It’s not unusual for manufacturers to seek concessions on future orders. It is extremely strange, at a minimum, for manufacturers to seek Cash Back On Prior Orders to Help Turn a Profit.
Tesla 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 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.
Act of Desperation
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.”
Major Oops In the Pipeline
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 June and promised to slow other spending as well. He’s become focused intently on becoming cash-flow positive, a person familiar with his thinking said.
Current Burn Rate
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’s Free Cash Flow
Date With Lady B
I have no position in this company but it is increasingly difficult to see how Tesla survives. As with Netflix, if the corporate bond market turns before Tesla can get cash flow profitable, Elon Musk has a date with Lady B: Bankruptcy.
For Netflix’s cash flow predicament, please see Can Netflix Survive?
Mike “Mish” Shedlock
Upon bankruptcy, Elon Musk and his cronies will still walk away with their billions… so actually it will be another win for modern US capitalism aka unbridled corporate exploitation.
Musk was the largest Solarcity shareholder, owning 20%. It’s amazing the SEC hasn’t nailed him for this self-dealing.
The problem for all these businesses that rely on the goodwill of external capital providers to survive is that all it takes is a change in the public’s mood and it’s all over.
Tesla is the new Tucker…
We’ll see how bad corp governance is Nov 1. That $230mm due Nov is from Solar City, which is still a separate entity, although wholly owned. TSLA does not guarantee those bonds. Musk already had TSLA pay for the equity of Solar City, of which a relative of his owned a lot.
I suspect Tesla would not be asking for retroactive cash back unless the situation is dire. Clawbacks are tough, even when done for cause. At this moment, suppliers are probably reviewing whether or not they will have to cut Tesla off and take their losses on accounts receivable.
Interesting to know if any of the suppliers have said no and offered future free product for a while instead of cash back on previous spend.
Tesla response to that would tell us a lot as to how desperate the liquidity issue is.
It’s not long before we see a Chinese company come in to buy it. It will put the blame on Trump.
Couldn’t agree more with you and 2b.
Don’t be in the creditor line to Tesla.
Just another example of the narrow-minded hubris that got him/them here in the first place. Thinking that he can do everything better than the rest of the industry. Cavalier over-extension without realistic accounting re profitability. F’ng little Napolean.
You got that right. This Telsa demand is going to backfire.
I follow a former coworker who just started at Tesla a few weeks ago. He’s on a 12 hour shift. Not sure how many days a week he’s working, but that seems a little odd considering they should have no problem hiring people, even in the Bay area.
If I were a supplier, not only would I not comply, for all future deliveries, I would want to be paid up front.
probably can be condensed to the last part: the taxpayer is going to be hit hard
TSLA will likely survive via a chapter 11 reorganization (i.e. bankruptcy). Bondholders will take a haircut and emerge as the the new equity holders. Existing TSLA shareholders can look forward to a total loss.
I am more concerned about Space-X going under. To protect one of his companies Musk merged it with another. Now if TESLA goes under, the taxpayer will be minimally impacted. If Tesla is merged with Space-X, then the taxpayer is going to be hit hard.