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Suppliers in dire straits amid gunfire

"Either supply directly, sell on consignment, or get out."

Agent Wang Lin told Leifeng.com that starting from 2023, domestic OEMs have become increasingly powerful and started to integrate the supply chain, directly cancel agents, and sign direct supply and consignment agreements with original manufacturers, thereby "avoiding middlemen from making profits from the price difference" to achieve the goal of reducing costs.

Since it is a buyer's market, suppliers have little bargaining power. "There are four or five companies working on the same project. The car manufacturers are not afraid to do it. They can choose whether to do it or not." Many suppliers have no choice but to sign this harsh contract.

Agents actually increase the purchasing costs of car manufacturers, and now that the price war is intensifying, it is only a matter of time before agents are cancelled. "Wang Lin said that in the past two years, many agents have been "forced to transform" due to lack of business.

However, while doing so may seem to reduce transaction costs, in reality the automakers are transferring the cost reduction pressure and financial risks to suppliers.

In the traditional system, agents can mediate, to a certain extent, adjust the supply and demand relationship, improve capital turnover, and reduce the communication costs between the original manufacturer and the OEM. However, the direct supply and consignment model completely cuts off the suppliers' retreat, and much of the work has to be undertaken by the original manufacturer itself.

For example, when the original manufacturer supplies more goods, the agent can buy some of the goods and consume them externally, thereby reducing the original manufacturer's inventory level. After cutting off the agent, the original manufacturer deals directly with the OEM and loses a buffer zone. "The direct supply terms of the car manufacturer are extremely harsh. Whether it is quality problems or shortages, which lead to the inability to withdraw cash later, the original manufacturer will be responsible."

However, under the threat of "ending cooperation if the agreement is not signed", the original manufacturers had no choice but to sign and seal the contract. In addition, many suppliers still believe that the direct supply terms are a bit harsh, but at least they have entered the supply chain of large manufacturers, and they can sell more than before, and they are dreaming of "winning by quantity".

However, this is just wishful thinking on the part of the manufacturer.

Lies of scale

Under the direct supply model, the original manufacturer supplies the car companies directly, which in theory can achieve "small profits but quick turnover" and realize the scale effect growth flywheel.

The reality is that due to the large number of suppliers and overcapacity, in a buyer's market, car manufacturers will only lower prices indefinitely and estimate prices based on bom costs.

Li Li, head of the purchasing department of a car factory, told Leifeng.com, "The profit margin of the OEM is actually between 5 and 8 points, while that of the supply chain is between 10 and 15 points. The car factory can continue to push it down" because "the advantage is with us. We have to reduce it every year. This is the KPI set by the group."

"They will only cut prices mercilessly, and cut again and again," the supplier Dali told Leifeng.com. Some OEMs purchase under the banner of small-volume imports, and they will first offer "friendly prices" and everyone will "give some consideration" for the first cooperation. When they need to import in bulk, they will bring out the killer weapon of "increasing the volume" and demand to buy at a price lower than the friendly price.

During the bidding stage, OEMs also kept pace with the times and adopted new real-time bidding strategies.

In the past, suppliers had to make independent quotations with a certain grace period. Dali said that in the past, suppliers had time to "collude" to prevent malicious price cuts to protect market share and share profits. In real-time bidding, several suppliers freely quote at a fixed time. Friendly suppliers cannot see each other's quotations, but can only see their own quotation rankings. In this case, in order to get more market share, all parties will only bid lower and lower.

"Prices were quoted every six months before, but now they are quoted every quarter, and they go down a little each time. Once they are offered, they will continue to go down until there is only a 5-point profit, and they can't go down any further."

Just like the six states of Shandong who knelt down and begged for peace in Jia Yi's "On the Qin Dynasty" -

"Today I will cede five cities, tomorrow I will cede ten cities, in order to beg for profit."

Downstream car manufacturers cannot bear to see upstream suppliers earning more than them. Except for some original manufacturers that cannot be avoided, such as NVIDIA - the tier 1 that the OEMs have to submit to can say no, the rest of the suppliers have to bear it silently. Even for those original manufacturers with certain core technologies, car companies will introduce a supply-A-B model to let suppliers compete with each other in order to get more favorable prices.

