Wall Street Journal
Tesla Asks Suppliers for Cash Back to Help Turn a Profit
Electric-car company, in memo, asks supplier to return a meaningful portion of money spent since 2016
By Tim Higgins
July 22, 2018
Tesla Inc. TSLA -3.84% has asked some suppliers to refund a portion of what the electric-car company has spent previously, an appeal that reflects the auto maker’s urgency to sustain operations during a critical production period.
The Silicon Valley electric-car company said it is asking its suppliers for cash back to help it become profitable, according to a memo reviewed by The Wall Street Journal that was sent to a supplier last week. Tesla requested the supplier return what it calls a meaningful amount of money of its payments since 2016, according to the memo.
The auto maker’s memo, sent by a global supply manager, described the request as essential to Tesla’s continued operation and characterized it as an investment in the car company to continue the long-term growth between both players.
While Tesla said in the memo that all suppliers were being asked to help it become profitable, it is unclear how many were asked for a discount on contracted spending amounts retroactively. Some suppliers contacted about the request said they were unaware of such a demand.
Tesla declined to comment on the specific memo. But it confirmed it is seeking price reductions from suppliers for projects, some of which date back to 2016, and some of which haven’t been completed. The company called such requests a standard part of procurement negotiations to improve its competitive advantage, especially as it ramps up Model 3 production.
The surprising requests raise further questions about Tesla’s cash position, which has dwindled after it struggled to boost production of its first car designed for mainstream buyers, the Model 3. After months of delays, Tesla last quarter reached its longstanding goal of making 5,000 Model 3s in a single week, which, if sustained, will help it generate cash.
Auto makers and suppliers have complicated relationships, each fighting for the best deal under immense pricing pressure. Supply-chain consultants say sometimes auto makers will demand a reduction in price for a current contract going forward or use leverage of awarding a new deal to get upfront savings on a contract. But they say it is unusual for an auto maker to ask for a refund for past work.
Dennis Virag, a manufacturing consultant who has worked in the automotive industry for 40 years, said a solicitation like Tesla’s could put suppliers in financial peril and jeopardize its future supply of car parts.
“It’s simply ludicrous and it just shows that Tesla is desperate right now,” he said. “They’re worried about their profitability but they don’t care about their suppliers’ profitability.”
Tesla has sought to balance its desire for rapid growth with paying for the expensive launch of new vehicles and building out infrastructure to compete against much larger auto makers.
Chief Executive Elon Musk has said he wants to avoid raising additional cash, promising the company can become cash-flow positive with the continued Model 3 build rate and turn a profit in the second half of the year. Many analysts expect Tesla eventually will need to raise more money.
Tesla has been burning cash at a rate of about $1 billion a quarter, and finished the first quarter with $2.7 billion in cash on hand. Tesla pledged to pare back planned capital expenditures this year to less than $3 billion from $3.4 billion last year. Its loss attributable to common shareholders in the first quarter was $710 million, the fifth consecutive quarter of record losses.
Tesla will need to pay down a $230 million convertible bond this November if its stock doesn’t reach a conversion price of $560.64, and a $920 million convertible note next March if the stock doesn’t reach $359.87. Shares closed Friday at $313.58, and are down about 4.5% over the past 12 months.
As part of Tesla’s bid to become profitable, Mr. Musk cut Tesla’s workforce by 9% in Juneand promised to slow other spending as well. He’s become focused intently on becoming cash-flow positive, a person familiar with his thinking said.
Last month, he told employees in an email: “What drives us is our mission to accelerate the world’s transition to sustainable, clean energy, but we will never achieve that mission unless we eventually demonstrate that we can be sustainably profitable. That is a valid and fair criticism of Tesla’s history to date.”
As a younger company, Tesla indicated it had trouble getting the attention of some of the most important suppliers. Mr. Musk has complained in the past that he wasn’t getting parts makers’ best teams, but he has said that changed with the Model 3.
Tesla has made changes with its suppliers in the past to help preserve its cash position.
In August, Mr. Musk told analysts Tesla was able to negotiate longer payment terms to about 60 days for Model 3 parts, in what he described as “the nirvana” that would allow the auto maker to make the car and get paid for it before the bill is due to suppliers.
“Obviously, that’s like the promised land right there,” he said.