The Wall Street Journal reported over the weekend that Tesla has requested some of its suppliers to refund a portion of the cash payable sums concerning what the company had previously secured in product component supply. The development was characterized as a surprising move in an attempt to help the electric automaker meet its near-term profitability goals and to preserve its cash needs. 
In its reporting, the WSJ cites a memo sent to a supplier last week requesting the return of what was termed as meaningful amount of money of its supplier payments since 2016. The request was reportedly characterized as essential to Tesla’s continued operation and as an investment to continue longer-term growth between both players. According to this report, it was unclear as to how many suppliers were included in this request. Some suppliers contacted by the WSJ indicated they were not aware of such a request.
Needless to state, this reported move is troubling on many dimensions.
Responding to a Twitter posting referencing this WSJ report article, Tesla CEO Elon Musk clarified on social media, “Only costs that actually apply to Q3 & beyond will be counted. It would not be correct to apply historical cost savings to current quarter.“
As we pen this blog commentary at mid-day on Monday, the price of Tesla stock has been down 3.2 percent on the news of the WSJ report.
Implications
From our Supply Chain Matters lens, the first and most obvious is that in many supplier relationship management encounters, requests for price concessions are often focused on either current or future buying agreements. Requesting added cash payments based on prior delivered materials is highly unusual and risks the perception that the buyer is in a rather desperate cash position, which could, or could not be the case. Suppliers can have a very mixed response to such a request. They can factor the potential longer-term buying relationship and determine whether dipping into the supplier’s own cash resources and working capital substantiates the benefit of far more expanded, and profitable business relationship. Conversely, they can view such a request as a significant warning sign to future business potential, and instead, elect to constrict existing payment terms or place the buyer on more supplier managed delivery terms . In the automotive industry where supplier margins are always lean, the latter response seems more plausible, especially since granting an outright refund on past business sets an unwanted precedent.
Further, what strikes this action as short-sided is that Tesla’s supply network goal has been to attract the best suppliers, those that innovate in product and process and thus gain the reputation and creditability support many global automotive OEM producers. Instead, Tesla is sending a troubling message that supplier relationships are to be exploited for singular-dimensional business gain.
To be balanced, CEO Elon Musk is in a vice trying to assure stockholders that their initial and continuing investment in Tesla will be rewarded in added revenues and promised cash-flow profitability in the next two quarters. Issuing new equity dilutes the value of current stockholders while additional borrowing is precluded by the bond rating agencies increasing concerns for Tesla’s cash and profitability outlook. To accomplish its goal, Tesla made the painful decision to cut its headcount by 9 percent, primarily in the staff and administrative support positions.
This latest reported development casts more of a shadow on Tesla’s ability to sustain or improve its Model 3 monthly production volumes as well as to have the added resources to fund required new development and product launch of products such as the Tesla semi-truck, or to deploy its announced future manufacturing plant in China.
More and more, it is appearing as though Tesla needs to find a strategic partner that is savvy in volume automotive manufacturing and has the deep pockets to invest in the growth of this innovative electric automaker.
Bob Ferrari
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