Tesla will have more than US $1 billion shortfall by the end of this year.

Tesla will have more than US $1 billion shortfall by the end of this year.

BI Chinese station reported on October 14th

From now until the end of 2018, Tesla needs to get $1 billion to repay creditors.

Now it seems that the company does not seem to have so much cash.

So forget about the lawsuit and Twitter controversy that Tesla CEO Elon Musk got involved in, the SEC's investigation and the bitter stories Musk told in an interview. Forget the goal of producing 5,000 Model 3 cars a week and moving from "production hell" to "delivery logistics hell" and all the rework. Forget all the revelations of hip-hop singer Azealia Banks.

Remember, Tesla is still an unprofitable listed company and has $11 billion in long-term debt. It also seeks to survive and grow in capital intensive and low margin industries.

Remember, in addition to bears and doubters, Musk has another enemy: mathematical computing.

Cash strained

Here are some signs of Tesla cash strain.

The company is trying to renegotiate with suppliers to get better payment plans or discounts. In August, a survey of 22 auto parts suppliers showed that 18 suppliers said Tesla had brought disaster to their companies. At least one supplier went bankrupt because he was waiting for Tesla payment. In Alamida County, more than a dozen companies have applied for mechanical liens against Tesla's unpaid payments for goods and services.

Moreover, there are indications that Tesla is also prepared to economize on its existing cash as much as possible. As of June 30th, the company's total debt of $9 billion 100 million has swallowed up its $6 billion 700 million assets. That is to say, its working capital has a shortfall of US $2 billion 400 million.

But this is Wall Street. Figures like this do not mean that a company is finished. Especially when the company has a market value of $50 billion and an outstanding CEO. As of June 30, Tesla still holds about $2.4 billion in cash, of which $942 million is a Model 3 margin paid by consumers. Apart from the margin, the company has only about 1 billion 400 million dollars in cash.

Moreover, its debt will expire at once. In November of this year, the company needed to pay $230 million to pay convertible bonds. By the end of this year, it will also need to prepare $920 million in cash to pay for loans due to expire in March next year. It also has a $157 million non recourse loan due in December of this year.

All of this adds up, and you will find Tesla's financial condition very bad. Apart from the Model 3 margin, Tesla's 1 billion 400 million dollar cash ended with only more than 60 million dollars.

There is a quick ratio in finance. It refers to the existing assets of a company divided by debt. Tesla's quick ratio is 0.20. In 2008, before GM went bankrupt, its quick ratio was 0.30.


So in March, Moody's downgraded Tesla, saying it had to raise money to continue operating and repaying its debts. It estimates Tesla will need to raise $2 billion this year, and its cash flow will remain negative in 2019.

In other words, Moody's says the increase in Model 3 production will not provide the cash Tesla needs in 2019.

In fact, according to Tesla's own estimate, it may not be able to make the company profitable. Musk said in a second-quarter earnings call to Tesla that it would produce 7,000 cars a week (5,000 Model 3 and 2,000 Model S and X) over the next quarter to make a profit.

Meanwhile, he plans to produce 50,000 to 55,000 Model 3 cars in the third quarter, and the actual delivery of 55,840 Model 3 vehicles exceeded expectations. However, this production is only equivalent to an average of more than 4,000 Model 3 cars a week, which is not enough to meet Musk's promise of profit.

Despite Moody's dire predictions and the disparity between Tesla's actual and profitable output, Musk repeatedly stressed this year that he would not raise money. So where does Tesla's capital come from?

Tesla watched many said they would not bet on musk. The company had been on the brink of a financial collapse and had barely managed a quarter. So despite all the difficulties Tesla faces, Macquarie analysts Maynard Um and Tim Liu still set their price targets at $430. They believe Musk will still be able to ride out the second half of 2019 as a juggle with electric vehicle credit (ZEV) and financing.

"Our view is that Tesla still has a lot of leverage to deal with maturing debt, including ZEV credit (estimated to be between $500 million and $600 million in the second half of 2008) and Modal 3 sales, unused debt commitments of $1.2 billion and possible adjustments in credit lines," the study said. Although Musk says Tesla does not need to raise more money, we believe that equity financing will improve Tesla's long-term prospects and provide a buffer against an unpredictable recession.

