The accord, reached last winter under pressure from former prime minister Dominique Villepin, calls for the automakers to pay their bills in 90 days, an average 15 days faster than they have done in the past, and the effects will ripple down the supply chain.
Application of the accord will begin from September 1, said Catherine Lejeune-Cottrau, director of communications and trade shows for the French suppliers’ organization FIEV. For the time being, the parties to the agreement are working to put in place the modalities of the accord.
French automakers have been one of Europe’s slowest payers. Renault and PSA have been paying their bills 90 days after the end of the month they were received, which amounts to an average 105 days. In Germany, for instance, rules on commerce require payments in 30 days.
French suppliers agreed to the slow pay in the early 1990s when the manufacturers were in financial trouble, but now it is French suppliers that need relief. France lost some 5,000 jobs last year in the supplier sector as factories closed, and sales of OEM parts to French automakers fell 11%.
Last November, Villepin threatened to enact a law on faster payments if the industry couldn’t agree on terms. FIEV, the carmakers’ organisation CCFA and the machine tool organisation FIM negotiated together.
The accord covers suppliers all the way down the supply chain in France and provides special protection to small suppliers and tool makers.
Companies with revenues over EUR300m a year must pay suppliers smaller than EUR50ms even faster: in 75 days starting this year, and in 60 days starting 1 September, 2008.
There is some flexibility in the matter of calculation, which reflects the various forms of business-to-business contracts. The parties agreed that the starting point of the agreed term of payment is either the date of invoice, or periodic statement date, or delivery date or execution date of the ordered services.
For moulds and tools, companies must pay 25% to 50% when they place the order and an additional 33% to 50% during development depending on job progress, with the balance on reception of the initial samples or when production starts.
Other provisions help finance the cost of development by a supplier. Automakers have mainly been repaying development costs in the piece price, which has the effect of delaying repayment of upfront engineering costs. In the future, French suppliers can bill customers for 10% of the engineering costs right away and get that repaid in 30 days, with the rest amortised in the piece price.
Special rules apply for engineering on projects where vehicle volumes are less than 30,000 units per year, or for parts projects where the cost of engineering is above EUR300,000 and the part volume is less than 10,000 units per year. In general, the rules aim at repayment 30 days after the invoice.
External auditiors will review the industry progress, and a government watchdog will report on progress to the industry minister 31 March, 2008. The industry organisations will review the situation and consider whether any changes are needed.
“Nothing is ideal in an accord, but we are happy with this conclusion,” said Jacques Monnet, FIEV’s executive secretary. Contrary to a law, an agreement implies that each party took care to get some advantage for himself.
For suppliers, the big gains are for smaller companies for whom cashflow problems are more critical. In addition, separating engineering costs from piece pricing will help generate cash.
The advantage to automakers is that 90 days remains among the longest repayment periods in Europe, and the bottom lines of PSA and Renault are unlikely to be seriously altered. Franois Loos, the minister of industry at the time the agreement was signed, said the provisions would add EUR1bn to the supply chain cashflow, but PSA purchasing director Jean-Philippe Collin said the effect would not be significant.