The Hype is No Longer with Tesla: Suppliers & Creditors Start to Fret

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Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

18 of 22 suppliers believe Tesla is now a financial risk to their companies.

Suppliers are getting nervous about their exposure to Tesla. That’s what a survey by the Original Equipment Suppliers Association (OESA), which represents automotive suppliers, revealed. The survey was sent to members of its council, all of them top North American sales executives representing about 100 suppliers. Of the 35 respondents, 23 were current or past Tesla suppliers. The survey was conducted between July 26 and August 8, the day after Elon Musk’s infamous and ludicrous tweet of taking the company private at $420 a share – “funding secured.” And that tweet did not soothe their nerves:

  • 18 of 22 respondents believe Tesla is now a financial risk to their companies.
  • 13 of 23 respondents said Tesla requested a “large” price reduction on current business and/or retroactive rebates. This is an issue that became public on July 23.
  • 11 of 23 respondents said Tesla had asked them to extend payment terms.
  • 8 of 22 respondents said they were worried that Tesla might file for bankruptcy.
  • But all of the respondents said they wanted to continue or grow their business with Tesla – which is logical, as long as they’re getting paid.

“Regarding Tesla, any time there is uncertainty in the marketplace, it causes concerns for suppliers,“ OESA CEO Julie Fream told The Wall Street Journal, which had reviewed a document with the survey results.

“The current dialogue about Tesla ‘going private,’ the well-publicized Model 3 manufacturing ramp-up challenges, as well as recently reported contentious purchasing tactics raise concerns for our members,” she said.

These suppliers are only a small sample of the suppliers around the globe that Tesla deals with. Nevertheless, there have been other indications about hand-wringing among suppliers, including persistent indications that Tesla is trying to stretch out payment terms, squeeze out additional discounts, and in some cases obtain retroactive rebates. Some of these practices are industry standard, but Tesla has pushed them to an extreme.

The Wall Street Journal also found:

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Tesla had asked one tooling supplier recently to stretch the terms from the current 60-day payment schedule to a 90-day payment schedule, “according to a review of a proposed contract and a person familiar with the matter.”

Tesla had asked another parts supplier for a 10% across-the-board price cut going forward, according to “a person familiar with the matter.” While other automakers often ask for price cuts of 1% or 2% on certain parts or programs, Tesla’s request was extreme, that person said. If these price cuts didn’t materialize, Tesla would try to stretch the current 60-day payment terms to 120 days, the person said.

Tesla had stopped making payments altogether since the spring despite numerous promises, another supplier said, adding, as the Journal put it, that he fears “insolvency for his own company if he continues to ship products to Tesla and not get paid.”

They’re all seeing what everyone else is seeing: An erratic CEO with at best a reckless Twitter habit, a company that is being kept afloat only by its sky-high market cap that, in theory, would allow the company to sell more shares to raise more money to pay the suppliers, assuming that the shares don’t collapse. That’s not a great security for a supplier operating in the real world.

And they’re seeing this:

In the first half of 2018, Tesla (TSLA) burned $1.9 billion in cash, according to its own reports: $1.13 billion in Q1 and another $812 million in Q2.

The company also raised some cash during that time, in various ways, including via deposits from its customers, but “cash and cash equivalent” was down to $2.2 billion as of June 30, and it doesn’t take a genius to figure out that Tesla would have to raise cash soon – or it’s all over for the suppliers.

Accounts Payables, the amounts that Tesla owes its suppliers and vendors, has jumped 26% year-over-year, to $3.0 billion at the end of Q2 2018.

Inventories have jumped by nearly 50% year-over-year, or by over $1 billion, to $3.3 billion at the end of Q2 2018. This might explain what happened to the 17,000 Model 3 cars that Tesla claimed to have “produced in the first half but did not “deliver” – as documented by endless photographic and video evidence of huge parking lots full of these cars.

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For suppliers who’re owed a lot of money, these are tidbits that make up a potential nightmare.

Bondholders are getting nervous too.

In August 2017, Tesla sold $1.8 billion in junk bonds with a 5.3% coupon, due in 2025, to an enthusiastic market willingly blinded by the hype around the Model 3. Moody’s rates those bonds Caa1; S&P rates them B-. Since then, the proceeds from the bond sale have been burned by Tesla’s infamous cash-burn machine. Model 3 production is a mess. Tesla’s financials have deteriorated. But the debt remains.

Today, these bonds fell further, last trading at 87.75 cents on the dollar, close to all-time lows, giving them a yield of 7.6%. Investors that had bought them at issuance are over 12% in the hole.

The “funding secured” claim has totally collapsed, and the market knows it: Tesla shares, currently at around $308, are trading $112 below the take-private amount of $420 a share.

Saudi Arabia’s Public Investment Fund, instead of coming to Musk’s rescue, is contemplating investing in a Tesla chaser, Lucid Motors. This morning, JPMorgan Chase cut its price target for Tesla to $195, from $308 a share, clearly indicating that Wall Street sees exactly zero chance of any kind of take-private or other buyout at $420 a share. And there have been numerous reports that the SEC has finally woken up and is seriously investigating various aspects of Tesla’s stock-hype schemes, including the “funding secured” announcement.

The hype is no longer with Tesla. And that would be the creditors’ greatest fear because Tesla’s fabulous hype had assured them in the past that there would be new funding to burn at every step along the way. But that assurance isn’t so credible any longer.

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