By Peggy Hollinger in Paris for the Financial Times
Published: May 13 2008 01:36 | Last updated: May 13 2008 01:36
France risks undermining its own industrial base if the government pushes ahead with legislation that would force companies to pay suppliers more quickly, according to Volvo, the world’s second biggest truck maker.
The Swedish group says it will review its supply policy if French proposals to limit payment delays to 60 days are passed into law this summer.
“If they pass the law we will have to take that into consideration in our negotiations,” said Mikael Bratt, Volvo’s finance director. “French suppliers will have to be more effective in other areas if they wanted to keep Volvo’s business. We have a long cash conversion cycle so it is in our interests to have long payment terms.”
The French government believes the country’s poor record on bill-paying – an average of 67 days, against Europe’s 57 – has deprived its smaller enterprises of vital finances and impeded the development of a community of mid-sized exporting companies similar to Germany’s Mittelstand.
Simply reducing the average payment delay in France from the current 67 days to 60 would free up €4bn ($6.16bn, £3.12bn) a year that could be more easily reinvested in growth, the government estimates.
The initiative is one of the key planks of the new law on economic modernisation, being presented to parliament this month, and which will also demand that France’s worst offender – the government itself – settles its bills within 30 days.
Car makers argue price is only one element of a complex supplier relationship. But recognise that payment delays could pose serious problems as manufacturers seek to rationalise their supplier base to simplify procedures and share risks.
Volvo, which buys about €4bn ($6.2bn, £3.2bn) a year in supplies from France, says that it resolved the problem with a supply-chain financing scheme in partnership with financial intermediary PrimeRevenue of the US.
“We did not want our partnerships to be an issue,” said Bruno Linsolas of Volvo. “They need to be able to grow with us.”
The Swedish group says on average it pays its global suppliers within about 85 days, although official French statistics show that the car industry average runs to more than 90 days. A study showed 39 per cent of suppliers to the industry suffer even greater delays.
Christine Lagarde, French finance minister, said the car industry’s concerns were exaggerated. “We know their business model is structured in a particular way, which is why we have given them time – until 2011 – to phase in decent payment terms,” she said. “In three years it should not be too complicated to alter the business model.” But Ms Lagarde signalled her determination to press ahead, in spite of the auto industry’s concerns.
“Their business model is based partly on the setting up of contractors, sub-contractors and sub-sub contractors and at each level there are payment terms that are fuelling the competitiveness of the bottom line above.”
The small employers’ federation, the CGPME said the legislation had been made necessary by the failure of years of negotiation. In the transport sector a law passed in 2006 had brought payment delays down significantly, said Jean-Eudes de Mesnil de Buisson of the CGPME.
“Carmakers and retailers have been managing their cash on the backs of small companies. Now the rules are clear for everyone.”
But there are certain sectors that claim the government has emptied the reform of all substance to take carmakers’ concerns into account, as the industry accounts for a sizeable share of French jobs and exports.