Tesla says supplier discount request was for ongoing projects

24 July, 2018, 18:58 | Author: Salvatore Jensen
  • The front hood logo on a 2018 Tesla Model 3 electric vehicle is shown in Cardiff California

A memo provided to The Wall Street Journal showed the electric carmaker asked one supplier to return what it calls a meaningful amount of money on its payments since 2016. On July 1, the company said it reached its goal of producing 5,000 Model 3 sedans - its newest vehicle - just hours after its self-imposed deadline, making it a "real auto company", according to CEO Elon Musk.

When a company asks suppliers to retroactively give money back, it's a sign that something has gone wrong. If a company needs to request money back from its supplier to achieve profitability, that doesn't seem like a sustainable business model.

Supply-chain consultants told the paper that sometimes automakers will demand a reduction in price for a current contract going forward or use leverage of the promise of a new deal to get upfront savings.

"This is troubling for us to hear", said Morningstar analyst David Whiston in a note to clients.

Becoming cash-flow positive is the primary goal of Chief Executive, Elon Musk, who said he wants to avoid raising additional cash, and turn a profit in the second half of the year.

Tesla had previously experienced serious production delays on its Model 3, which reportedly also impacted its supplier.

Of course, this news won't make Tesla investors happy.

The tech giant has been chasing profitability in recent months, after Musk promised the company would reach that target by the third or fourth quarter this year. Tesla has repeatedly said it will become profitable by the end of 2018, but has struggled amid production issues that have plagued its Fremont, California assembly line.

Efraim Levy, a senior equity analyst for CFRA, said he found Tesla's request unusual.

Not everyone agrees. Ben Kallo, a Robert W. Baird & Co. analyst with the equivalent of a buy rating on Tesla shares, said he thinks the supplier renegotiation is about boosting profits "rather than a necessity for the balance sheet".

Despite of years of unprofitability, Tesla's market capitalization is over $50 billion.

In June the company said it was eliminating 3,600 jobs, or 9 percent of its staff, as part of a restructuring effort.



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