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Businesses The Almighty Buck

Tesla Burns Through Record Cash To Bring the Model 3 To Market (bloomberg.com) 220

Dana Hull, reporting for Bloomberg: Tesla's Elon Musk keeps getting the green light to do what it takes to bring electric cars to the masses, regardless of how much it's going to cost. The company burned through $1.16 billion in cash in the second quarter by spending on capacity for its cheapest model yet and boosting battery output. Investors fixated instead on what Musk said is coming next: Hundreds of thousands of Model 3 sedan deliveries, installations of solar roofs and an all-new semi truck to add to the lineup. "This is the best I've ever felt about Tesla's future," Musk said on a conference call. The stock surged as much as 7.4 percent to $349.94 as of 9:45 a.m. Thursday in New York, the biggest intraday gain in four months. The chief executive officer has built a fanatical following of Tesla shareholders who continue to throw their support behind his clean-energy vision. It helps that consumers keep opening their wallets: The Model 3, which starts at $35,000, has racked up almost half a million reservations and is drawing more deposits by the day. The record negative free cash flow Tesla reported for the three months ended in June was almost double the $622 million it went through in the first quarter. With a little more than $3 billion in cash on hand, Musk told analysts the company is thinking about raising money through a debt offering.
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Tesla Burns Through Record Cash To Bring the Model 3 To Market

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  • by sxpert ( 139117 ) on Thursday August 03, 2017 @10:44AM (#54933205)
    it's buying hardware and services to set up the production facility... big difference burning cash would be spending it on things that don't do anything for the company, such as distributing dividends and cash executive bonuses...
    • by ranton ( 36917 ) on Thursday August 03, 2017 @10:47AM (#54933223)

      it's buying hardware and services to set up the production facility... big difference
      burning cash would be spending it on things that don't do anything for the company, such as distributing dividends and cash executive bonuses...

      Considering the terminology for how much they spend each month is their "burn rate" I don't see how burning cash is that inaccurate of a description. Probably evokes some misleading connotations but these are the terms the industry is using.

      • by sxpert ( 139117 ) on Thursday August 03, 2017 @10:48AM (#54933237)
        it shows "the financial sector" has it's priorities reversed if they seem to think "investing in production machines" is "burning cash"
        • by fruey ( 563914 ) on Thursday August 03, 2017 @11:07AM (#54933377) Homepage Journal
          Well the cashflow is negative, for sure, but it's a long term investment strategy. Headlines are getting more clickbait-reinforced by the day.
          • by Solandri ( 704621 ) on Thursday August 03, 2017 @12:12PM (#54933797)
            The problem is their cashflow is mixed together with government incentives influencing buyers, and selling ZEV credits [ca.gov] to other car manufacturers. It's not at all clear that Tesla's long-term investments actually yield a self-sustainable business model without these external factors. Both have to end at some point.
            • Well consider that majority of American M3 buyers KNOW they will not get 7500 from feds, and are STILL buying M3s. In fact, it appears that M3 may be the highest demand car in America.
              • by uncqual ( 836337 )

                Very few people have actually bought a M3 yet. The deposits are fully refundable and a few negative reports on the M3's reliability, function, or value could cause a rash of cancellations. I wish Tesla the best of luck, but at this point their venture is quite speculative - esp. given that Musk seems to be intent on dividing his attention as many ways as possible across unrelated fields.

            • > Both have to end at some point. Why?
          • by Rakarra ( 112805 ) on Thursday August 03, 2017 @04:35PM (#54936063)

            Well the cashflow is negative, for sure, but it's a long term investment strategy. Headlines are getting more clickbait-reinforced by the day.

            The difference is that cash flow is real, and long-term investment is hope. There are lots of companies that spend cash to "invest in the future" and that cash is gone when the hoped-for sales don't occur. Tesla has a leg-up on them, given it has deposits for future sales, but not all of those future sales will happen.

