TOKYO — Tesla is accelerating its timeline for turning cash into product and back to cash, giving the company a rare opportunity to commit more resources for investments into its future.
The strategy already appears to be paying off. Tesla’s net profit increased more than sevenfold on the year in the January-March quarter to $3.3 billion, not far behind Toyota’s 533.8 billion yen ($3.93 billion).
Tesla’s cash conversion cycle, which shows how long it takes a company to convert inventory investments and other resources into money from sales, fell to minus 15 days in fiscal 2021. This was the company’s first time in negative territory since starting mass-production in 2012, a rare feat for a manufacturer.
Manufacturers typically need to have a large amount of working capital on hand to operate. A negative cash cycle eliminates this need, allowing a company to instead invest the money.
For comparison, Toyota Motor’s cycle was 31 days and Volkswagen’s 74 days, both excluding their financial operations.
Tesla has always been very efficient at collecting revenue. “It almost runs like a built-to-order business, with cash already on hand before starting production,” said Ryosuke Izumida, an analyst at financial services provider Monicle.
The electric vehicle maker has succeeded in improving its cash cycle even further by slashing inventory turnover to 45 days from a peak of 152 days — a feat made possible through aggressive streamlining of parts and the assembly process. Tesla logged a gross profit margin of 26.5% for its automobiles in fiscal 2021, outpacing Toyota’s 16.7% and Volkswagen’s 18.7%.
Its popular Model 3 has a pared-back interior, with a single touch screen replacing the usual meters and buttons. The Model 3 and the Model Y account for 95% of Tesla’s total production.
The cars require just a handful of electronic control units (ECUs), which are responsible for steering and stopping vehicles, reducing the need for wiring to connect them all. Typically, a vehicle would use 50 to 70 ECUs. Luxury cars can have about 100.
Tesla also uses large-scale casting equipment to build complex components in one go, instead of putting together several smaller parts. Electric vehicles are typically said to require about 20,000 parts, down from 30,000 in a gasoline-powered vehicle. Tesla is believed to have reduced the number even further to 10,000.
These streamlining efforts helped shield Tesla from the global chip shortage. The company held about $20,000 of stock per vehicle produced in January-March, roughly 20% less than Volkswagen.
The Model 3’s features and settings are controlled by a touchscreen panel, eliminating the need for buttons and meters and reducing the amount of components in the car. © Reuters Tesla has a short lead time as well. CEO Elon Musk sees locally based supply chains and a fast turnaround from sourcing to delivery as key to earning more cash quickly. The new Gigafactory in Texas, which came online in April, is equipped for the full range of production processes, from battery making to vehicle assembly. And sales are conducted directly online, making brick-and-mortar stores unnecessary..
The extra cash has allowed Tesla to make big investments and reap big rewards. The company has built a flurry of new factories in China, Europe and elsewhere, and is developing new EV batteries. Its benefit-to-cost ratio — the operating cash flow for fiscal 2021 divided by the investment cash flow for fiscal 2020 — was 3.7, compared with Toyota’s 0.9 and Volkswagen’s 1.5.
Still, Tesla’s stock price has dropped about 40% from the beginning of the year. The company has almost doubled its revenue every year since going public, and recently announced a price hike in a show of bullishness. But it is unclear whether it can keep up this growth amid growing concerns of an economic slowdown. Its future will depend on whether it can chart a new path for growth while maintaining its ability to generate cash.