In a rather extraordinary move, electric car and truck maker Tesla – suffering from severe cash flow issues as it struggles to ramp up production of its new Model 3 class of vehicles - has sent letters asking its supplier to send it money based on how much Tesla has purchased from them going back two years.
Supply Chain Digest Says... |
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| Musk has complained in the past that he wasn't getting parts makers' best terms, but that that has changed with the Model 3. |
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The Wall Street Journal broke the story last weekend, reporting that it reviewed a memo recently sent to a supplier that the supplier return what Tesla called a meaningful amount of money from its payments since 2016.
The memo was sent by a global supply manager and described the request as essential to Tesla's continued operation. The requested payment was characterized as an investment in the car company to continue the long-term growth between both it and its supplier.
In other words, if you want to keep doing business with Tesla in the future, you need to help us out financially now to ensure we don't go bust.
The Journal article says Tesla said in the memo that all suppliers were being asked to help it become profitable, but it is unclear how many were asked for what might generously be called rebates on contracted spending amounts retroactively. The paper says some suppliers contacted about the request said they were unaware of such a demand.
Before the article was published, Tesla declined to address the specific memo reviewed by the Journal. It did tell the paper, however, that such requests are a standard part of procurement negotiations to improve its competitive advantage.
But after the story appeared in the Journal in print and on-line, Tesla did issue a statement saying that it was negotiating with suppliers in an effort to reach a "more sustainable long-term cost basis," and that it had contacted fewer than 10 suppliers with these requests. The company said that its other discussions with suppliers were focused on price negotiations for future shipments, not retroactive rebates.
In a tweet, Tesla CEO Elon Musk also said, "Only costs that actually apply to Q3 & beyond will be counted. It would not be correct to apply historical cost savings to current quarter."
The company added that the suppliers contacted for the rebates were in general capital equipment/project related vendors, rather than traditional parts suppliers, and were involved in projects that are not yet complete.
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But then it added that "The remainder of our discussions with suppliers are entirely focused on future parts price and design or process changes that will help us lower fundamental costs rather than prior period adjustments of capex projects. This is the right thing to do."
 Tesla has been burning cash at a rate of about $1 billion a quarter, the Journal notes, and finished the first quarter with $2.7 billion in cash on hand – not much of a cushion at that burn rate. Its loss attributable to common shareholders in the first quarter was $710 million, the fifth consecutive quarter of record losses.
As a younger company, Tesla said it had trouble getting the attention of some of the most important suppliers. Musk has complained in the past that he wasn't getting parts makers' best terms, but that that has changed with the Model 3.
Tesla has made changes with its suppliers in the past to help preserve its cash position.
In August, 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.
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