Do the Oems Keep Track of Tier 1 - Tier 2 Relationships?

By: Deepesh

A recent comment on SupplierBusiness caught my attention. The comment is about the payment terms of French carmakers - it seems they are bringing the payment gap down from an astronomical 105 days to a more respectable 90 days. That left me wondering about the payment terms in India.

While all OEMs have their payment terms with suppliers, the general time lapse between delivery and payment in India seems to be at around 30-60 days. That's quite good for an emerging market like India.

However, there is quite some variation in this time lag between different OEMs. While some OEMs maintain a 30-45 day lag, for some others the payment terms are quite harsh, extending up to as much as six months and many stages of approval. Maruti seems to have the best payment terms with its Tier 1 suppliers, maintaining an online transaction system - payment as soon as material is delivered is the stuff of dreams even in many developed markets.

But how are the payment terms of Tier 2s? Do Tier 1s pay the people below them in the value chain as fast as the OEMs are paying them? Do Maruti Tier 1s pay their Tier 2s instantly - I am not sure about this as the Tier 1s do not maintain an online system with Tier 2s barring some cases.

How about a Tier 1 using the cash flow from OEM payments to fuel its own expansion and acquisitions while delaying payments of its Tier 2s? Think of it, there is very little a Tier 2 can do in these cases, except request for payments.

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