5 Ways to Overcome Cash Crunch and Quickly Achieve 10X Stock Explosion in a Year: Tesla

In 2018, Tesla was almost going bankrupt, but then in 2020, the company became profitable, and the stock price increased tenfold.

Between 2017 and 2018, Tesla made a massive investment in factories. Elon Musk wanted to make the production “efficient” and significantly increase the car production to boost the company’s sales. That’s why he bought all the new machines. He envisioned a fully automated production process. However, the machines didn’t actually lead to an increase in output. And, by spending too much on those investments, Tesla was on the brink of bankruptcy in early 2018.

Elon calculated that if he could produce 5,000 Model 3 cars (a cheaper version of the Tesla car, which started production in 2017; before that, Tesla’s cars prices were more than $100,000) per week, he could make a profit and save the company. But as mentioned earlier, the expensive machines themselves didn’t accomplish this goal.

Tesla had advantages in its cost structure. No matter how much Tesla increased sales, its research and development (R&D) and selling, general, and administrative (SG&A) expenses didn’t change significantly.

In 2018, Tesla was the only player in the electric vehicle (EV) car field, so selling EVs itself was a unique selling proposition (USP) for the company, and they didn’t have to compete for customers through advertising. Even now, Tesla doesn’t pay for advertising because it has an excellent referral program. If you bring a friend to buy a Tesla, you can get insider perks from the company, for example,

・you’ll both get 1,000 miles of free Supercharging

・chance to win a Model Y monthly and a Roadster supercar quarterly, both signed by Elon Musk (only 1 car each)

https://www.tesla.com/blog/teslas-new-customer-referral-program

・invite to Tesla factory or SpaceX

・Free Premium Connectivity linked to Elon Musk’s Starlink

Tesla expands referral program rewards with free premium connectivity | Electrek

which doesn’t cost Tesla much. Additionally, Elon Musk was already a very famous celebrity, showing up in various places and getting free publicity for Tesla.

Regarding R&D, since Tesla had no EV competitors at that time, spending a constant amount on R&D was enough.

So, by increasing production, the margin between sales and the cost of making cars became a profit. Normally, when a company increases sales, its R&D and SG&A expenses also increase, but not for Tesla.

Elon focused solely on increasing production numbers. Ironically, the bottleneck in production was the high-spec machines he had purchased. Some “high-spec” machines couldn’t even pick up parts, while even the lowest-skilled human workers could do that task. He admitted that full automation was a mistake, and that nearly bankrupted the company.

The best situation would have been for him to generate positive operating cash flow first and then invest it in buying new machines – that is very healthy. Instead, he did the opposite: he borrowed money heavily, which had to be repaid in the short term, purchased unnecessary machines a lot, and caused a cash crunch – a typical textbook case of mismanagement.

He announced to his workers that the company was almost out of cash. In the first and second quarters of 2018, a cash outflow was $2 billion. The only cash on hand was $2.8 billion, and if the same pattern continued in the third and fourth quarters, the company would be dead. Moreover, Tesla had to repay $1.1 billion in debt before March 2019.

Factories and machines are fixed costs, so even if you make more cars, the cost remains the same – economies of scale work in this case. For example, if you buy a factory for $100 and make 100 cars, the fixed cost per car is $1, but if you make 1,000 cars, the fixed cost per car becomes $0.1. The more cars you make in the same period, the less the cost per car becomes. It’s more about the faster you make them, the less they cost.

And the following were the steps Elon Musk took to increase production speed:

1. He cut unnecessary processes. By eliminating steps ruthlessly, he made the production cycle shorter, allowing Tesla to manufacture more cars in the same period.

2. He discarded the machines he had heavily invested in and replaced them with human workers. They had to work on a 10 hours 7days schedule because Elon threw the machines away.

When cutting processes, he asked each process manager what the purpose of their process was, and if they couldn’t justify it, he cut it immediately. Reducing processes decreased work in progress at each stage, leading to less inventory.

Let me tell you a little story:

You and your friend both start small shops with $5,000 in inventory, each making $10,000 in monthly sales. Your friend decides to expand by opening two more stores – now they have three stores, each needing $5,000 in inventory. That means they’ve tied up $15,000 total in inventory to make $30,000 in monthly sales across all three stores.

You take a different path. Instead of opening new stores, you found a busy location where things sell much faster. Your single store still has just $5,000 in inventory, but you sell out and restock three times each month. You’re making the same $30,000 in sales as your friend’s three stores, but with just $5,000 in inventory.

Your friend chose to multiply their stores, which meant multiplying their inventory too. You chose to make your inventory work faster – like having one super-efficient store instead of three regular ones. Both approaches reach the same sales goal, but yours needs much less inventory to get there.

The same thing is happening here.

The inventory/sales ratio shows approximately how many times the inventory is sold. In the first quarter of 2018, it was 1.3 times, then in the third quarter of 2018, it became 2.0 times. They were selling cars faster after the turn around.

Fewer inventory and fewer fixed assets mean you have more cash because you don’t have to keep putting your cash into operations. If you have an unused land, sell it. And you can get the cash out of it. Being lighter is the way to be cash-rich

Also, fewer inventory items also mean smaller warehouse costs, and other operation costs compared to larger inventories. Also, you can sell the unused warehouse.

Elon should have bought machines only at the last moment when it became apparent that a specific process couldn’t work well without a particular machine, making it clear that purchasing that machine would solve a bottleneck and increase production speed. He should not have invested based on speculative thinking like “maybe this can improve general production…”

The biggest difference between machines and humans is versatility. Humans can invent poems or assemble cars. You can change a person’s role easily compared to a high-tech machine. You can reassign an employee, but not a machine. That’s why you should buy machines at the last possible moment – after you find out you can’t use the machines you have, you can’t change their usage and have to abandon them.

Those were the steps that allowed Tesla to increase production and make 5,000 Model 3 per week by July 1, 2018, turning around the situation.

Reference

Elon Musk by Walter Isaacson