Overview of payment practices

By industry

ICT/ELECTRONICS

Overview

The Chinese ICT/electronics industry appears to have been hit by customer credit risk more severely than the domestic agri-food and chemicals/pharma industries, and reported more late payments than the industry average for Asia. The majority of industry respondents told us they resorted to taking and managing customer credit risk in house, rather than outsource it to credit insurance, which conversely appears to be more often used by their peers in Asia.

Their management of customer credit risk primarily involves a focus on cost

containment and liquidity levels, in order to protect the financial flexibility of the business. In addition to these concerns, survey respondents told us they were worried about ongoing disruptions of international supply chains and a likely resurgence of geopolitical trade tensions affecting global trade flows. However, they are also more optimistic than their industry peers in Asia about an improvement in business performance, which they believe will come mainly from a rebound in the domestic economy.

ICT/electronics businesses more exposed to customer credit risk than Asia peers

Compared to the chemicals and agri-food industries, the ICT/electronics industry in China was the hardest hit by B2B late payments over the past 12 months. With an average of 49% overdue invoices, compared to a 47% average for Asia, businesses in the industry in China are more exposed to customer credit risk, and experience more pressure on cash flow.

To minimise the impact of customer payment default on their operations, more businesses in China (71%) than their industry peers in Asia (69%) resorted to retaining and managing customer credit risk internally through selfinsurance.

The downsides of this approach

include the potential to block-up liquidity in bad debt reserves, thus increasing administrative costs for credit management. 65% of businesses (regional average: 59%) reported offering discounts for early payment of invoices. 40% delayed payments to suppliers (regional average: 38%). Despite this strong focus on collection of overdue trade debts, the DSO average is 150 days, far longer than the regional average of 110 days. This appears to be the result of less effective trade debt collection, particularly of long-term overdue invoices (over 90 days overdue), which were experienced by far more businesses in in China (41%) than in Asia (31%).

Expectations of a rebound in the domestic economy fuels business confidence

Looking ahead, more businesses in China expressed concerns over maintaining adequate cash flow (28%) than their industry peers in Asia (23%). More ICT/electronics businesses in China than Asia are also worried about the potential for on-going disruption of international supply chains and a possible resurgence of geopolitical trade tensions. however, on a more positive note greater optimism is shown by businesses in the industry in China (63%) than in Asia (42%) when predicting an improvement in their business performance (sales and profits) over the coming months. Businesses in China and across Asia believe that improvement will come from a combination of increased exports and improved conditions of their domestic

economies. however, far more businesses in China (55%) than in Asia (46%) believe that the improvement in their business performance will come mainly from the rebound of the domestic economy. Interestingly, far fewer businesses in the industry in China (4%) than in Asia (14%) believe that the expected improvement in business performance will be stemming from export trade flows. Against this backdrop, far more businesses in the industry in China (46%) than in the industry in Asia (42%) believe that trading on credit with B2B customers will play a greater role in B2B trade relationships as short-term financing tool, becoming more widespread over the coming months to allow B2B customers to pay invoices.

CHEMICALS/PHARMA

Overview

The chemicals/pharma industry ranks second In China in terms of the impact of late payments on businesses. Although survey respondents told us they resorted more often to taking and managing customer credit risk by themselves (through self-insurance) than to outsource it to credit insurance, both self-insurance and credit insurance are used more often in the industry in China than in Asia overall. This is likely to be the reason why more businesses in the industry

in China than in Asia are able to keep DSO under control.

However, amidst concern over maintaining adequate cash flow levels and containing credit management costs to protect business profitability, businesses in this sector predict growth to come from more favourable conditions in the domestic economy and global trade. In this context, B2B credit sales are expected to play a greater role as a short-term financing for customers.

Chemicals/pharma businesses more effective at controlling DSO than peers in Asia

Businesses in the chemicals/pharma industry appear to be more comfortable at managing customer credit risk than their industry peers in Asia. An average of 47% of all B2B sales were made on credit in the industry in China compared to an average 54% in Asia. 5% of receivables were written off, compared to 7% in Asia.

These differences may indicate a different way of managing trade debt between the Chinese chemicals/pharma industry and their industry peers in Asia. One striking feature is the significant percentage of chemicals/pharma businesses in China (48%) that reported strengthening their credit control procedures, compared to 39% in Asia.

