Beware of bad debt traps behind car exports
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Bad debt rate at export up to 5%
"30 billion US dollars = bad debts for overseas exports of Chinese companies", this is an equation in a recent sample survey of the Institute of International Trade and Economic Cooperation of the Ministry of Commerce. According to statistics, the bad debt rate of China's current export business is as high as 5%, which is 10 to 20 times that of developed countries.
In fact, some people from the Ministry of Commerce told the reporter that in 1990, China’s overseas bad debts had reached 10 billion U.S. dollars, and an additional 15 billion U.S. dollars worth of bad debts were added every year. On the whole, behind the huge export scale, the total amount of overseas accounts receivable of Chinese enterprises currently exceeds at least 100 billion US dollars.
What is the concept of $100 billion? According to the data from the Ministry of Commerce, last year China’s total export volume was 593.4 billion U.S. dollars, that is, overseas bad debts accounted for one-fifth of China’s total exports in 2004.
“The company has been owed millions of dollars a year. The company’s production is in a hurry to use money, and the cash flow is cut off quickly.†At the National Auto Parts Conference that had just ended, the boss of a Xiamen parts and components company had found a reporter who would bad debts overseas. Bring a stomachache to the reporter. However, the boss told reporters that this is not a new issue, because there are many companies there are facing this problem. This has also attracted the attention of reporters. What level of overseas bad debts does Chinese auto companies currently have?
Ms. Yao of the Legal Affairs Department of China Export Credit Insurance Corporation told reporters that because of the development of the automobile industry, more and more auto vehicle companies and parts and components companies have joined the army of exporters overseas, but a considerable part of these companies are facing The risk of exporting bad debts. “A lot of parts and components companies’ products are mainly exported to the US market, but the proportion of US companies selling credits is as high as 90%. Especially in May and June of this year, North American auto parts companies are in crisis, which will lead to the difficulty of recovery of automobile companies in China. As far as I know, many export companies in the auto industry are now talking about “discoloration overseasâ€, because they all have experienced “one loss, no revenue for the whole yearâ€, which makes them face more than just The problem of bad debts is a matter of survival."
The three major causes of huge bad debts
It is reported that the bad debt rate of developed country companies is only 0.25% to 0.5%, and the international average is only about 1%. So why is the bad debt rate of Chinese companies so high? Are there any prior assessments and investigations of Chinese auto companies for this possible risk? How did such a large amount of bad debts appear?
The reporter tried to make a detailed investigation of overseas bad debts of some complete vehicles and parts and components companies. However, the heads of many companies used various pretexts to evade this issue and the interview did not go well.
Ms. Yao of the Legal Affairs Department of Export Credit Insurance Company analyzed the following three reasons for the reporter:
The first reason is the rashness and the blindness when entering the international market. Due to fierce competition in the domestic market, many companies are eager to make the international market bigger in order to make performance, but also take the signing of orders as a sign of successful marketing, and they start when they do not understand the details. Supply to the importer. In addition, due to the small number of innovative products with independent intellectual property rights in China's automotive export products, enterprises often rely on pricing strategies to obtain orders, or over-adjust customers in terms of settlement methods and payment terms. Finally, companies that want to be accounted for will refuse to pay due to defective goods and poor sales.
The second reason is that Chinese companies are not active in the process of debt-recovery. Therefore, the proportion of accounts receivable delayed by Chinese companies exceeds 50%, which is much higher than that of European countries and the United States. Powerful big companies don't care about the recycling time of each payment, and small businesses always go to account because they have no experience. In our investigation, we often find that many companies have accounts receivable for several years.
The third reason is that many companies (including automotive companies) lack credit monitoring systems. According to relevant statistics, only 11% of China's enterprises engaged in import and export business have established their own credit monitoring systems, and 93% of these 11% are multinational companies with foreign capital background. In addition, products exported by Chinese companies tend to have a meagre profit, so many companies are willing to choose other settlement methods that are more risky in order to save money.
Knowing yourself is the key
Ms. Yao believes that if we want to fundamentally reduce the risk of exporting bad debts, we must first know ourselves. This requires companies to establish credit risk management systems internally and control risks from business processes. Credit risk management mainly includes credit insurance and establishment of internal corporate credit mechanisms, of which the latter is a key factor and is a systematic project undertaken by the company itself. Of the current Chinese auto companies, only some large companies have established such a system, and most of the small and medium-sized enterprises are still indifferent to this system.
According to its introduction, whether credit risk management is effective can refer to the US approach. In the last century, many American companies were once plagued by high and bad debt rates. Later, they established credit management mechanisms, established credit management departments, and standardized credit sales. In less than five years, the average bad debt rate and overdue account rate of U.S. companies have fallen drastically. What U.S. companies can do can also be done by Chinese companies.
In addition, Ms. Yao believes that companies must seize the time to recover debt, which is an important part of avoiding the risk of bad debts. It is understood that when the overdue time is one month, the debt collection success rate is 93.8%; when it is overdue for six months, the debt collection success rate has dropped to 57.8%; and when overdue for two years or so, the debt collection success rate can only reach 13.5. %.
Relevant persons also reminded us that in today’s global economic integration, China’s links with the world are becoming increasingly close. We must not only learn these rules of the game, but also flexibly apply these rules of the game in the turmoil of trade.
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