that partner with BYD did

not respond to requests for comment.

China's central bank, which regulates commercial paper and

bank notes, declined to comment.

With Dilian - whose Chinese name means "BYD supply chain" -

BYD issues electronic IOUs, whereas other automakers in China

generally use commercial paper, bank notes or cash, according to

sources.

Sources say that compared to commercial paper or bank notes,

Dilian IOUs are not directly regulated by authorities and are

perceived to carry a higher default risk. Cashing them in

earlier than the set payment date can often cost more than bank

notes.

Dilian has helped BYD keep a tight lid on costs, and the

automaker, which sells the vast majority of its cars in China,

has managed to roll out new models at a dizzying pace.

Analysts say the system allows the automaker to keep a large

pile of cash on hand, meaning it does not need to rely much on

other external sources of funding, which reduces its working

capital costs. A shift away from Dilian could prove to be a

headache for BYD at a time when sales are slowing, profits have

fallen and it is planning to invest heavily overseas.

Last year, BYD took an average of 127 days to pay its

suppliers and short-term creditors, LSEG data shows. Sources

also said some Dilian notes have stipulated that payment is not

due for periods as long as a year.

By comparison, the industry average in China was 108 days,

according to LSEG, which Reuters supplies news to. Many global

automakers often pay their suppliers in less than 90 days, while

less than 60 days is also common.

Additionally, if BYD suppliers want to cash in their notes

early with the automaker's bank partners, they do so at a

discounted rate. A discount rate of 6% for some BYD notes was

cited by some sources.

Bank notes usually have a discount rate of less than 2% if

cashed in early.

Hong Kong's GMT Research said in January that BYD's use of

supply chain financing meant the company's true net debt as of

June 2024 was closer to 323 billion yuan ($45 billion), rather

than the 27.7 billion yuan BYD reported in its earnings.

BYD did not address Reuters queries about GMT's assertions.

NEW RULES AND LOOPHOLES

BYD's suppliers can use Dilian notes to pay their own

contractors. That allows BYD to identify those lower-tier

suppliers, which helps increase its bargaining power when

negotiating prices, the sources said.

Dilian vouchers have also circulated widely outside BYD's

supply chain. A rivet manufacturer in Henan, which is not a BYD

supplier, told Reuters it received Dilian vouchers as payment

four to five times in the past two years.

Chinese regulators issued new rules that went into effect in

June, which require automakers to pay suppliers within 60 days

and stipulate that vendors can no longer be forced to accept

non-cash payments like electronic IOUs or commercial paper.

While BYD and other automakers pledged to abide by the new

regulations, suppliers say there are loopholes. For example,

automakers can delay paying by taking time to acknowledge the

receipt of goods, they say.

Separately but no less significantly, China's financial

regulators also said in April they would tighten their oversight

of supply chain financing. Issuers of electronic IOUs like

Dilian notes have been given a two-year grace period to improve

"self-regulation" and have been told to monitor credit risks

that might arise from the notes.

The changes to its Dilian system come at a time when BYD has

a lot on its plate.

Its October sales volume fell 12% from a year ago, and its

domestic market share, which this year accounts for over 80% of

its total sales, slid to 13.2% from 19.1% a year earlier.

Revenue also slipped 3% in the latest quarter, the first decline

in more than five years, while profit tumbled by a third.