Most businesses chose at least two or more credit management tools to manage their credit risks. For 75% of businesses, this involved relying on their own internal resources (self-

insurance) for the management of customer credit risk (regional average: 70%). 62% of businesses in China (regional average: 57%) outsourced the management of customer credit risk to a credit insurer over the past 12 months, as a more cost-effective way of protecting the business from the risk of payment default than retaining and managing it in-house. Whether employing self-insurance or a strategic tool such as trade credit insurance, businesses in China’s chemicals/pharma industry appear to be more effective at managing DSO than their counterparts in Asia. A reflection of this is the 68-day average DSO recorded in China, compared to the 95-day average for Asia. Success in keeping DSO under control was reported by more businesses in the industry in China (67%) than by their industry peers in Asia (48%), and DSO deterioration was experienced by far fewer business in China (25%) than in Asia (39%).

Global trade and a rebound in the domestic economy expected to drive business growth

Maintaining adequate cash flow over the coming months is paramount for the Chinese chemicals/pharma industry, as reported by 32% of businesses, compared to 25% in Asia. Containment of credit management costs is a common cause for concern for businesses in both in China and in Asia, although this is most often seen among businesses that opted self-insure. Continued disruptions of international supply chains and concerns over restriction to bank lending over the coming months appear to worry industry businesses in China more than their peers in Asia. A 52% majority of chemicals/pharma businesses in China (regional average: 57%) anticipate improvement in their business performance (sales and profits).

Businesses in both China and Asia share the opinion that this improvement will be chiefly due to improved conditions of their domestic economies. however, far more businesses in China (52%) than in Asia (41%) believe that the combination of more benign conditions in the domestic economy and of international trade will trigger improvement in their business performance over the coming months. 45% of industry respondents in China (35% in Asia) believe that offering B2B credit terms as short-term finance will become far more widespread over the coming months to give B2B customers more time to pay invoices.

AGRI/FOOD

Overview

Late payments are less common in the agri-food industry than in the other industries surveyed in China. The industry favours the use of credit insurance to minimise the risk of unpaid invoices, improve cash flow and keep DSO under control. Backed

up by the protection offered by credit insurance, businesses told us they expect credit sales to increase over the coming months, mainly to give B2B customers more time to pay invoices, rather than to boost demand from customers.

Majority of agri-food industry favour credit insurance

In contrast to the survey results for the ICT/electronics and chemicals/pharma industries, (both of which favoured inhouse retention and management of customer credit risk through self-insurance), most businesses in China’s agrifood industry use credit insurance. This includes 65% of the businesses polled, and compares to 63% in the industry in Asia. Factoring is employed by 60% of the Chinese agrifood industry and used almost as often as their industry peers in Asia (57%). The adjustment of payment terms to reflect the credit risk profile of the customer was cited by 62% of businesses in China, compared to 51% in the industry in Asia. 60% use an in-house management of B2B trade debts collection (53% in Asia).

The frequent use of credit insurance may explain why the agri-food industry shows a lower impact of customer payment default (43% of the

total value of credit sales are overdue) than the industry in Asia (49%). The same goes for the total value of B2B receivables that was written off as uncollectable. These amount to 5% in China, lower than the 6% of write-offs in the industry in Asia.

As survey findings reveal, the frequent use of credit insurance among businesses in the agri-food industry improved cash-flow and helped keep DSO under control. More businesses in the industry in China (68%) than in the industry in Asia (52%) reported stable DSO (now at a 116 day average in China and 119-day average in Asia) over the past 12 months, with increases reported more often in Asia (37% of respondents) than in China (28%). Unsurprisingly, businesses with credit insurance reported more stable DSO than those resorting to self-insurance.

Domestic economy predicated to foster improvement in business performance

Although one third of the businesses polled in both China and Asia agree that maintaining adequate cash flow will be one of the greatest challenges they will be facing over the coming months, the containment of credit management costs appears to worry more businesses in the industry in China (23%) than in Asia (17%). Likewise, more businesses in China expressed concern over a potential introduction of restrictions to bank lending over the coming months, than in Asia. 48% of industry respondents in China expect no significant change to business performance. That said, fewer businesses in China expect an improvement to businesses performance than their industry peers in Asia.

However, more businesses in the industry in China (63%) than in Asia (57%) are of the opinion that any

improvement in business performance will be chiefly due to improved conditions of the domestic economy. Interestingly, only a very limited number of businesses in China (4% of the respondents, compared to 14% in Asia) anticipate improvement to come from international trade. In this landscape, the outlook for trading on credit terms with B2B customers over the coming months is positive. Nearly 40% of agri-food businesses in China, believe that offering B2B customer credit, will become increasingly frequent over the coming months to allow B2B customers additional time to pay invoices. This contrasts with the picture for the industry in Asia where businesses are more likely to believe that B2B trade credit will be more widely used as a sales tool to boost customer demand.

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