Tesla’s asking suppliers to refund cash ‘reeks of desperation’

A Tesla Model 3 is seen in Fremont, Calif., on Monday, February�12, 2018. A Tesla Model 3 is seen in Fremont, Calif., on Monday, February�12, 2018. Photo: Lea Suzuki / The Chronicle Buy photo Photo: Lea Suzuki / The Chronicle Image 1 of / 1 Caption Close Tesla’s asking suppliers to refund cash ‘reeks of desperation’ 1 / 1 Back to Gallery

When a company asks suppliers to retroactively give money back, it’s a sign that something has gone wrong.

That’s what analysts worry about with Tesla Inc., which has asked suppliers to return a portion of payments for parts they’ve delivered going back to 2016. In the memo to suppliers last week, Tesla asked for a meaningful amount of money to help it become profitable.

That’s worrisome because Chief Executive Officer Elon Musk has said that the success of the new Model 3 sedan should pull the perennial money-loser into the black in this year’s second half and show positive cash flow. What may be happening is that Tesla spent so much money racing to get its factory producing 5,000 Model 3s in a week — while not delivering all of them to buyers yet — that second-quarter numbers are going to look rough and Musk needs a hand from suppliers to shore up the balance sheet until later in the year.

“It’s troubling,” David Whiston, an analyst with Morningstar Inc. in Chicago, said in an interview on Monday as Tesla’s stocks and bonds declined. “Usually, carmakers play hardball with suppliers going forward not backward. The second quarter could look ugly because they spent a ton of money ramping up to hit production targets.”

Tesla has been a prodigious cash burner, torching $8 billion in the past four years. In the first quarter, as the company was pushing to get the Model 3 production line going, it went through more than $1 billion, according to data compiled by Bloomberg.

As pressure mounted to ramp up Model 3 production, Musk set up a tent outside Tesla’s plant in Fremont. The company had trouble with its heavily automated assembly line indoors and needed to set up the outside line to boost production.

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The race to get the Model 3 going may have added unexpected costs in the second quarter. Even though Tesla is making more of the sedans, the company won’t complete delivery and collect revenue for many of them until the third quarter, Whiston said. So even though Tesla may be able to show its investors a pleasant surprise in the second half, Musk may want suppliers to help him shore up cash flow and profits now.

In the memo, which was obtained by the Wall Street Journal, Tesla called the move a routine practice of working with suppliers. While it’s true that carmakers will ask for lower prices in future model years as both sides wring cost out of manufacturing, asking for money from parts made two years ago is highly unusual, said Ron Harbour, a senior partner at Oliver Wyman in Detroit.

“I have never heard of that,” Harbour said. “Suppliers have been asked for reductions, but going back for them in arrears reeks of desperation.”

Not everyone agrees. Ben Kallo, a Robert W. Baird & Co. analyst with the equivalent of a buy rating on Tesla shares, said he thinks the supplier renegotiation is about boosting profits “rather than a necessity for the balance sheet.” He said it “could be an indication production is ramping.”

A Tesla spokesman didn’t return emails seeking comment.

Musk has said he won’t need to raise cash this year, but some analysts have doubts. This could be a sign that Musk has to change his mind, Whiston said. In addition to boosting Model 3 production, Tesla in short order plans to build new factories in China and Europe and bring the Model Y sport utility vehicle, a semitruck, pickup and roadster to market.

All of that has to happen while Tesla carries $10.5 billion in debt. Of those obligations, more than $1.7 billion is due in the next 16 months. Tesla has $230 million due in November, $920 million due in March of next year and $566 million due next November. Even if Tesla’s operations are cash flow neutral this year and next, just paying off that debt would leave Tesla with only $900 million in cash on the balance sheet, said Joel Levington, a debt analyst with Bloomberg Intelligence.

Tesla stock fell 3.3 percent to close at $303.20 Monday afternoon. It’s down from a peak of $385 in September, with many investors growing concerned about Tesla’s spending and its ability to meet its production goals.

While it may be a bad sign, going after suppliers is just the latest thing Tesla is doing to get cash and get the Model 3 to Tesla’s eager buyers. The company also has taken $1,000 deposits for Model 3 orders to help fund development and manufacturing, which established carmakers don’t have to do.

“I’m not sure it’s any worse than getting upfront money from your customers,” said Levington.

The Associated Press contributed to this report.

David Welch is a Bloomberg writer. Email: dwelch12@bloomberg.net