Co-written by Steve Hanley and Zach Shahan
UPDATE: Tesla has responded to our request for extra input, which we’ve incorporated below.
A report in the Wall Street Journal claims Tesla has sent a communication to several of its suppliers asking them to refund a portion of the money Tesla has paid them since 2016. The document, which the WSJ has reviewed, says the request is designed to help it become profitable — something Elon Musk has promised investors will happen this year, hopefully as soon as the end of the current quarter.
According to Tech Crunch, the company is asking some suppliers to return a “meaningful” amount of the money they have been paid going back to 2016 as well as requesting them to lower the amount they will accept for future work. Tesla described its request as being not only important for Tesla’s operations but also as an investment in the company’s long-term growth that will redound to the benefit its suppliers.
While Tesla declined to comment directly about the memo to the Wall Street Journal, it did acknowledge it is seeking price reductions on some projects, including several dating back to 2016 and some which have yet to be completed. It also told the newspaper that requests like this are standard in procurement negotiations between auto manufacturers and their suppliers.
We have now obtained an official statement from a Tesla spokesperson on this story:
“Negotiation is a standard part of the procurement process, and now that we’re in a stronger position with Model 3 production ramping, it is a good time to improve our competitive advantage in this area. We’re focused on reaching a more sustainable long term cost basis, not just finding one-time reductions for this quarter, and that’s good for Tesla, our shareholders, and our suppliers who will also benefit from our increasing production volume and future growth opportunities. We asked fewer than 10 suppliers for a reduction in total capex project spend for long-term projects that began in 2016 but are still not complete, and any changes with these suppliers would improve our future cash flows, but not impact our ability to achieve profitability in Q3. 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.”
In case that isn’t clear, the requests for cost reductions were only sent to certain suppliers, not all suppliers, and while Tesla didn’t say so explicitly, one could presume this is due to unsatisfactory work. Others with more experience in procurement comment on this possibility in the quotations below.
A thread on the investment section of the Tesla Motors Club forum includes a handful of people on both sides of the procurement world indicating as well that this is standard practice. One forum member stated it in a way that succinctly explains business logic, “One thing to add is that while generally your company does not want to be known as a bad customer…. anything you can pull to get savings is a win…. it’s just a matter of weighing the long term relationship with the supplier vs the desire to get more TVC (total value creation). Seems like Tesla has leverage with this supplier. In fact I would be more worried if Tesla didn’t try this at all.”
Negotiating with suppliers for lower prices in the future is one thing, but what about trying to get a discount on previous work/supplies? Well, that could have a simple business explanation as well. Another forum member noted, “I worked for a company that did that with Cisco because some stuff we bought didn’t ‘mesh network’ like advertised and they eventually admitted it 2 years into the project. Or with Motorola because the batteries were failing early and bulging. And those aren’t exactly small companies.
“My guess is a part didn’t perform as was expected or required more rework than suspected, as that’s when you start talking about rebates. Whoop de do.”
Yet another member explained more deeply what kind of considerations go into such a request:
“Let me add the reasoning on why you ask for the cash back in the first place instead of just credit or future discount. When you are asking for cash it’s usually because the vendor *sugar* the bed in some way, my case was promised feature not working and early failure of product. You ask for money back as a shot across the bow because the other two options lock you into that supplier in the future. So you’re basically saying look you cost me money and you are going to pay me for that and we MAY decide to continue forward with you given the price is right AND you clean up your act.
“To me that’s the most likely case and what happens from my experience. However if Tesla was specifically asking for this deal from all vendors I would worry that they are being that much of a dick to all their vendors. But that wouldn’t even make sense in the first place as to me there’s usually a reason to ask for that.”
That member also said, “Seeing as I saw it twice in a three year span and I’m not in procurement I’d say it’s not ‘HIGHLY unusual’.”
Getting more specific about one scenario that might make a good deal of sense, a forum member added, “For all we know, this supplier could be the company responsible (in terms of building the machinery) for the Model 3 module assembly debacle. Wouldn’t that change the tone of the story?”
People who have commented on the Tech Crunch story also seem not to be overly concerned by Tesla’s request. “The retail industry does this to their suppliers on an annual basis left right and center… nothing new or alarming. Just shorts making a big thing out of a normal procurement approach,” writes a person with the screen name of Moon Cake. Another comment from Mace Moneta adds, “Seems reasonable to me. They’re asking, not demanding. And if Tesla achieves profitability this way, then they are… profitable. What’s wrong with negotiating with suppliers to improve your bottom line?”
A Tesla Motors Club forum member from Brussels sums up the sentiment of many investors who are long Tesla [TSLA] regarding what will be in the news in the week before the next Tesla earnings call (EC):
“Guys (and gals?), we enter a critical period. I expect full-Plaid FUD for the next week until we get to the EC. So gird your loins, keep the faith and get noisy via any channel you have to push back against the total BS that’s raining down upon us.
“I see how this procurement memo going to be negatively spun, basically if there’s any sign of profitability, the enemy will call ‘foul’ and say it’s an artificial situation engineered by Elon — same as they basically did for the 5k/w end of June.”
In another comment, he shared this tweet:
Flashback to one year ago. Suppliers raised prices and $TSLAQ rejoices. Today, @tesla negotiates cheaper parts from suppliers and $TSLAQ rejoices. $TSLA #Tesla https://t.co/sPTuPrBLyA
— 💎🐾Esteemed Earl of Frunkpuppy🐶 (@28delayslater) July 23, 2018
Flipping the script and explaining how this news is a sign of Tesla’s strength, rather than weakness, yet another forum member added the following point of perspective:
“In the auto procurement world everything is allowed if you are strong and large. We have seen many examples from the past where VW has crushed margin from suppliers and driven them into chapter 11.
“That Tesla is able to put that demand on the table today is a strong signal of strength and confidence not weakness. If you have the power you press money from your suppliers as you do with quality and volume of parts. If you don’t then don’t start a business in the auto industry.
“Without a steady high production rate they would not have been able to ask suppliers to renegotiate. This is a confirmation of a further ongoing ramp.
“Let’s be all happy that Tesla is doing that move.”
Perhaps the sharpest comment of criticism we’ve seen is this one: “I freaking can’t believe this can be spun. In supply chain management software, a large chunk of complexity just comes from frequent price adjustment and kickbacks. It’s a common practice in all business. The author is either completely ignorant or deliberately misleading.”
As a reminder, the Wall Street Journal is owned by the same Rupert Murdoch–controlled News Corp as the New York Post and Fox News.
In the early morning hours of July 23, Elon Musk responded via Twitter to the news.
Tesla has been doing a high stakes financial dance for a decade or more. Short sellers have been pressuring the company’s stock price for years, essentially since its IPO, and this latest news will only serve to invigorate those who claim Tesla is about to go over a cliff. On the other hand, Elon Musk has shown an uncanny ability to snatch victory from the jaws of defeat on multiple occasions. Can he continue to do so? “We’ll see,” said the Zen master.
One Tesla Motors Club forum member, though, thinks the story is already clear enough:
“I have posted this a few places. Specifically about Tesla’s cash position:
“Cash position will never be worse than it was 4 weeks ago. Going forward, it gets better every day. Did Tesla go bankrupt 4 weeks ago? Did I miss that?”
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