Gene Munster, founder of Loup Ventures, says he thinks things like ZEV credit are just noise. It is still the old way to make Tesla spend the debt crisis, that is, to generate cash through sales.

"In the final analysis, Tesla's development depends on the sales volume and gross profit margin of Model 3." "If you can figure out a way to turn cash flow from negative to positive, you can cope with the debt crisis," he said.

Munster's plan is roughly as follows: (Remember, Tesla needs $1.5 billion in cash to support its business.)

Sales volume of Model 3 continued to grow, and gross profit margin reached 15% in the third quarter of 2018.

If this is achieved, Tesla should be able to meet its $230 million in convertible bonds and $157 million in non-recourse loans, even if its cash flow is zero. This will reduce Tesla's cash to just under 2 billion dollars.

The hardest time was in the fourth quarter of 2018, when Tesla needed to raise its gross margin to 20% and increase car sales.

If it can do that, it can generate $1 billion in cash. Then, it will have 3 billion dollars in cash at the beginning of the new year, which is enough for it to pay its debts.

"Assuming I'm wrong, Model 3's gross margin didn't reach 15% in the third quarter or 20% in the fourth, its share price would fall, and then the question becomes: Can it still raise $1 billion?"

From "production hell" to "logistics hell"

Making the Model 3 gross margin 20% is not easy, in part because of what Musk calls "production hell." In the past year, Tesla has been having difficulty in simplifying the production process of Model 3 and reducing its cost.

Moody's downgraded Tesla in March because its Model 3 production was slower than expected. Since then, Tesla has been trying to speed up production, but it's still producing a $50,000 Model 3 and hasn't fulfilled its promise to start producing a $35,000 Model 3. There is no doubt that some people who bought the Model 3 under the margin are waiting for a relatively cheap version. But Musk himself has said that selling a cheaper Modal 3 now "is killing Tesla," because it's too cheap.

The more expensive Modal 3 is good for gross margins, but it also has a side effect --- Tesla is now not producing the cheaper Modal 3 that people expect. This leads to demand.

By July, about 25% of consumers waiting for Model 3 had withdrawn their margins, according to Rajvindra Gill, an analyst at investment firm Needham & amp; Co. At the same time, Tesla agreed to provide this set of indicators to anyone (as long as they are willing to buy a more expensive Model 3).

As a result, what Mask called "delivery logistics hell" appeared.

Unlike traditional car manufacturers, Tesla does not sell its cars through distributors. Traditionally, dealers buy cars from car manufacturers and are responsible for selling and delivering them. Tesla must be responsible for all these aspects. Moreover, the company seems not to be ready to do that. Mask also proposed another solution to burn the money to build his own truck.

At a teleconference on Tesla's second-quarter earnings report, Musk said he found Tesla's "mass production activities are in software, and mass production problems are mainly software problems".

We did not know what he meant by that.

"Software is not their production problem." Munster said, "production is their production problem."

Software problems can be solved through a few hours of programming and publishing. Production problems are different. It needs to redesign parts, make different tools, or rebuild assembly lines. More importantly, the cost of doing so is very high.

"We have solved a lot of old problems." Tesla, a former vice president, said, "however, there are always new problems. Production lines undergo numerous adjustments every week, and there are often unexpected consequences. "

Detroit would say these problems could be avoided if Tesla made cars in the traditional way. This traditional method is slower and more mechanically operated, with thorough planning before production begins. But Tesla's former and current employees say that careful planning is not the trait of the company.

"I found Tesla's financial difficulties from the first day." The vice president said, "the company can convince everyone that it is growing. But how much patience does Wall Street have to wait for? "

If Tesla's finances improve as Munster expected, Wall Street may soon be able to breathe a sigh of relief. Investors will be able to focus on Tesla's other issues - controversial CEOs, friction with regulators and others.

"Once you get a lot of profits, the doubters will not abandon you." Munster said, "and doubters will become less and less."

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