"In order to increase the volume, many factories are working hard to earn money, and some are even losing money." Gao Yun, the original factory manager, said that his own products are 700 to 800 yuan, and the industry average is more than 600 yuan, but competitors directly supply more than 300 yuan, which is directly cut in half and is bound to be a loss. Their logic is that even if they lose money, they still have to create benchmark customers and expand cooperation, "tell people to bluff", and rely on the brands of some well-known OEMs to make money in the capital market.

The car manufacturers also know that the original manufacturers want to rely on the big tree, and they can control the psychology of suppliers to lower prices unscrupulously. Gao Yun told Leifeng.com that to some extent, the relationship between the two is "Zhou Yu fighting Huang Gai - one is willing to fight and the other is willing to be beaten". The original manufacturers chose the former between market share and profit - this is essentially no different from the OEM choosing sales volume over profit.

This strategy is only suitable for large-scale original equipment manufacturers. For more small and medium-sized suppliers, there is no room for bargaining in front of powerful OEMs. "If you don't do it, there will be a lot of people doing it, and if you do it, you won't make money, which is equivalent to chronic death." In addition to lowering prices from the beginning, OEMs have another trump card - payment period and settlement method, which has become the Achilles' heel hanging over the heads of original equipment manufacturers.

“6+3+N”

"The days of 60 days for wire transfer are gone forever," sighed supplier Wang Qiang. Times are tough, and supplying goods to car manufacturers now is no longer a contractual relationship, but a "creditor-debtor relationship."

In the past, as long as the goods were delivered, the payment would be made by telegraphic transfer within 60 days. Even if there was an occasional delay, it would not be too long. The capital turnover efficiency of the original manufacturer was very high. Now, asking the OEM to pay is like borrowing money to collect debts. The debtor has become the grandfather, and the borrower has become the grandson. The payment period is getting longer and longer, and the settlement methods are getting more and more complicated.

"From 60 days to 90 days, and then to N days." Wang Qiang saidThe time of settlement depends on whether the relationship is strong enough and whether there are acquaintances. The original cooperation has not been delivered yet. According to the previous model, new suppliers are basically "6+N", and no one knows how to calculate this N.

In addition to the payment period, the settlement method has also gradually evolved from the original telegraphic transfer (cash) to commercial bills. "Bank acceptance is still acceptable, after all, as long as you go to the bank to ask for money with complete procedures, you can probably get it back; but many car manufacturers have started to use commercial acceptance, which is very uncomfortable."

"Commercial contracts are just blank checks issued by car manufacturers, and the settlement rights are in the hands of the OEMs." Wang Qiang complained that some companies would pay on time, but some might not. "You (suppliers) can't ask the bank for discounts in advance, otherwise you will lose interest, so you can only wait." This wait may last forever.

Sometimes, due to the pressure of capital turnover, the factory director has to go to the financial department of the car company to beg for help, and in the process, he will be cheated. "I'm thankful that I can get it back," Wang Qiang told Leifeng.com. Some of his friends have received commercial bills worth tens of millions of yuan, but they have not been paid. There are one or two hundred people in the factory waiting for their wages, "and everyone is going crazy."

Low-price purchases, supply from one supplier to another, delayed payment, and acceptance... With this combination of punches, car manufacturers have made their suppliers obedient, and the latter can only swallow their anger and dare not speak out. To make matters worse, some OEMs have begun to take back purchasing rights from their sub-brands and intend to implement a centralized purchasing model, preparing to cut costs again, which has made the already bleak suppliers even more uneasy.

Is centralized procurement by OEMs a win-win or a lose-lose situation?

Under the price war, the profits of OEMs have been greatly reduced. According to the data of the National Bureau of Statistics, from 2017 to 2023, the profit margin of the automobile industry has dropped from 7.8% to 5.0%, and many automakers have fallen into the embarrassing situation of increasing revenue but not profits.

In order to protect their financial reports, car manufacturers choose to seek profits from upstream suppliers. The most effective way is to conduct "centralized procurement" to reduce prices by increasing volume.

According to Leifeng.com, Geely has completed the purchase adjustment, taking back the purchase rights of its major sub-brands including Zeekr and Lotus, integrating the resource pool and personnel, and the purchase is approved by the group. A certain car company had a "centralized purchase" plan a year ago, which was pushed down in the form of group supervision, but due to too much resistance to the implementation, it was interrupted for a time and restarted recently.

