Tesla, the innovative but troubled electric car manufacturer, has sent a memo to its suppliers asking them to refund some of its previous spend, a report in The Wall Street Journal has revealed.
The automaker described its move as a necessary cost reduction request to a number of its suppliers in order to improve competitive advantage.
Tesla’s supply relationship management issues have been the focus of news coverage for some time. As Q1 2018 closed, the automaker’s CEO and co-founder Elon Musk assured the company’s shareholders that it would achieve positive cash flow by the Q3 and Q4 this year. Should he deliver on that pledge, the company would achieve a sharp reversal of the severe, negative cash flow that has bedevilled it for some time now.
The company has already boosted production and restructured its workforce. But credit risk expert Bill Danner (President of CreditRiskMonitor) believes that efforts to negotiate better payment terms with suppliers to improve cash flow are fraught with difficulty. Many of Tesla’s suppliers simply don’t have the financial latitude to pare prices down sufficiently to solve Tesla’s cash problems.
Danner told Supply Chain Dive magazine that Tesla’s suppliers are already feeling somewhat stressed at present. This is not least because the automaker’s boosted production has driven up requests for more parts to be produced as quickly as possible, with design and engineering alterations. As Danner puts it, “And now he wants money back? Those are big, big asks.”
If Volkswagen’s efforts to do the same a few years back are anything to go by, things could backfire. When it asked for lower prices from its supplier, Prevent, the latter simply stopped producing seat covers. As it was a single supplier, Volkswagen’s hands were tied, and they had to stop production.
While Tesla is some distance from bankruptcy, given its huge debt and financial structure, Danner warns that “if the economy stumbles, this company is pretty vulnerable to economic shock.”
Steve has over 28 years of success as CPO, MD and Procurement BPO leader in a range of industries. Steve is COO at Odesma, responsible for Odesma’s delivery capability & infrastructure.