Does Tesla's 'big ask' for cash from suppliers risk disrupting the supply chain?
- Tesla sent a memo to some of its suppliers, asking to return cash to the automaker, The Wall Street Journal reported. Tesla did not respond to Supply Chain Dive's request to confirm the memo.
- The automaker told the Journal it is looking for price reductions from some of its suppliers to improve competitive advantage.
- Since the beginning of the year, "we've seen a huge run up" in the amount of money due to suppliers, Bill Danner, president of CreditRiskMonitor, a financial risk analysis and news service, told Supply Chain Dive. The figure, however, isn't unexpected as Tesla ramps up production of the Model 3.
At the end of the first quarter of 2018, Elon Musk assured Tesla shareholders he's feeling "quite confident" the auto company will have positive cash flow in the third and fourth quarters of the year. If Musk is able to deliver, the result will be a sharp turnaround from the past several quarters of millions in negative cash flow.
On its path to turn the numbers around, Tesla has boosted production, restructured its workforce and now it is going to its suppliers to negotiate prices and payment terms. "If they can get better payment terms, that won't make it more profitable, but it will at least cause them to have better cash flow, because they don't have to pay the suppliers quite as quickly," Danner said.
But Danner doesn't think most suppliers have the financial capacity to move the needle far enough to bring Tesla's cash flow into the black.
"The suppliers are probably feeling a little stressed out at the moment," he said. As the automaker boosted production of its vehicles, it likely requested more parts produced quickly by its suppliers, along with engineering and design changes. "And now he wants money back? Those are big, big asks."
As Tesla demands more of its suppliers, it needs to consider the long-term impact, Marcell Vollmer, chief digital officer at SAP Ariba, told Supply Chain Dive in an email. "It’s easy to ruin trust but takes ages to rebuild."
While Tesla has reportedly asked for cash back, Volkswagen went to its supplier Prevent years ago with the same goal to boost profits. It asked Prevent to lower prices, but the move backfired. "Prevent was a single supplier and stopped delivering seat covers. Volkswagen had to stop production. The supply chain got disrupted and ... Volkswagen had to delay delivering thousands of cars to consumers," Vollmer said.
Delayed car deliveries would mean delays in funds coming in — and could translate to late supplier payments.
Since the beginning of the year, Danner said Tesla's delinquency rate of supplier payments has stayed about the same. "They're not paying everybody on time, but they're paying a lot of their vendors on time," he said.
If the delinquency rate increases, it could sound alarm bells for vendors. Tesla is "some distance from bankruptcy," Danner said, but given its high debt and financial structure "if the economy stumbles, this company is pretty vulnerable to economic shock."
- The Wall Street Journal Tesla Asks Suppliers for Cash Back to Help Turn a Profit
- CreditRiskMonitor Assessing Contraction Risk: The Transportation-Manufacturing Industry
- Supply Chain Dive Case study: How Tesla changed the auto industry
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