From a group level perspective, “centralized procurement” brings many benefits. After unified management of suppliers, the links of interest transfer can be reduced.

Lin Yong, a purchasing employee of a main engine factory, told Leifeng.com,"Previously, some car manufacturers' procurement was 'rather chaotic', with the group, sub-brands and even factories having the right to decide on suppliers, resulting in more than three or four suppliers for one component."

When car manufacturers integrate their purchasing resource pools and implement centralized purchasing, it is difficult for sub-brands and factories to find loopholes in purchasing. On the one hand, it reduces unnecessary transaction costs, and on the other hand, it is easier to bargain with suppliers to get more favorable prices. Lin Yong revealed that after merging the software purchases of different models, more than 60% of costs can be saved.

However, as the saying goes, "Misfortunes often come with blessings, and blessings often come with misfortunes." Centralized procurement has inherent advantages, but it also has many problems.

How to unify rights and responsibilities?

"Profit = selling price - cost". This famous Toyota formula has been used as a reference by many car companies. The essence of this formula lies in the ultimate cost control. In Toyota's philosophy, the market price of a car cannot be accurately determined. In order to create real profits, the only way is to work hard on costs.

Therefore, in order to ensure profit margins, Toyota must take cost improvements into consideration throughout the entire process from design to mass production of each vehicle.

Since car companies' assessment of sub-brands is mainly based on revenue and profit, under this formula, in order to complete the assessment, the sub-brand must have the power to mobilize resources to improve costs, and purchasing power is one of the branches of power.

When the group takes back the purchasing rights, the sub-brand loses a means to complete the assessment.

"If the group takes away the purchasing power, the group will have to bear the responsibility for profits. If it does not, that would be abnormal. You take away the power yourself, and then ask the people below to create profits. How can they create profits?" Lin Yong said that this would undermine the autonomy and initiative of the sub-brands.

A certain automaker was previously unable to implement "centralized procurement" from the group level downwards because of the need to unify responsibilities. "Each brand and each model has its own ideas, and suppliers also have their own demands. In the end, when all were brought together, the model was directly rejected with one sentence: 'You can do this, but you are responsible for the quantity of the cars, and I am not.' No one dared to respond to this."

The purchasing power was taken away, and the sub-brands' voice in suppliers was also weakened, which endangered their ability to innovate. "Centralized purchasing means being out of touch with technology and the market, and a lot of information cannot be obtained," said Mei Feng, a purchasing director of a main engine manufacturer, who was very wary of this.

"It's very simple for the group to set prices from a high position. After setting the prices, suppliers will take advantage of you. I only need to deal with the upper level. I don't need to listen to the process improvement and technology improvement requirements from the lower level. Why should I improve? I will supply you with the points and prices set by the upper level. You have no right to object."

Sub-brands can use their control over purchasing to promote their internal technical centers and quality departments, maintain communication with the purchasing department and suppliers, and continuously improve technical solutions and processes. "If the improved process is effective in reducing costs, it will be implemented immediately."

Mei Feng, who has been in charge of supply chain procurement for a long time, believes that only materials with very simple standards, such as steel, are easy to purchase in bulk, and "it must not be a one-size-fits-all approach."

For example, materials with strong versatility, such as MCUs, can be reduced in cost through centralized procurement to cope with price wars. However, centralized procurement of specialized and less versatile materials may be counterproductive, lengthening the procurement process, making it inefficient, and failing to keep up with changes in market supply and demand information, resulting in inventory backlogs.

A supply chain employee of a small OEM told Leifeng.com that the procurement chain has been lengthened, efficiency has slowed down, and sub-brands are not feeling well. "Because we don't know how the production and sales of other brands in the group are determined, and how much production capacity the group will allocate to us, we can only work hard to fight for it, and keep battling, so the communication cost is high."

For suppliers, centralized purchasing means that the procurement chain will be lengthened and the payment period will be extended. The OEMs can transfer inventory risks to suppliers, which is a huge hidden danger.

Suppliers must be very vigilant and "consider whether there is so much demand in the market." Although they can make small profits but quick turnover, they also bear the risk of greater volatility. Once the OEM's information judgment is wrong, the suppliers will be the ones who suffer the most.

