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

Oct. 27, 2017 9:35 AM ETTesla, Inc. (TSLA)495 Comments

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

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