Recently, a letter signed by a senior executive at a Chinese automotive company has garnered considerable attention, sparking significant concern within the industryThe email, which was sent to suppliers, demanded a 10% price reduction on all supplied products starting from 2025. The responses from suppliers were rife with expressions of "strong dissatisfaction," highlighting the growing tension between car manufacturers and their essential partners.

The automotive industry is recognized as the most complex segment of mass production, characterized by a vast network that includes thousands of individual components, raw material procurement, parts suppliers, vehicle manufacturers, and dealers handling the final product deliveryTo navigate this intricate supply chain, various players operate within specific rolesUnfortunately, component suppliers often find themselves in a vulnerable position compared to the larger manufacturers, grappling with the immense pressures to cut prices that are frequently passed down from automotive companies

As the production and sales scale of complete vehicles expands, these pressure points tend to intensifyWith the costs related to tooling and assembly lines becoming more distributed, Many auto parts suppliers are now being squeezed into precarious situations, further complicating their financial realities.

This annual price negotiation, colloquially known as “year-on-year depreciation,” is considered an industry standardNonetheless, this specific request for a drastic price cut has triggered palpable discontentIt suggests a departure from the usual bargaining toward a more aggressive and untenable directionThe situation is exacerbated by the intense competition within the automotive sector over the past year, leading to multiple price reductions that have not translated into profitability for numerous manufacturers, thereby further squeezing supplier marginsThe recent release of the "2024 Global Automotive Supply Chain Core Enterprise Competitiveness White Paper" indicated that the profit margin for China's top 100 auto parts manufacturers stands at a mere 7.2%. If these suppliers were to suffer a further reduction of 10%, it would almost certainly plunge many into a state of loss, diminishing the viability of their operations.

In addition to price pressures, the delayed payments by car manufacturers have become a critical source of concern

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Reports indicate that multinational automotive firms operating in China generally maintain a shorter payment term with suppliers, demonstrating more efficient financial management practicesFor instance, companies such as BMW have shortened their payment cycles to between 30 and 45 days, while Tesla maintains approximately 90 daysIn stark contrast, many domestic automotive companies exhibit significantly lengthened payment periods, a trend that is weakly worsening over timeThis elongated payment cycle alleviates liquidity pressures on manufacturers but simultaneously increases the operational costs and risks faced by suppliers.

Painful as it is, the data garnered from financial reports does not necessarily indicate that suppliers receive payments on timeManufacturers often employ banking instruments such as promissory notes to delay settling accounts, creating a widespread issue that further complicates suppliers’ cash flow management

Most automotive component suppliers in China are small to medium-sized private enterprises that struggle to secure working capital from banksAn extended payment period, coupled with financial instrument manipulation by dominant manufacturers, exacerbates an already precarious situation, placing additional burdens on suppliers.

While it is understandable that automotive companies seek to enhance competitiveness in passenger vehicles, such improvements should ideally stem from advancements in product innovation, quality enhancement, brand establishment, and service improvement rather than engaging in ruthless pricing wars that disregard ethical business practicesThe current climate, in which price competition has reached fever pitch, means the additional benefits suppliers receive from driving down costs are diminishing rapidlyIn the past, there have been calls to bolster industry self-discipline to avert harmful competitive practices; however, the escalation of price wars poses risks that are detrimental across the board

Excessive competition without regulation could yield severe repercussions, resulting in suppliers cutting corners to lower costs, thus undermining product quality, which ultimately affects not just suppliers, but also manufacturers and the entire supply chain relationship.

A healthy relationship between manufacturers and suppliers is fundamental to cultivating a robust industrial ecosystem and is pivotal in driving the sector towards sustainable high-quality developmentInternational experience in automotive industry growth demonstrates that strong suppliers correlate directly with the overall strength of the automotive sector itselfFor China to ascend to the ranks of global automotive powerhouses, it is imperative for leading firms to identify and nurture exceptional suppliers while upholding a win-win philosophy that factors in long-term industry sustainability and benefitsBuilding and fostering a cooperative, healthy ecosystem along the supply chain is essential for mutual success.