How to optimise supplier payments in the electric vehicle manufacturing industry

India is leading the charge in embracing the electric vehicle (EV) revolution, aiming to establish itself as a major manufacturing hub for this sector. This reflects the growing momentum towards EV adoption, as evidenced by India’s total EV registration surpassing 1.5 million units in 2023—a significant jump from just over 1 million units the year prior. Even globally, EVs are poised to capture a substantial share of new vehicle sales, particularly in regions such as Europe and China. 

However, despite advancements in India's domestic manufacturing sector, several suppliers still need assistance with payment processing and cash flow management challenges. These obstacles strain supplier relationships and lead to supply chain disruptions, forcing suppliers to confront an important question: how will they maintain their cash flows and profitability while making substantial developments in innovation and sustainability?

Supply chain finance (SCF) offers a powerful solution to this dilemma. By bridging the gap between payment terms and the actual flow of goods, SCF empowers buyers and suppliers to optimise their cash flow. This entails accelerating receivables for suppliers and extending payables for buyers. Notably, it enables buyers and suppliers to combat revenue losses from payment delays within the supply chain through different mechanisms. 

But what causes payment constraints?

The competitive price and narrow profit margins prevalent in the automotive industry have severely strained manufacturers’ liquidity, leading to delayed supplier payments. This financial pressure is rippling the entire automotive supply chain, disproportionately affecting suppliers in the lower tiers. 

As delayed payments trickle down, Tier III and IV suppliers face significant financial strain, casting doubts on their long-term viability. While government initiatives incentivising EV component manufacturing aim to alleviate some of these challenges, the benefits primarily favour established companies, leaving smaller players underserved. 

In response, fintech has capitalised on the chance to support small enterprises. It streamlines the entire transaction chain, from origination to funding and ongoing servicing, driving a substantial reduction in operational costs. Through tailored financing solutions, fintech is simplifying transactions, optimising cash flow, and fostering collaboration among suppliers, thus mitigating the strains imposed by the fragmented supply chain landscape.

Role of SCF in EV production

While new production techniques and rising demand will eventually lower costs, OEMs continuously need funding for new production facilities and the working capital to maintain inventory flows as production increases.

From a financing perspective, stakeholders must manage this working capital position by swiftly reinvesting incoming cash into vehicle development, production, and sales while ensuring attractive returns for investors. Here, SCF is crucial for sustaining the entire EV production ecosystem, as suppliers rely on prompt payments to maintain their operations. 

Moreover, the digitalization of SCF optimizes the entire transaction chain, leading to improved forecast accuracy, thereby facilitating better decision-making. Properly implemented digitalization offers scalability and increased transparency, leading to better risk management. This progress ensures that the EV supply chain remains robust and helps the market grow, positioning EVs to become a $117.78 billion market by 2032.

Strong relationships can improve EV supply chains

Financial challenges, along with issues like lack of end-to-end visibility and poor quality from multiple suppliers, are damaging operational efficiency and trust within the supply chain. This underscores the need for strategic partnerships, such as supplier consolidation—to streamline processes and maintain higher quality standards by creating strong relationships with a smaller group of key suppliers. 

Moreover, collaborations between EV OEMs and digital lenders, public and private entities, and cross-industry coordination are imperative to address financial challenges through economic partnerships. As Indian companies are now beginning to integrate into the global EV supply chain, it is revealing its fragmented nature. Shortages of semiconductors, chips, electric metals, and batteries impact these companies, making technological and sourcing partnerships increasingly crucial.

Taking a step further

India has become a magnet for significant investments in EV manufacturing, attracting both local companies and overseas manufacturers. This sector holds vast potential as a driver of economic growth and environmental sustainability. By tackling challenges proactively and embracing a comprehensive approach to innovation and collaboration, EV manufacturers can establish themselves as leaders in India's electric mobility revolution.

While challenges are unavoidable, they are just a path forward for opportunities. As the automotive industry increasingly embraces EVs, suppliers who are not equipped to meet the unique demands of this shift pose risks to automobile manufacturers. It is prudent for OEMs to future-proof their supply chains by assessing whether key suppliers are taking the necessary steps to remain valuable partners in a rapidly changing landscape. This perspective has never been more pertinent as the EV sector charts its course forward.