Therefore, the centralized procurement model seems to be able to achieve "win-win" results, but in fact it also lays the potential for "multi-loss".(In addition to procurement, it is already a major industry trend for large car companies to recycle resources such as R&D into a central location. For this topic, please add the author’s WeChat ID stj09twinkle for communication and discussion)

Beware of the localization of auto companies

“It’s harder to collect debts.”

Supplier Zhang Peng described "centralized procurement" in this way. In the past, when supplying to small OEMs (relative to the group), he could get paid quickly by relying on personal relationships. After centralized procurement, he could only ask the group's financial department for money, which was as difficult as climbing to the sky: he didn't know anyone, and he had to go through a long process. "I had to run around again, and I had to serve them well before I could settle the bill."

For example, some companies implement a quota system when doing commercial acceptance. That is, the number of acceptances in a month is limited, nominally on a first-come, first-served basis, but in reality it also depends on connections. Those who have no connections or are slow to act are often turned away and cannot be honored, and can only wait in line for the next month's settlement, which is equivalent to extending the account period by another month.

The payment period was extended when the cooperation was being discussed, and then extended by another month or two during the settlement phase. This model made many small and medium-sized suppliers miserable. "The production line cannot be stopped, and if it is stopped, the loss will be greater, but the supply cannot be paid, and the capital turnover is very difficult."

But the OEMs do not "empathize" because the longer the payment period, the greater the advantage, and the more they can control the suppliers. In the context of oversupply, suppliers have lost the courage to say "no" to the OEMs.

Another purpose of the OEMs extending the payment period is to collect payments through cards and engage in financial business.

Zhang Peng told Leifeng.com that the OEMs have money in their accounts, but they don't pay, or pay in installments or delay payment, paying a little today and a little tomorrow, so that suppliers can't fall out with the OEMs. Moreover, "this amount of money is not a small amount, ranging from tens of billions to tens of billions. Even if it is deposited in a bank, the interest is a considerable income."

Investor He Qiang believes that this model is "equivalent to the OEM obtaining low-interest financing by extending the payment period, with extremely low costs and high returns." It is very similar to the way real estate finance works - relying on pre-sales to recover a large amount of funds in a short period of time, but blocking the project payment and using the funds to carry out high-profit financial business.

"According to the current gross profit margin of the OEMs, it is very stressful to feed so many people." He Qiang said that a car factory has tens of thousands of mouths to feed, and the cost of food, drink, and defecation is a huge sum of money, not to mention that they have to invest a lot of money in the research and development of intelligent driving. The cash flow of many OEMs is not optimistic. Therefore, to some extent, it is a last resort to "move funds" through the credit period, and the only way is to "make suppliers suffer."

It is worth noting that this approach is extremely prone to bank runs.

"Suppliers also manage expectations. When the sales volume of OEMs continues to grow, delayed payment may not be unacceptable and they can just get by. However, once sales volume declines and confidence in expectations is insufficient, a run on the bank will occur, triggering a chain reaction."

Therefore, both OEMs and suppliers should not be blindly optimistic, but should put risks in place and make financial plans in advance, especially small and medium-sized suppliers with weak capital chains.

Small and medium-sized suppliers break through

Zhang Peng recalled that he used to be very happy to make money in the automobile business. But now it is a general trend for OEMs to engage in centralized procurement. The price sickle is cutting down the supply chain without any emotion. All he will earn in the future will be processing fees and hard-earned money. In order to survive, "you must make plans early." Friends around him have already started to be tempted.

For example, some have optimized their supply systems and concentrated their efforts on supplying goods to partners with good qualifications and credit. They would rather "have less quantity and lower price" but be able to get paid on time to ensure the normal flow of the company's funds.

For example, some manufacturers simply changed the table and stopped participating in the automotive business, looking for some small and beautiful directions, similar to consumer parts in the automotive aftermarket, which have small quantities but relatively high profits.

Those who really can't make it will just close the factory, pay off their debts, and switch to being a Didi driver.

"Under the current situation, balance sheet reduction is more important than anything else."

Zhang Peng said that it is difficult to do business with long payment terms. Although there is a payment for goods, each order is a loan, which is difficult to get back and may become a bad debt. If the production line is expanded to increase the volume, the risk is very high and the debt-to-asset ratio will be very high. Once the money cannot be obtained, it will be irreversible.

"No one knows how long this phenomenon will last or when it will end."

