Not getting paid for goods delivered has become a huge headache--and constraint on growth--for foreign investors in China. Some have found creative solutions
By Trish Saywell/SHANGHAI
Issue cover-dated July 6, 2000
WITH CHINA POISED to enter the World Trade Organization, a fresh wave of foreign investors is preparing to take the plunge into its huge market. But as they do so, these newcomers should learn a hard truth from their more seasoned, battle-worn predecessors: Just because you make a sale, it doesn't mean you will get paid for it.
It's a headache only too familiar to Stanley Chan, senior vice-president of finance at Thailand's Ek Chor Industrial Group, which has nine joint ventures in China. One of them, a motorcycle plant in Luoyang, Henan province, had accumulated bills for unpaid goods worth 100 million renminbi ($12 million) by early 1998. "That's a lot of money," says Chan. "These losses affect our bottom line."
Ek Chor played hardball with the delinquent debtors. It took 20 companies to court, including five of its largest distributors, and won nearly all the cases. But Chan says Ek Chor will be lucky to get back 35%-40% of the debt. About a third of the debtors claim to be broke, he explains, while another third have offered up a rag-tag assortment of assets--secondhand cars, household appliances, office furniture--that he must try to convert into cash. The remaining third have promised to work with Ek Chor to reschedule their debts on 12- to 18-month repayment plans. To control the problem, the company now cuts off errant customers, puts supervisors in the offices of its distributors, offers fewer goods on credit and demands more payments in advance.
So, add "receivables"--goods sold but not yet paid for--to the long list of problems facing companies in China. On top of well-known woes such as competition from fake goods, inept joint-venture partners, local protectionism and opaque regulations, simply securing payment for goods delivered is one hassle that's often overlooked by eager new investors.
Outstanding accounts receivable are starving many companies of working capital and constraining their growth. The problem creates unnecessary work for staff and consumes the time of managers, increasing the cost of doing business. Accounts receivable that go unpaid for two years are classified as bad debt in publicly listed companies; the period varies in other companies. Trading and manufacturing firms, on average, have most bad debt, and some industries suffer more than others, according to a 1999 report by Dun & Bradstreet.
The problem afflicts foreign and domestic firms alike. Some of the best-known Chinese companies are finding their dreams of going global tripped up by so-called triangular debt: As more and more state-owned enterprises go bust, they're defaulting on payments to suppliers, which in turn can't pay their own suppliers, creating a chain reaction of cash-flow problems.
Last year, receivables at consumer-electronics giant Sichuan Changhong Electric climbed to $580 million, or 44% of its sales; refrigerator and washing-machine maker Haier had receivables of $80 million, or 16% of sales; and television maker TCL posted receivables of $23 million, a shocking 59% of sales.
In tackling their accounts-receivable problems, some companies are taking a conservative approach, such as tightening up on credit to customers and investigating their finances.
Nike, for example, has tightened up so sharply on credit terms that it has impeded its expansion in China. Burned by bad-debt problems in the past, the sporting-goods giant has cut off "problem" customers. It now picks new customers more carefully and is more rigorous in its financial dealings with them. "Nike avoids bad-debt problems in China by avoiding bad-debt risk," says Dan Loeb, general manager of Nike (Suzhou) Sports. "There is no doubt that this strategy inhibits the pace of business growth and development but we feel that it is the best course for the long-term health of our brand and business in China."
Other companies have come up with a variety of creative ways to control the problem.
Asimco, a maker of automotive parts, last year started giving the managers of its 17 joint ventures financial incentives to chase up outstanding accounts and avoid bad debt. Their incentives and bonuses are now calculated on the basis of each joint venture's annual earnings. And those earnings are affected by accounts receivable. If, for example, a receivable goes past six months, the joint venture takes a charge against earnings worth 25% of the outstanding bill; if it goes past a year it takes another 25% charge. "Since these managers are paid and evaluated on earnings this acts as an incentive," explains Jack Perkowski, Asimco's chief executive. "All our managers know that if they want to sell to traditional customers who don't pay, they're going to get penalized."
Still, in some of its joint ventures, Asimco receives about a third of its payments from state-owned enterprises in kind. This comes each year in the form of $10 million to $15 million-worth of trucks that it then tries to pass on to suppliers or sell in the market place. Some of its joint ventures have even set up special units to try to sell the vehicles. "It's a pain in the neck," says Perkowski. "It's tremendously inefficient." Asimco now aims to increase its sales to customers overseas and foreign joint ventures in China--who are more reliable about payment--to more than 50% of total sales by 2002, up from the current 25%.
That sort of solution has already been adopted by Swiss Timcal Group, which operates a plant in Changzhou, Jiangsu province, making graphite products used as lubricants in the steel-processing industry. General Manager David Anderson says his company was "suffering very badly" from receivables problems and stopped selling to two of its five big state-owned customers. Turning its business strategy on its head, Timcal now exports 80% of its output. The company's original target was to export just 20% and sell the rest to domestic buyers.
To lessen the risk of nonpayment, consumer-goods giants Procter & Gamble and Gillette now demand mortgage guarantees, meaning a debtor would forfeit his property if he doesn't pay up, and other payment guarantees.
Since the end of last year, Gillette has requested third-party guarantees from many of its customers. The third party could be the customer's parent company, a subsidiary or even the company of a friend willing to vouch for him. Gillette, the customer and the guarantor sign a contract stating that if the customer doesn't pay for goods bought, the guarantor will pay on his behalf.
"With a third-party guarantee we can immediately take action against the third party and demand the money," says David Chen, Gillette's legal counsel in Shanghai. "It's quite effective to press the client to repay."
Gillette is also paying closer attention to customers' business licences to see how much capital was registered when they set up, as well as examining financial statements to determine their assets, sales volume and sales channels. The efforts are paying off. "In the old days we would only recover about 20% of the debt," says Chen. "Now we can recover more than 50%."
Sometimes, the best solutions are the simplest--and the sneakiest. Jack Sun, head of Flow UHP Waterjet Technology Shanghai, started putting electronic passwords on his company's industrial-strength water jets, regardless of the type of customer. If they don't pay up, he activates the password and the machine can't be switched on. "It helps a lot," says Sun. "Now some of our customers are really trying to pay us back."
The road to profits in China is hard and long. Of 70 multinationals surveyed by A.T. Kearney in 1998, only 41% were able to claim profits. The rest were either losing money (34%) or merely breaking even (25%). Only 25% of the companies said they were confident of exceeding profit targets in the following three years. Of the 50 manufacturers surveyed, only 38% reported that they were making a profit.
--------------------------------------------------aber vielleicht macht ja Li seine Gewinne in vier Jahren woanders