Tesla, Pushing for Profit, Faces New Questions Over Finances

Source: By Neal E. Boudette, New York Times • Posted: Thursday, July 26, 2018

A Model 3 body on the assembly line at Tesla’s factory in Fremont, Calif. The automaker has pinned its profitability outlook to ramping up production of the new model.Justin Kaneps for The New York Times

It’s crunchtime for Tesla Inc.

The electric carmaker has vowed to turn a profit in the second half of this year and has apparently increased production of a key driver of revenue, the fledgling Model 3 midsize sedan. But analysts are not yet convinced that Tesla and its chief executive, Elon Musk, will turn the corner in this quarter.

“I’m skeptical,” said Efraim Levy, an analyst at CFRA Research who follows the company. “It will be challenging on an operating basis to be profitable in the third quarter.”

And new questions have arisen with the disclosure of an effort by Tesla to renegotiate agreements with suppliers to achieve price reductions on work already underway.

The issue arose in a report Sunday night by The Wall Street Journal that Tesla had asked some suppliers to refund a portion of payments made since 2016. The report cited a memo to a supplier saying Tesla was asking for cash back to help it become profitable.

In a statement on Monday, Tesla said the discussions involved fewer than 10 suppliers and “are entirely focused on future parts price and design or process changes that will help us lower fundamental costs.” Tesla said negotiating for price reductions “is a standard part of the procurement process” and added that the requests it had made were aimed at improving cash flow in the future and not part of its push to achieve profitability in the current quarter.

Tesla said the reductions sought were for long-term projects not yet complete. It did not say whether it sought rebates for work already delivered.

Tesla’s shares were down sharply Monday morning and ended the day with a decline of 3.3 percent, to $303.20.

While squeezing cost savings out of suppliers is a common tactic in the auto industry, it most often involves future contracts rather than rebates for work already done, said Mike Jackson, executive director of the Original Equipment Suppliers Association.

“There have been instances of it, but it’s not normal,” he said.

Pressuring suppliers was a regular tactic of the three Detroit automakers a decade ago as they were scrambling to avoid bankruptcy, a fate General Motors and Chrysler were unable to evade. Many suppliers also slipped into bankruptcy, in part because constant price reductions made many lines of business unprofitable.

Tesla has said it needs to be able to assemble at least 5,000 Model 3 sedans a week to become profitable, and this month it said it reached that level in the last seven days of June. The company declined Monday to say if it had been able to sustain that rate since then. It plans to provide an update on Model 3 production next week, a spokesman said.

Tesla’s appeal to suppliers emerged after a series of incidents involving Mr. Musk that have raised concerns among at least some Tesla shareholders.

In a March earnings call, he clashed with analysts who asked what appeared to be routine financial questions. In the last several weeks, with Model 3 production hanging in the balance, he became involved in a bid to develop a mini-submarine to help save children trapped in a cave in Thailand, and lashed out at a rescuer who criticized the effort as a publicity stunt. On Twitter, Mr. Musk called the man a “pedo” — short for pedophile — although he later deleted the tweet and apologized.

The billionaire entrepreneur also offered, through Twitter, to help solve the water crisis in Flint, Mich., and sparred repeatedly with short sellers — investors who are betting against Tesla.

Gene Munster, managing partner at the venture-capital firm Loup Ventures, warned Mr. Musk in an open letter to him that his actions were “shaking investor confidence” in Tesla.

“Your behavior is fueling an unhelpful perception of your leadership — thin-skinned and short-tempered,” Mr. Munster wrote. “Twitter might keep Tesla in the news, but it won’t help continued improvements in production and product.”

Right now, Tesla has no more important product than the Model 3. The car, which is so far available only in versions selling for $49,000 or more, is supposed to provide revenue as the company spends heavily to develop future models. Tesla has not made a profit since it was founded in 2003, and in the first quarter it recorded a loss of $785 million. It also used up $745 million in cash.

Mr. Musk had once predicted Tesla would produce a half a million cars in 2018, most of them Model 3s, but production has been hampered by glitches and bottlenecks involving complicated robotic machinery the company is using. Mr. Musk has said he was sleeping at the company’s factory in Fremont, Calif., to solve manufacturing problems.

Tesla has taken reservations for more than 400,000 Model 3s, each secured by a $1,000 deposit. But analysts are concerned that some customers may cancel reservations because a $7,500 tax credit available to buyers will begin phasing out next year, increasing the car’s cost.

Furthermore, Tesla originally said the Model 3 would be available in a base model selling for $35,000, but the company has acknowledged that it will be difficult to hit its profit goals with that version right now. It recently removed the $35,000 version from the website where customers place orders.