The industrial chain calls for a return to rationality

Everyone can hear the dealers complaining, but in reality it is the supply chain that is really suffering, and their cries are drowned out by the cheers brought by the price cuts by the car companies.

Supplier Wu Feng told Leifeng.com that the price war among car manufacturers has made the entire industry chain a mess, and neither dealers nor suppliers can make money. Consumers seem to get a discount, but in fact, the sheep are the ones who pay for it.

"Car manufacturers are reducing costs, and the bulk of the cuts are from suppliers. To make a profit, the company must increase production and ensure delivery. They can only arrange for employees to work overtime, from three shifts to two shifts, and the quality of the materials used will also be uneven."

In the price war, consumers can indeed buy cars at lower prices, but the quality is difficult to guarantee.

"It used to take almost two years from the introduction of materials to the mass production of models. Now, some car manufacturers can launch new models every quarter. The speed is extremely fast. The high efficiency will cause quality control problems. For example, if industrial specifications are used instead of automotive specifications, it may be fine for one or two years, but it is unclear after that."

Moreover, consumers are also producers. Consumers in one industry are producers in another industry. The essence of price wars is that car companies cleverly cover up their exploitation of suppliers under the banner of "giving benefits to consumers". The profit margin will eventually be transferred from suppliers to ordinary consumers.

However, under the car companies' overwhelming propaganda of "who is lower than who", this contradiction has become the "core competitiveness" of car companies after a series of packaging.

“It’s pretty sad.”

Wu Feng said,It is reasonable for automobiles to reduce costs. This should be in line with market rules, such as economies of scale brought about by mature technology, rather than downstream OEMs relying on their leading position to force suppliers to reduce costs by 15% this year and 20% next year, and continue to roll back. The strength of the automobile industry does not rely on car companies alone, but on the prosperity of the entire industry chain.

"Foreign brands such as BBA, Honda and Toyota have successively withdrawn from the price war. On the surface, it seems that the effect of exchanging price for volume is not good, which has lowered the brand tone; in fact, their supply, production, sales and service systems cannot support such high-intensity competition."

Another supplier, He Qiang, also believes that in the face of sales and profits, brands such as BBA have chosen to protect profits, which is the only way to maintain the operation of the ecological chain. "According to the way domestic car manufacturers are doing, the supply chain system of foreign brands will be stretched and then collapsed", so they decisively chose to withdraw, which was a last resort.

The world has suffered from price wars for a long time. "Everyone is looking forward to the price war ending soon." If the price war continues, suppliers will not make money. "We have received tens of millions of business contracts, but we don't know how to cash them." Over time, these accounts receivable have become bad debts to some extent. "If we can't get the money, we can't pay wages. The workers are anxious, and the bosses are even more anxious."

He Qiang said that the entire automotive industry chain is now in a dilemma: in the price war, the OEMs want to protect their profits, so they try every means to cut costs, send letters to suppliers requesting cost reduction, and require employees to work overtime to contribute; "increasing quantity without raising prices" actually gives the profits of one group to another, and the OEMs make a profit from the difference. This model of dodging and maneuvering has not generated more profit value, but has instead caused the entire industry chain to be "lifeless."

Of course, this does not negate the benefits that price wars bring.For example, consumers have indeed benefited from it, buying decent cars at lower prices; for another example, some domestic supply chains have been able to enter the OEM system and complete partial domestic substitution; for another example, this kind of internal circulation can also, to some extent, clear out inferior suppliers and force suppliers to upgrade.

Specifically speaking about the OEM's purchase adjustment,Group purchasing is more conducive to OEMs to push down prices upstream, and car companies have more bargaining power.For suppliers, the situation will get better for some and worse for others. However, the original equipment manufacturers who are already in this price war all want to break out of this "siege".

As investor Jiang Hai said: "In the context of consumption downgrade, the price war is essentially a 'surgery' to remove excess production capacity." Any surgery will definitely hurt the whole body, especially the parts near the surgical center, which will inevitably suffer the pain of cutting flesh. At this stage, it is difficult to evaluate the effect of this surgery. The only thing that can be confirmed is that the quality of the surgery depends on the level of the doctor.

The automotive industry chain is undergoing such a deep operation, and the final outcome is difficult to predict.

But people who are in the tide of the times will inevitably experience the pain of transformation.