Highlights of the Euler Hermes Survey (May 2018) by Marc Livinec
- In 2017, the average DSO increased by +2 days in 2017 to 66 days. It should increase by +1 day in 2018
- The US, part of the Eurozone and China experience the highest in- crease in DSO
- Upstream industrial sectors such as Electronics, Machinery and Con- struction have the highest DSO
The return of growth and trust dis- tract attention from payment discipline
As shown in chart 1 , there is a clear correlation between DSO and glob- al economic activity as measured by GDP growth. The economic and financial crisis of 2007-2008 had led companies to closely monitor or accelerate debt collection, reflected in the sharp fall in DSO (-5 days, to 60 days in 2008 on average). The return of growth then allowed DSO to rise to 64 days where it stayed constant from 2012 to 2016 before the back- drop of +2.8% p.a. average GDP growth. We interpret the latest in- crease in DSO as a certain lowering of the guards and greater trust as a result of stronger growth and optimistic short-term macroeconomic forecasts: GDP growth reached +3.2% in 2017, after +2.6% in 2016. We expect a similar dynamic in 2018, with global DSO rising by one more day, to 67 days.
Widespread lengthening of payment periods
Across our sample of 2000 listed companies across 20 sectors and 36 countries, DSO rose by +2 days on average globally, reaching 66 days at the end of 2017. After five years of stability at 64 days, DSO reached a ten-year high. Moreover, the spread of DSO around its mean increased in 2017, with one company out of four being paid by its clients within less than 31 days, but one out of four being paid after 90 days. This com- pares to one out of four companies achieving payment within 88 days in 2016.
The lengthening of DSO reflects a relaxation of payment standards between companies. As global economic health is improving (see chart 1), companies tend to trust their clients to pay them – despite the in- crease in insolvencies of large companies.
The increase in average DSO in 2017 stems from a global trend observed in most countries. As shown in chart 2, DSO increased in 2017 in two thirds of the countries in our universe. For the most part, they are developed countries, but some are large emerging economies, such as China and other Asian countries, but also Turkey (+3 days) and Brazil (+1 day). In China where the average DSO already by far exceed the glob- al average, DSO rose by a further +3 days in 2017. By early 2018, it reached 92 days. It is worth noting that DSO increased in twelve sectors out of eighteen in China, compounded by the share of Chinese companies with DSO that exceeded 90 or even 120 days.
In light of relative levels of DSO (see chart 3), three main groups of countries emerge with respect to the global average:
- The seven strongest countries have an average DSO inferior or equal to 51 days, the country with the lowest DSO globally being New- Zealand with 43 days. Other countries with short averages are the Nordic countries (Denmark and Fin- land), Austria and Switzerland, the US and eventually the Netherlands despite the four-day rise due to the strong increases in the telecom, technologies and support services sectors.
2) The group of 7 other countries for which DSO stays below the global av- erage, comprises amongst others Ger- many (54 days), Canada (54), Brazil (62), and the UK (53) in which it is sta- ble despite uncertainties due to Brexit. We find it noteworthy that Russia is part of the group, with DSO decreasing by +2 days to 56 days, with one quarter of companies being paid under 22 days.
3) Finally, the remaining group of 12 countries with an average DSO superi- or to the global average of 66 days, such as France (74), Italy (83). China has the highest average DSO (92 days). With respective average DSO of 74 days and 83 days, Portugal and Turkey should be closely monitored as almost one company out of four is paid after four months in these two countries.
The average DSO grew in two-thirds of the countries, being above average in both construction and upstream industrial sectors.
We note increasing DSO in almost all sectors while four sectors particularly stand out: Aeronautics (+4 days in 2017, +12 days since 2012), Automotive (respectively +3 and +7), Construction (+3) and Electronics (+3), the sector with the highest a DSO in our universe. There are only four sectors with stable DSO (Food, Household equipment, Machinery, Recreational goods) and two with decreasing DSO y/y (Pharmaceuticals and support Services). DSO is once again far higher in B2B than B2C activities.
The longest DSOs are in sectors with long manufacturing processes, i.e. Aeronautics (72), Automotive (72), Machinery (87) and Electronics (91). DSO in all of these sectors exceeds the glob- al average of 66 days by +6 days or more.
This is also the case for Chemicals, with a DSO of 73 days on average. It is no surprise, as it is a supplier to all industrial activities.
Construction is one of the three sectors with the highest DSO with 85 days: this stems from public works and infrastructures, but also from increasing delays in real estate programs. Not overly surprising given the heterogeneous nature of the sector, there is great divergence around the mean. DSO in the Energy (63 days), Metals (58) and Paper (62) sectors stand below our global average. However, the metric for the two former ones increased by +3 and +2 days in 2017, respectively, as a con- sequence of the increase in commodity prices. As for the Paper industry, the +1 day increase to 62 days can be explained by the rise in online sales.
Finally, Pharmaceuticals is the only B2B sector with a decreasing DSO (-2 days) in 2017, albeit still with (78 days), linked to its particular customer base – mainly public health insurance systems.
At the other end of the spectrum are sectors closer to the end consumer, with DSO far lower than the global average of 66 days, such as Food (46 days), Transportation (49) and House- hold equipment (49).
The average DSO grew in two-thirds of the countries, being above average in both construction and upstream industrial sectors
This is also the case for Chemicals, with a DSO of 73 days on average. It is no surprise, as it is a supplier to all industrial activities.
