Tesla is Running Low on Cash and is Now Demanding Retroactive Price Cuts from Suppliers

Jul 23, 2018
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Tesla (NASDAQ:TSLA) has made quite an unusual move - supplier managers at the Palo Alto, CA-based electric car manufacturer have reportedly reached out to some of their large vendors with a bizarre request: The Wall Street Journal has confirmed that Tesla has asked for "retroactive" price cuts from its suppliers.

Wall Street reacted quickly, prices plummeted by 4% at market opening this morning.

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Tesla employs various supplier managers whose job is to both handle the day to day procurement of materials from vendors, as well as manage longer and more strategic items such as master contracts and pricing agreements that are typically negotiated and signed for multiple years at a time.

Tesla negotiating price cuts for purchases.... in the past

Automakers are notorious for squeezing the life out of their suppliers, pinching every single penny possible and swiftly switching to an alternate, lower cost bidder if one presents itself. If you are an automaker, the usual way of doing this is going to the negotiating table and dangling the carrot of huge demand. Any automaker will have the purchasing power in the millions of units, a deal few suppliers will pass up.

The supplier can weigh the volume versus their margin on products and decide to sign a purchase agreement with said carmaker. These deals are quite frequently locked in for several years and give both parties the chance to forecast and predict how their business will perform. In fact, we've reported on some large automaker supplier contracts before..

This past March we reported on a multi-billion dollar deal VW inked to secure batteries for its future electric cars.

What is so odd about the memo the WSJ confirmed is that Tesla is going back and asking for price cuts on historical purchases. Dating all the way back to 2016, no less! 

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Imagine owning a widget business that sold Tesla inventory two years ago and opening an email from a supplier manager at the company asking for cash payments.

This basically amounts to Tesla asking for cash rebates from vendors, akin to a handout. The memo even went on to rationalize that the company is seeking profitability and that the rebates were crucial to a cash-strapped Tesla.

Dennis Virag is a manufacturing and supply chain consultant with over 40 years in the automotive industry and he said he's never seen anything like it:

“It’s simply ludicrous and it just shows that Tesla is desperate right now. They’re worried about their profitability but they don’t care about their suppliers’ profitability.”

Virag does have a point, automotive suppliers already operate on razor-thin margins, buoyed by large volumes. A direct cash hit to their bottom line could put many in jeopardy.

Tesla might be running out of cash

Tesla's heavily automated production line

This all comes down to the crossroads Tesla finds itself at.

On the one hand (good) Model 3 production is finally cresting the magical 5,000 units per week benchmark that was laid out by CEO Elon Musk as a crucial milestone for the company. On the other hand (bad) the company is burning through cash at a rapid clip with expenses showing no sign of slowing down. $230 million worth of convertible bonds become due in November and a possible $920 million in convertibles will become due in March of 2019 if the price of TSLA stock doesn't reach $359.87.

Currently, the automaker is consuming around $1 billion a quarter and finished the first quarter of 2018 with $2.7 billion in cash reserves.

Tesla has said it will pare down planned capital expenditures meaning fewer upgrades and purchases to its existing facilities, and recently cut 9% of its workforce.

Despite the expense reductions Tesla is predicted to be out of cash by the first quarter of 2019.

With all of that knowledge in hand, and also keeping the pressure to drastically ramp up Model 3 production in mind, its not so surprising the company would pull a drastic move like asking suppliers for cash rebates. It seems anything is fair game to a company that seemingly breaks all the rules.

 

 

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