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Tesla turns to suppliers to reduce cost and become profitable

Tesla has been making a lot of moves lately to try to achieve profitability during the second half of the year as targeted by CEO Elon Musk.

Now the automaker reportedly turns to suppliers to reduce cost and become profitable.

The Wall Street Journal reported that Tesla contacted suppliers to ask price reductions for parts in the Model 3 program:

“The Silicon Valley electric car company said it is asking its suppliers for cash back to help it become profitable, according to a memo reviewed by The Wall Street Journal that was sent to a supplier last week. Tesla requested the supplier return what it calls a meaningful amount of money of its payments since 2016, according to the memo.”

Tesla declined to comment on the report, but they said that it’s part of their normal procurement negotiations.

The automaker had a different approach with suppliers when it came to the Model 3 program.

With Model S and Model X, Tesla had less credibility when it negotiated with suppliers, but by the time it came to place orders for parts for the Model 3, Tesla had two successful programs in production and it was talking about much higher volumes for Model 3.

Yet, those higher volumes also came with a steep production ramp-up that would affect suppliers.

Tesla suffered delays in the Model 3 production ramp, which also impacted its suppliers, but it now has achieved the long targeted 5,000 units per week production rate.

The automaker now attempts to become profitable with this new production ramp and as it aims to increase manufacturing capacity to 10,000 units per week next year.

Tesla has taken more drastic measures than asking for discounts from suppliers in order to achieve profitability.

Last month, Tesla started laying off about 9% of its workforce as it restructures the company.

Electrek’s Take

There’s nothing uncommon about a company trying to get suppliers to reduce their prices, but it certainly strange that they would ask to be reimbursed for previous payments on part programs that started years ago.

We have asked Tesla for more information about the situation and we will update if we get an answer.

Update: Tesla sent us a full statement:

“Negotiation is a standard part of the procurement process, and now that we’re in a stronger position with Model 3 production ramping, it is a good time to improve our competitive advantage in this area. We’re focused on reaching a more sustainable long term cost basis, not just finding one-time reductions for this quarter, and that’s good for Tesla, our shareholders, and our suppliers who will also benefit from our increasing production volume and future growth opportunities. 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. This is the right thing to do.”

In the meantime, what do you think? Let us know in the comment section below.

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