Tesla is one of the most innovative companies in the world. Not only have they changed the game by making the most popular electric cars in the world, but they also revolutionized assembly line automation, autopilot features, malignant CEOs, and production tents. Now they are making groundbreaking movements in the supply chain and the balance sheet.
The Silicon Valley electric-car company said it 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 auto maker’s memo, sent by a global supply manager, described the request as essential to Tesla’s continued operation and characterized it as an investment in the car company to continue the long-term growth between both players.
Although Tesla is highly leveraged on the balance sheet, it doesn't appear that they have much leverage with their offer.
There's nothing wrong with the classic, "you scratch my back, I scratch yours." However, just like a lopsided relationship, one person is doing more scratching than the other. All Tesla wants is an unprecedented retroactive discount from suppliers that would date back two years because the company is burning through cash faster than Snoopdog goes through an eighth of weed. And in return, the suppliers get ... the long-term growth of Tesla?
Auto makers and suppliers have complicated relationships, each fighting for the best deal under immense pricing pressure. Supply-chain consultants say sometimes auto makers will demand a reduction in price for a current contract going forward or use leverage of awarding a new deal to get upfront savings on a contract. But they say it is unusual for an auto maker to ask for a refund for past work.
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.”
Even if the suppliers help out, Tesla's outlook is bleak. The company is more strapped for cash than a college student with a newly developed coke problem. And cash is more important than ever because of another hastily made promise by their CEO.
Tesla shares are almost directly correlated with the short-term results, and even tweets, related to the company. Let's walk through some of the events that cause notable price shifts in Tesla stock.
And there's much more we can look into, but that's just the start.
All of these events lead to either a short-term hike or spike. And the company knows it. We saw the mad scramble unfold to produce 5000 Model 3s, and the company saw a very short-term increase in stock price, only to have the price fall back down later in the day after doubts that Tesla could maintain those production numbers and stay profitable.
And with the strategic approach of a heroin addict, Musk chases the dragon instead of learning from his mistakes. Instead of holding a meeting, and pivoting to a business model that allows Tesla to scale at a financially reasonable speed, they grab the cash that's closest to them and try to ramp it up. And it's not going to help Tesla.
Refunds are not a consistent cash flow. If Tesla is able to get cash back from their suppliers, they may be able to turn a profit in Q3 which looks good to the naked eye. But just like an ex who looks great to the naked eye, staying involved with them will cause anguish. With that being said, if they turn a profit in Q3, Tesla will be expected to turn a profit and remain cash flow positive in Q4.
Even more alarming, Q4 is going to be treacherous and unforgiving for the Tesla balance sheet if they can't raise their share price to $560.64 by November.
Tesla finished the first quarter with $2.7 billion in cash on hand, compared with $3.4 billion at the end of last year. Analysts surveyed by FactSet predict the company will burn through $1.2 billion in the remainder of the year. It 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 $301.06.
Given, the ongoing trade war and the narrative surrounding Musk and Tesla, this could prove more challenging.
Although the situation is riddled with uncertainty, we can always rely on one thing. As problems continue to arise, Elon will do ridiculous things in short-sighted attempts to solve them. And if his slow creep towards mild insanity continues, the debacle that unfolds will be hilarious.
Tesla shares rise as Elon Musk rips short sellers [Fox Business]