Tesla Asks Suppliers for Refunds to Help Profit

Could Tesla be in trouble

When asked by WSJ, Tesla denied the memo, however confirmed it is seeking price reductions from suppliers for projects, some of which date back to 2016, and some of which haven't been completed. What's more, a recent teardown of the Model 3 suggests that Tesla's mass market EV might be far more profitable than initially anticipated.

While certainly an ambitious goal given Tesla's history, there's reason to believe that Musk's promise might actually pan out. Tesla has been hemorrhaging cash at a rate of about US$1 billion a quarter, and finished the first quarter of 2018 with US$ 2.7 billion in cash on hand.

It's not so unusual for carmakers to ask suppliers for discounts retroactively, and some Japanese automakers have done it before, said Tatsuo Yoshida, an analyst at Sawakami Asset Management Inc.in Tokyo, who worked at Nissan Motor Co. between 1983 and 1999.

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Initially, Tesla shares dropped by more than 5% on Monday morning as investors responded to the report, although they recovered some ground later. If a company needs to request money back from its supplier to achieve profitability, that doesn't seem like a sustainable business model.

Morningstar's David Whiston writes that while auto makers face "brutal" pricing demands on suppliers for future work "but retroactive rebates is not something we hear much about, and this is troubling for us to hear".

It is unclear how much cash back Tesla has requested, or how many of its suppliers have received this request. "It would not be correct to apply historical cost savings to current quarter", tweeted Musk.

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"Now that we're in a stronger position with Model 3 production ramping [up], it is a good time to improve our competitive advantage in this area", a company spokesman said.

The tech giant has been chasing profitability in recent months, after Musk promised the company would reach that target by the third or fourth quarter this year.

In June, Tesla said it was cutting several thousand jobs to become sustainably profitable without endangering the ramp-up of Model 3 production.

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