China’s electric vehicle giant BYD is slashing prices to unprecedented lows, such as offering a starter EV for under $8,000, but this aggressive strategy is forcing suppliers to endure severe financial strain through delayed payments and relentless cost cuts. According to The Wall Street Journal, suppliers report that BYD often issues electronic IOUs instead of cash, exacerbating cash flow issues in an industry already grappling with overcapacity and weak demand.

Suppliers Face Prolonged Payment Delays

BYD pays many suppliers using an electronic IOU called D-chain, issued by a company subsidiary. Suppliers may wait for the better part of a year before cashing these notes. This practice disrupts their operations, as they struggle with liquidity while trying to maintain production. Suppliers describe such methods as a nightmare for cash flow, yet they comply to secure ongoing orders. For instance, Guangdong Huazhuang Technology, a BYD supplier making auto parts like brake-system controllers and cooling fans, revealed in its IPO prospectus that it receives D-chain one to two months after deliveries, with terms typically lasting six to eight months.

This raises questions about sustainability. Suppliers can sell D-chain to brokers or banks, but they lose a few percentage points in fees. Building on that, BYD’s accounts payable and related liabilities surged ninefold to $54 billion over the past five years, representing two-thirds of its total liabilities by the end of last year. Analyst Nigel Stevenson from GMT Research noted that “none of BYD’s recent growth has been financed with conventional debt,” instead relying on squeezing suppliers to fund expansions.

Escalating Demands for Price Reductions

Carmakers like BYD demand frequent price cuts, sometimes monthly, while intensifying audits. They require suppliers to submit detailed cost data, including electricity bills and worker shift records, and even visit factories to verify production details. In November, BYD requested a 10% price reduction from some suppliers for 2025 contracts, stating in a letter that “market competition will grow fiercer in 2025, ushering in a final showdown, a knockout round,” and calling for a “concerted effort from our entire supply chain to achieve sustained cost-cutting.”

This trend stems from broader economic pressures. China’s auto industry faces deflation, with factory-gate prices falling for 32 consecutive months. Profit margins in auto manufacturing nearly halved over the past decade to 4.3% in the first five months of 2025, per government data. Economist Jianwei Xu from Natixis explained that “neijuan often arises when an economy experiences unexpected downturns, particularly during deflationary periods,” adding that Chinese EV makers are “trapped in neijuan” due to large factories they must keep running amid lackluster demand.

Broader Implications for EV Market Growth

Lower EV prices benefit consumers, potentially accelerating adoption, but economists warn that this race to the bottom erodes long-term growth. Squeezed suppliers cut corners on wages, and insecure workers reduce spending, perpetuating deflation. A survey by the China Automobile Dealers Association found that 84% of dealers sold cars last year below wholesale prices paid to carmakers.

Frustration is mounting. Guo Chuan, chairman of KH Automotive Technologies, wrote in a viral open letter: “I have a dream that one day in China’s auto industry, leading automakers and large suppliers will have a social conscience.” This highlights ethical concerns in the supply chain.

Regulatory Responses and Future Outlook

Chinese authorities are intervening. In late June, the legislature revised competition laws to prohibit “obviously unreasonable payment conditions” and exclusivity agreements by large companies. Leader Xi Jinping has urged crackdowns on neijuan, and officials are investigating risks from instruments like D-chain. Under pressure, BYD and over a dozen automakers pledged in June to pay suppliers within 60 days of deliveries, though suppliers remain skeptical.

Analyst Ernan Cui from Gavekal Dragonomics argued that these moves fail to address root causes: “While the leading automakers are profitable, there is a long tail of struggling firms that should probably exit the market, yet continue to produce thanks to ample government and private-sector financing.” For EV enthusiasts, this dynamic could sustain low prices short-term but risks supply chain disruptions, potentially affecting global EV availability as trade tensions with the U.S. persist.

Overall, BYD’s approach underscores the challenges in China’s EV sector, where intense competition drives innovation but threatens stability.