Tesla Begs Suppliers for Cash Back on Prior Orders: WTF?

Mike Mish Shedlock

In an unprecedented act of desperation, Tesla is asking for "meaningful" cash back, not on future orders but prior ones.

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

Comments (18)
No. 1-18
Six000mileyear
Six000mileyear

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.

Roger_Ramjet
Roger_Ramjet

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.

KidHorn
KidHorn

If I were a supplier, not only would I not comply, for all future deliveries, I would want to be paid up front.

ReadyKilowatt
ReadyKilowatt

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.

2banana
2banana

You got that right. This Telsa demand is going to backfire.

aqualech
aqualech

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.

caradoc-again
caradoc-again

Couldn't agree more with you and 2b. Don't be in the creditor line to Tesla.

Brother
Brother

It's not long before we see a Chinese company come in to buy it. It will put the blame on Trump.

Snow_Dog
Snow_Dog

“Move fast and break things”

I think it was first coined by Uber or one of the other baby unicorns.

Break things ~~> countless safety regulations, laws, municipal codes, societal standards, accounting norms, etc.

Move fast ~~> rely on the governmental regulatory bodies to be infinitely slow to move on your bold and daring business disruptions.

caradoc-again
caradoc-again

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.

CautiousObserver
CautiousObserver

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.

jlsv
jlsv

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.

oudaveguy98
oudaveguy98

Tesla is the new Tucker...

Pater_Tenebrarum
Pater_Tenebrarum

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.

pgp
pgp

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.


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