Elon Musk may have dug himself a PR hole with his ego-driven tweet disparaging one of the heroic Thai cave divers, and meeting customer deadlines has been a challenge. But he and Tesla have a much better problem: money.
Nothing shows this more clearly than the memo, obtained by the Wall Street Journal, in which the company asks vendors for retroactive discounts.
[Update 23-July-2018 6:15PM: Tesla sent a statement that called negotiation a "standard part of the procurement practice" and that it was "time to improve our competitive advantage in this area." The statement in part further says:
"We asked fewer than 10 suppliers for a reduction in total capex project spend for long-term projects that began in 2016 but are still not complete, and any changes with these suppliers would improve our future cash flows, but not impact our ability to achieve profitability in Q3. The remainder of our discussions with suppliers are entirely focused on future parts price and design or process changes that will help us lower fundamental costs rather than prior period adjustments of capex projects."
However, it does not refute the Journal's report that Tesla has asked vendors to provide retroactive discounts or rebates. [I have responded to the company's statement, directly asking if any such considerations have been requested, and I will provide a further update on receipt of an answer.]
Tesla wants, and needs, rebates to keep enough cash to stay in business. That's a terrible sign, according to experts.
It also shows that visionary genius and a fabulous idea are not enough. You need the management and operational abilities, even if you have to hire help to bring it in. If you drive your business into a brick wall at high speed through second-guessing real experts, it doesn't matter whether the engine is powered by gasoline, a battery, or fairy dust.
The news out of the Journal is truly shocking from a managerial viewpoint. The automotive industry is one among many where customers and vendors jockey over prices and terms. Pushing to get lower costs, longer times to pay, and other benefits is hardly new.
For a company to ask any vendors for retroactive discounts or rebates is highly unusual. David Johnson, a longtime automotive turnaround executive and managing partner of Chicago-based Abraxas Group, told Inc.com, "It is so far beyond the pale that I'm trying to think of a reputable blue chip company trying to do it, and I'm scratching my head."
There come times when any company or entrepreneur might face difficulties and need to work with vendors, partners, and others. "As someone who has done this for 20 years -- and I have stretched suppliers when my clients had cash-flow problems -- you can do that for a little while and then you have to do a lot of fence-mending when you're done," Johnson said. "When you're a public company and your financials are available [so suppliers can see your performance], how are these companies going to want to work with you again?"
Exactly. You can easily burn bridges. To complicate things, Tesla has grossly misunderstood the position of its vendors. In the automotive world, a supplier may not have an extra $5 million or $10 million to send back even though it has delivered products in good faith under an existing contract.
Instead of getting "extra" money from the vendors, Tesla is, in effect, asking them to go back to their banks to extend credit terms. "Every bank that holds a revolving line of credit for one of these suppliers is now essentially supplying Tesla cash flow and they're going to push back," Johnson said. "Tesla probably thinks it's fighting suppliers, and they're not. They're fighting Wells Fargo and Bank of America. I can't image how a public company let this get past a five-minute discussion in the boardroom. Their cash burn is going to go up, not down, after this."
This all comes down to mismanagement. Hitchhiker's Guide to the Galaxy author Douglas Adams once said of deadlines: "I like the whooshing sound they make as they fly by." At Tesla, you'd have to wonder whether whooshing sounds were something drifting over from a test track or yet another missed milestone.
Musk may be a famous and successful entrepreneur, but you have to ask what the word success means. "I think success kills companies just as much as failure does because success masks bad habits," Johnson rightly said. "Everything gets coded as success, so he might assume everything he's done was right." However, none of his companies are profitable and the near financial future is hazy. When you're the one in charge, you can blame others only for so long.
Different people have different talents. Entrepreneurs often need to bring in real management with skills in operations, finance, marketing, HR, and other aspects of running a business.
Musk has a long reputation as a micromanager. That approach is questionable at best. But when you don't know as much as the people whose decisions you question, it can be a disaster. And that explains a lot at Tesla and his other ventures.
It's time for Musk to step back and let others who know how to produce cars at volume on schedule take charge. Whether his ego will let him do that or not is another question.