Northwest Arkansas Democrat-Gazette

Tesla’s supplier call stirs concern

Carmaker seeks to get back portion of its payments for parts

- DAVID WELCH

When a company asks suppliers to retroactiv­ely give money back, it’s a sign that something has gone wrong.

That’s what analysts worry about with Tesla Inc., which has asked suppliers to return a portion of payments for parts they’ve delivered going back to 2016. In the memo to suppliers last week, Tesla asked for a meaningful amount of money to help it become profitable.

The electric-car maker made the request to fewer than 10 suppliers, related to capital expenditur­es for longterm projects that started as far back as 2016 and aren’t complete, a spokesman said in a statement.

That move is worrisome because Chief Executive Officer Elon Musk has said that the success of the new Model 3 sedan should pull the perennial money loser into the black in this year’s second half and show positive cash flow. What may be happening, analysts say, is that Tesla spent so much money racing to get its factory to 5,000 Model 3s in a week — while not delivering all of them to buyers yet — that secondquar­ter numbers are going to look rough and Musk needs a hand from suppliers to shore up the balance sheet until later in the year.

“It’s troubling,” David Whiston, an analyst with Morningsta­r Inc. in Chicago, said in an interview Monday as Tesla’s stocks and bonds declined. “Usually, carmakers play hardball with suppliers going forward, not backward. The second quarter could look ugly because they spent a ton of money ramping up to hit production targets.”

The changes with suppliers won’t affect third-quarter profitabil­ity, but they would improve future cash flows, the spokesman said. The remainder of supplier discussion­s focus on future parts prices or other changes that will help lower costs, he said.

Tesla has been a prodigious cash burner, torching $8 billion in the past four years. In the first quarter, as the company was pushing to get the Model 3 production line going, it went through more than $1 billion, according to data compiled by Bloomberg.

As pressure mounted to

ramp up Model 3 production, Musk set up a tent outside Tesla’s plant in Fremont, Calif. The company had trouble with its heavily automated assembly line indoors and needed to set up the outside line to boost production.

The race to get the Model 3 going may have added unexpected costs in the second quarter. Even though Tesla is making more of the sedans, the company won’t complete delivery and collect revenue for many of them until the third quarter, Whiston said. So even though Tesla may be able to show its investors a pleasant surprise in the second half, Musk may want suppliers to help him shore up cash flow and profits now.

In the memo, which was obtained by The Wall Street

Journal, Tesla called the move a routine practice of working with suppliers. While it’s true that carmakers will ask for lower prices in future model years as both sides wring cost out of manufactur­ing, asking for money from parts made two years ago is highly unusual, said Ron Harbour, a senior partner at Oliver Wyman in Detroit.

“I have never heard of that,” Harbour said. “Suppliers have been asked for reductions, but going back for them in arrears reeks of desperatio­n.”

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.” He said it “could be an indication production is ramping.”

Musk has said he won’t need to raise cash this year, but some analysts have doubts. This could be a sign that Musk has to change his mind, Whiston said. In addition to boosting Model 3 production, Tesla in short order plans to build factories in China and Europe and bring the Model Y sport utility vehicle, a semi truck, pickup and roadster to market.

All of that has to happen while Tesla carries $10.5 billion in debt. Of those obligation­s, more than $1.7 billion is due in the next 16 months. Tesla has $230 million due in November, $920 million due in March of next year and $566 million due next November. Even if Tesla’s operations are cash-flow neutral this year

and next, just paying off that debt would leave Tesla with only $900 million in cash on the balance sheet, said Joel Levington, a debt analyst with Bloomberg Intelligen­ce.

News about the letter to suppliers sent Tesla stock down 3.3 percent to $303.20, paring earlier losses of as much as 6.6 percent.

While it may be a bad sign, going after suppliers is just the latest thing Tesla is doing to get cash and get the Model 3 to Tesla’s eager buyers. The company also has taken $1,000 deposits for Model 3 orders to help fund developmen­t and manufactur­ing, which establishe­d carmakers don’t have to do.

“I’m not sure it’s any worse than getting upfront money from your customers,” said Levington.

 ?? Bloomberg News file photo ?? An employee speaks with a customer at the Tesla Inc. showroom in Newport Beach, Calif., earlier this month. Tesla’s finances rather than its cars were the focus Monday after a report that the company asked suppliers for refunds to help it turn a profit.
Bloomberg News file photo An employee speaks with a customer at the Tesla Inc. showroom in Newport Beach, Calif., earlier this month. Tesla’s finances rather than its cars were the focus Monday after a report that the company asked suppliers for refunds to help it turn a profit.

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