Some Tesla Suppliers Fret About Getting Paid
Auto maker’s tumultuous year has concerned some of its suppliers, which are pushed to extend payment terms or asked to give cash back
Tesla Inc.’s TSLA -0.80% tumultuous year has fueled concern among some of its suppliers about the auto maker’s financial strength after production of the Model 3 car drained some of its cash, according to industry executives and documents.
A recent survey sent privately by a well-regarded automotive supplier association to top executives found that 18 of 22 respondents believe that Tesla is now a financial risk to their companies, according to the document reviewed by The Wall Street Journal.
Separately, several suppliers in interviews said Tesla has tried to stretch out payments or asked for significant cash back. And in some cases, public records show, small suppliers over the past several months have claimed they failed to get paid for services supplied to Tesla.
Tesla has improved its on-time payments to production-related suppliers to about 95% from 90% last year, according to people familiar with the matter. For nonproduction suppliers, Tesla is paying on time about 80% of the time, the people said.
“We’re not behind because we can’t pay them,” Tesla Chief Executive Elon Musk said in an interview Friday. “It is just because we’re arguing whether the parts are right.”
The suppliers collectively represent a sliver of the hundreds of vendors that provide Tesla with components, tooling of manufacturing parts and services such as building construction. But taken together, the survey, interviews and documents show some suppliers are anxious about Tesla’s ability to pay them back.
“Regarding Tesla, any time there is uncertainty in the marketplace, it causes concerns for suppliers,“ said Julie Fream, the chief executive of the Original Equipment Suppliers Association, which sent the survey in the past few weeks—a period that encompassed Tesla’s second-quarter earnings and Mr. Musk’s announcement on Twitter that Tesla had secured funding for a plan to go private. “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.”
The survey was sent to members of the Original Equipment Suppliers Association’s council, which is made up of lead North American sales executives representing about 100 suppliers. It isn’t known how many exactly were surveyed. Of the 35 that responded, 23 were current or past Tesla suppliers. Some respondents didn’t answer all questions.
In the interview, Mr. Musk and financial chief Deepak Ahuja said Tesla’s financial strength is improving and it remains on track to be cash-flow positive and profitable in the current quarter. They said relations with its suppliers are good.
“If there was any doubt in our suppliers in the first place that should definitely be strongly extinguished, with our commentary and our results and the ramp-up of our production,” Mr. Ahuja said.
All of the respondents to the survey said they wanted to sustain or grow their business with the auto maker, and none wanted to exit.
Delays this year in the production of the Model 3 car drained Tesla’s cash, which fell by $1.13 billion in the first six months of the year to $2.24 billion.
Tesla’s current cash picture looks similar, according to internal company records reviewed by the Journal and to people familiar with the situation.
Tesla’s cash and cash equivalents fell to $1.69 billion as of Aug. 12, according to the records. That was largely because it repaid $500 million of a revolving credit line in July. Tesla plans to tap that same amount again later this quarter, according to the records. That, plus additional cash flow that Tesla anticipates from an increase in vehicle deliveries in the second half of the quarter, is expected to leave it with several hundred million dollars more in cash at the end of September compared with three months earlier, according to the records.
To conserve cash, Tesla has asked some of its capital-equipment suppliers in recent weeks for cash back ranging from 9% to 20% of what the company paid dating back to 2016, according to people familiar with the requests. In one email to a supplier reviewed by the Journal, Tesla asked for help to make “an immediate impact” by providing a rebate on products already purchased.
Tesla has said the rebates applied to less than 10 capital-equipment suppliers. Mr. Ahuja stressed that production-related suppliers—those it depends on to keep cars coming off the assembly line—weren’t asked for rebates, but instead Tesla is seeking to get costs reduced on future work.
The recent Original Equipment Suppliers Association survey found that 13 of 23 respondents said Tesla requested a “large” price reduction on current business and/or retroactive rebates.
One parts supplier was asked by Tesla for a 10% reduction on costs across the board going forward, a person familiar with the matter said in an interview. This person said the request was extreme, saying other auto makers typically seek savings of 1% to 2% on individual parts or programs.
The supplier said Tesla indicated it would ask to extend the payment terms to 120 days from 60 days if it didn’t get the price reduction, a length rarer among auto makers than a 90-day term.
Eleven of 23 responding suppliers in the survey said Tesla had asked them to extend payment terms. One tooling supplier was asked in recent weeks to move to a 90-day payment schedule from 60 days, according to a review of a proposed contract and a person familiar with the matter.
Mr. Ahuja said it is normal for auto makers to ask for better terms as the business improves. Tesla has steadily lengthened its payment terms over the past few years, and more U.S. public companies are extending the amount of time they take to pay their bills.
One of the suppliers said Tesla has stopped making payments to the company since last spring despite numerous promises. This person said he fears insolvency for his own company if he continues to ship products to Tesla and not get paid.
Public records show 16 companies since October have taken the unusual step of filing mechanic’s liens—or legal claims seeking unpaid compensation—against Tesla claiming bills haven’t been paid for supplies and services. Previously, only four liens had been filed against Tesla in all of 2015 and 2016 combined.
The liens were mostly filed this year in Alameda County, Calif., by small subcontractors against Tesla and contractors of the auto maker, primarily for providing work at the company’s Fremont factory. Some of the suppliers have since been paid, and the total outstanding dollar amount of claims is relatively small, totaling nearly $8 million, according to the documents.
Liens filed by suppliers against auto makers are rare, say automotive industry specialists. “When a customer is having financial issues…suppliers start filing liens to protect their secured position to ensure they are paid,” said Dan Sharkey, a lawyer at Brooks, Wilkins, Sharkey & Turco PLLC who specializes in supply-chain issues.
Mr. Ahuja, Tesla’s CFO, said it would be wrong to see the liens by subcontractors as a sign of financial distress. “It is an issue between the subcontractor and contractor,” he said, adding that it is common practice for subcontractors to name the manufacturer in a lien to create pressure on it.
Tesla shares were 1.6% lower at $300.60 in midafternoon trading in New York Monday after JPMorgan Chase & Co. slashed its stock-price target for Tesla to $195 from $308.
The Original Equipment Suppliers Association survey also found that eight of 22 respondents said they are worried about the auto maker filing for bankruptcy. It was conducted between July 26 and Aug. 8, the day after Mr. Musk tweeted about a plan to go private. He has since revealed a deal is far from complete.
In an email on Friday to the Journal, Mr. Musk said, “We are definitely not going bankrupt.”