Tesla asks suppliers for money back on Model 3 parts

Tesla Model 3 all-wheel drive Performance rolls off a new assembly line in a temporary structure

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In its ongoing effort to reach profitability by the end of this year, Tesla has asked several of its suppliers to lower prices retroactively on components of the Model 3, including some contracts that date back to 2016.

In a memo sent to the suppliers last week and reviewed by The Wall Street Journal (subscription required), the company reportedly described the give-backs as “essential to Tesla’s continued operation.” 

At the end of its last reporting period, Tesla revealed that it had about $3.3 billion in cash on hand as had lost about $800 million for the quarter. Following the report, the company laid off 9 percent of its workforce and reduced investments in new projects and expanding existing operations.

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In a Tweet, CEO Elon Musk said the company would need three to six months of full production of the mass-market Model 3 to become profitable enough that it could afford to bring the long-promised $35,000 base Model 3 to market.

Musk repeatedly specified a target of 5,000 Model 3s per week to achieve profitability. In the last week of June, Tesla produced 5,031 Model 3s, but analysts question whether the company could sustain that production rate. Musk has since released a new target of 6,000 Model 3s per week.

He has also promised that Tesla will be profitable by the end of 2018.

READ THIS: Tesla Model 3 shows bigger profit in latest cost breakdown

On the road to profitability, suppliers often get squeezed. Auto manufacturing consultant Dennis Virag told The Wall Street Journal that automakers and suppliers often renegotiate contracts for work going forward, but that it is unusual to make such a reduction retroactive.

In a statement emailed to Green Car Reports, a Tesla spokeswoman confirmed the request and added: “We asked fewer than 10 suppliers for a reduction in total capex (capital expenditure) project spend for long-term projects that began in 2016 but are still not complete, and any changes with these suppliers would improve our future cash flows, but not impact our ability to achieve profitability in Q3. The remainder of our discussions with suppliers are entirely focused on future parts price and design or process changes that will help us lower fundamental costs rather than prior period adjustments.

“Negotiation is a standard part of the procurement process, and now that we’re in a stronger position with Model 3 production ramping, it is a good time to improve our competitive advantage in this area. We’re focused on reaching a more sustainable long term cost basis, not just finding one-time reductions for this quarter, and that’s good for Tesla, our shareholders, and our suppliers who will also benefit from our increasing production volume and future growth opportunities.

“It’s the right thing to do,” she added.

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It’s worth noting that such supply contracts are often renegotiated as volume increases, which reduces part-costs.

Last month, Tesla allowed all existing Model 3 deposit holders to order their cars, which required those buyers interested in the offer to give the company an additional, non-refundable $2,500 deposit, which some observers saw as another way for Tesla to pull revenue forward.

According to the Journal, Tesla is facing payments on $230 million in debt in November if its stock price doesn’t reach a conversion price of $560.6 per share. Next March, it faces  even bigger bills on $920 million of bonds if the stock isn’t at $359.87 at that point. The stock closed down 10 percent Monday on the news of the supply contracts, at $303.20.

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