In an unusual move, Tesla reportedly asked some suppliers to return part of the money it’s paid them since 2016, including for past work. According to the Wall Street Journal, which reviewed a memo Tesla sent to a supplier last week, the electric auto maker said it is asking suppliers for refunds to help it reach profitability. This stokes concerns about the company’s cash flow, despite earlier assurances from Tesla founder and CEO Elon Musk that it will be profitable in the third and fourth quarters of this year.
After months of production delays for the Model 3, Tesla recently hit a major milestone, announcing earlier this month that it reached its 5,000-per-week production target for the vehicle.
According to the Wall Street Journal, the memo, sent by one of Tesla’s global supply managers, said the company is requesting back a “meaningful” portion of its payments since 2016. Tesla described it as not only important for Tesla’s operations, but an investment in the company’s long-term growth that will also benefit its suppliers.
Tesla declined to comment about the memo to the Wall Street Journal, but said it is seeking price reductions on some projects, including several dating back to 2016 and some which haven’t been completed. It also told the newspaper that requests like the memo are standard in procurement negotiations between auto manufacturers and their suppliers.
But if Tesla is indeed asking suppliers for money back on past work to help it achieve profitability, as opposed to reduced prices on future work, it adds to concerns about company’s cash flows. It may also make some suppliers reluctant to work with Tesla. As manufacturing consultant Dennis Virag told the Wall Street Journal, “it’s simply ludicrous and it just shows that Tesla is desperate right now. They’re worried about their profitability but they don’t care about their suppliers’ profitability.”
Tesla declined to comment on the report, but they said that it’s part of their normal procurement negotiations. The automaker had a different approach with suppliers when it came to the Model 3 program.
With Model S and Model X, Tesla had less credibility when it negotiated with suppliers, but by the time it came to place orders for parts for the Model 3, Tesla had two successful programs in production and it was talking about much higher volumes for Model 3.
Yet, those higher volumes also came with a steep production ramp-up that would affect suppliers. Tesla suffered delays in the Model 3 production ramp, which also impacted its suppliers, but it now has achieved the long targeted 5,000 units per week production rate.
The automaker now attempts to become profitable with this new production ramp and as it aims to increase manufacturing capacity to 10,000 units per year.
Tesla has taken more drastic measures than asking for discounts from suppliers in order to achieve profitability.
There’s nothing uncommon about a company trying to get suppliers to reduce their prices, but it certainly strange that they would ask to be reimbursed for previous payments on part programs that started years ago.
Last month, Tesla CEO Elon Musk announced a vague plan to flatten management and restructure the company in order to achieve profitability during the second half of the year.
Tesla confirmed that only salaried employees will be laid off and no production associates will be let go as Tesla is still focused on increasing Model 3 production.
Employees affected by the round of layoffs are going to be informed this week. We are told that some of them already were let go Monday and Tuesday.
The move follows Tesla starting a brutal review of contractors and firing everyone that is not vouched for by an employee last month.
Tesla’s workforce has grown at an incredible pace since the acquisition of SolarCity, which pushed Tesla’s total headcount to over 30,000 employees.