Tesla’s quick money: Electric vehicle maker hot on the heels of earnings leader Toyota

TOKYO — Tesla is accelerating its timeline for turning cash into product and back into cash, giving the company a rare opportunity to commit more resources to investments in its future.

The strategy already seems 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 investments in inventory and other resources into cash from sales, fell to minus 15 days in fiscal 2021. It was the first time the company had been in negative territory since mass production began in 2012, a rare feat for a carmaker.

Manufacturers generally need to have significant working capital to operate. A negative cash cycle eliminates this need, allowing a company to invest the cash instead.

For comparison, Toyota Motor’s cycle was 31 days and Volkswagen’s was 74 days, both excluding their financial operations.

Tesla has always been very efficient in collecting revenue. “It works almost like a build-to-order business, with cash already on hand before it starts production,” said Ryosuke Izumida, an analyst at financial services provider Monicle.

The electric vehicle maker managed to further improve its cash cycle by reducing inventory turns to 45 days from a peak of 152 days – a feat made possible by aggressively streamlining parts and the assembly process. Tesla posted a gross profit margin of 26.5% for its automobiles in fiscal 2021, topping Toyota’s 16.7% and Volkswagen’s 18.7%.

Its popular Model 3 has a clean interior, with a single touchscreen replacing the usual meters and buttons. The Model 3 and Model Y represent 95% of Tesla’s total production.

Cars only require 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 50-70 ECUs. Luxury cars can have around 100.

Tesla also uses large-scale molding equipment to build complex components all at once, instead of assembling multiple smaller parts. Electric vehicles are generally said to require around 20,000 parts, compared to 30,000 in a gasoline-powered vehicle. Tesla is believed to have further reduced the number to 10,000.

These streamlining efforts have helped shield Tesla from the global chip shortage. The company held about $20,000 in inventory per vehicle produced in January-March, about 20% less than Volkswagen.

Model 3 features and settings are controlled via a touchscreen, eliminating the need for buttons and meters and reducing the amount of components in the car. © Reuters

Tesla also has a short delivery time. CEO Elon Musk sees local supply chains and a fast turnaround from sourcing to delivery as key to making more money fast. The new Gigafactory in Texas, which went into operation in April, is equipped for all production processes, from battery manufacturing to vehicle assembly. And sales are made directly online, making physical stores unnecessary.

The extra money allowed Tesla to make big investments and reap big profits. The company has built a host of new factories in China, Europe and elsewhere, and is developing new batteries for electric vehicles. Its benefit-cost ratio – operating cash flow for fiscal 2021 divided by investing cash flow for fiscal 2020 – was 3.7, compared to 0.9 for Toyota and 1.5 for Volkswagen.

Yet Tesla’s stock price has fallen about 40% since the start of the year. The company has nearly doubled its revenue every year since its IPO and recently announced a price hike in bullish momentum. But it’s unclear whether he can sustain that growth amid growing fears of an economic slowdown. Its future will depend on its ability to chart a new growth path while maintaining its ability to generate cash.

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