Tesla Cuts Vendor Orders: Could Be In A World Of Hurt

Summary

• Tesla is procuring parts at a high rate for Model 3 but Model 3 production is not in sight.
• Given the current status, we are skeptical Tesla produced even 100 cars this month so far.
• We see Tesla cash needs becoming urgent and necessitating a capital raise which may collapse the stock.

It is well known that Tesla (NASDAQ:TSLA) is struggling with Model 3 ramp. A report in Reuters based on a report on Thursday from a Taiwanese newspaper UDN gives intriguing insights into supplier dynamics of Model 3.

As we will explain in this article, we believe the implications for Tesla from the supplier contacts is dire.

Firstly, note that the report is in Chinese and Google Translate is needed for English language readers to get a better idea of the story. The best we can tell, Tesla Model 3 supplier, Hota, which makes a gearing related part for Model 3, is claiming several things:

• Hota was originally ordered to make 5000 parts per week. They are currently making and planning to make 5k parts per week for October and November.
• Per contract, Tesla gave them a 2-month notification to reduce order rate (part of the reason for the 2 month lead time could be the shipping time from Taiwan to the US).
• Other Taiwanese vendors are also affected and are in a similar situation.
• The article also speculates about production problems with Model 3 seats.

We have heard a similar story from a US vendor who has also seen their orders being cut by 40%.

Based on these data points, we believe that Tesla is realizing that Model 3 problems are not small problems and the Model 3 part procurement needs to be stopped or slowed down to better manage the Company’s cash flow and logistics. Given Tesla does not seem to be producing any vehicles right now, and has already built up a considerable inventory of parts, why does Tesla not ramp the orders to zero?

We believe, it is likely that Tesla is bound by a minimum procurement levels and those levels could be around 3K units per week.

The massive inventory of parts that is already built up and that is continuing to build can have severe cash flow and credit line implications for Tesla.

How big is the problem?

The magnitude of the problem

We estimate that, excluding battery costs, Tesla incurs around $14,000 in parts for each unit of base Model 3. As an approximation, let us assume that about $10,000 per car in parts are parts that are under vendor contracts with minimum orders and lead times similar to Hota.

At a planned run rate of 5,000 per week, Tesla has been ordering 5K kits per week from suppliers even though Model 3 is not in production. These 5000 kits per week at $10,000 per kit of orders leads to $50M in cash burn per week.

If 3,000 per week is the minimum contract size Tesla can go to, then Tesla may be forced to order 3K kits on an ongoing basis whether it needs or not. These 3,000 kits per week at $10,000 per kit of orders leads to $30M in cash burn per week.

Given these orders have a lead time of 2 months, it is likely that Tesla will be, or already has been, saddled with at least a quarters worth of inventory. One-quarter inventory could mean $650M in cash (in part financed with ABL) that needs to be parked in parts inventory ($50M X 13 weeks).

Going forward, for every week of delay in Model 3 ramping, Tesla will be burning cash/ABL at a rate of $30M per week.

It Can Get Worse

This flood of parts coming in with Model 3 production lines stopped means that all of these parts, several tens of thousands of automotive kits, will now need to be stored and managed. Considering that the space in Fremont factory is supposed to be at a premium, is there even storage space within Fremont to store these tens of thousands of kits? Will some of these kits have to be stored outdoors due to lack of indoor space?

As we have seen with Model X, it is possible that, with the onset of rainy season and winter, several of these parts will sit in storage and rust away creating future quality and logistical problems.

It is also possible that, by the time Tesla completes its beta testing and has production tooling, Tesla may find that some of the parts are no longer applicable and some of the inventory may need to be rubbished.

In short, what Tesla is now going through is a logistical, cash burning, nightmare.

Capital Raise Is Around The Corner

With mounting cash needs necessitated by Model 3 delays, we believe that Tesla is increasingly in need of fresh new capital. Some of the new capital may come in form asset-backed loans but that too has a cost and restricts the Company’s capital structure.

As the capital raise comes into focus, and with Model 3 story in disarray, we expect that the next capital raise will be a difficult one for Tesla. As funds and savvy investors realize this eventuality, we expect that there will be an exodus from the stock.

In our opinion, there is a steep fall ahead for Tesla stock.

Our View: Sell Short

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.