Suppliers for Tesla Inc. are scratching their heads after the electric car company sent an unusual memo to some of its suppliers last week asking for a partial cash refund to boost profitability. According to Bloomberg, less than 10 suppliers received the memo, which Morningstar Analyst David Whiston described as "troubling" in an interview with the publication.
The requested refund was sent by a global supply manager and would consist of supplier payments made in 2016, Yahoo Finance reported. In addition to cash back, Tesla is also asking for price reductions. After the memo was obtained by The Wall Street Journal (WSJ) on July 22, suppliers and manufacturers in the auto industry began questioning Tesla's motives.
"Usually, carmakers play hardball with suppliers going forward, not backward," Whiston told Bloomberg. "The second quarter could look ugly because [Tesla] spent a ton of money ramping up to hit production targets." The article noted that Tesla, which is $10.5 billion in debt, spent $8 billion since 2014, $1 billion of which was spent in the first quarter of 2018 for the production of its Model 3.
Tesla's share price plummeted on July 23, WSJ reported, but supplier payments have been slow since 2016 in efforts to "save cash."
While Tesla is made in the U.S., NACM Economist Chris Kuehl, Ph.D., said the auto sector as a whole has been "on the edge" over the past few months, particularly because of the administration's tariffs. The 25% tariff on steel imports, which has been underway for nearly two months, is putting a strain on carmakers, who are also facing an average price increase of 40% for steel.
"The consumer is beginning to worry about inflation now [and] it is not clear they will tolerate much of a price hike," Kuehl said. "Conversations about tariffs and bans on imported cars have not been helpful either, as the auto sector is not so easily divided into these categories anymore. The tariffs would hit GM and Ford as hard as Toyota and others."—Andrew Michaels, editorial associate