        • it shows "the financial sector" has it's priorities reversed if they seem to think "investing in production machines" is "burning cash"

          Actually, their priorities are fine, it's just not the priorities that people think they have.

          About a month ago a huge percentage of Tesla's stock was held short(*), and everyone was screaming about how the stock was going to tank any day now.

          Except that they knew the Model 3 would be announced around the turn of the month, so people started getting out of the short position. That caused the stock to dip, and more people exited the short strategy, and the stock went from $383 at the end of June to $319 a co

          • so people started getting out of the short position. That caused the stock to dip, and more people exited the short strategy, and the stock went from $383 at the end of June to $319 a couple of days ago.

            I'm not following the logic here. A short position is exited by buying the stock, and that causes the stock price to rise, not fall.

          • Now maybe we will see some legitimate news and analysis about the health of the company.

            Burning $1.16B, having $3B cash on-hand, and considering a debt offering is legitimate news about the health of the company.

            Tesla does carry very real financial risk: they need to ramp up production higher than ever before, and they're running out of money to do it.

        • by hord ( 5016115 )

          It shows you don't work in the financial sector if you don't use their jargon.

        • by Kjella ( 173770 )

          it shows "the financial sector" has it's priorities reversed if they seem to think "investing in production machines" is "burning cash"

          It's an idiomatic use, like "He got his paycheck yesterday and already the cash is burning a hole in his pocket." indicating how willing the company is to use their cash reserve as opposed to sitting on it. They don't think anyone is going to set it on fire, literally or proverbially.

    • The main problem with Tesla is that, as it sells more cars, the expenditure per car sold rises linearly. That means they aren't getting economies of scale. The more they build, the more they have to spend to support existing vehicles on the road. It isn't clear if it's a quality issue or management issue or support issue or whatever, as they aren't entirely transparent on these types of expenditures, but it's worrying.

      https://seekingalpha.com/artic... [seekingalpha.com]

      • by sxpert ( 139117 )
        that's because they have to invest to grow their network of support locations, superchargers and the like. other gas powered car companies are using a network that's been build over the last 100 years or so...
        • Maybe so, but it is worrying to investors non-the-less.. Tesla remains high risk, even after all these years.

          The questions here are will Tesla make money, eventually, or will they have to burn all their cash on this infrastructure building from now until bankruptcy comes? If the answer is they will survive, then investors are asking HOW LONG will it take to turn a profit?

          Do you know the answers? Tesla doesn't know, Musk is making no promises so nobody knows... That makes them high risk. If you like the

          • Who cares? That only matters to investors. What matters to the clients if if they can deliver the product and how good it is. AMD seldom turns a profit as well but I think you would be hard pressed to find anyone in the PC segment who thinks they don't serve a purpose.

            • It *should* matter to buyers too. Where are you going to get that Tesla serviced if Tesla goes bust? How about getting parts? Do you have any idea how much it costs to maintain a DeLorean? Even WITH being able to time travel, it's expensive...

      • Tesla needs to hit a critical mass for their business model to really work and generate positive cash flow. That is clearly more than the ~2-300k cars they have on the roads today, and is likely closer to 1MM cars. They also need to have learned lessons from previous models for the mass-market strategy to actually work.

        From what little I see of the Model 3, my guess is they have worked hard to address complexity issues and design a vehicle that can be manufactured with reasonable complexity, and that is h

      • Re: Burn Rate (Score:4, Informative)

        by WindBourne ( 631190 ) on Thursday August 03, 2017 @12:31PM (#54933939) Journal
        Yeah, he and some MontanaSkeptic guy are well known for arguing that Tesla is dead, but Tesla keeps going and selling more. Gut feeling says both are idiot trolls being paid by kock Bros.
      • by Khyber ( 864651 )

        " the more they have to spend to support existing vehicles on the road"

        Uhhh, nope. Plenty of places like fast food joints and gas stations are putting in electrical charging stations for EVs, on their own dime.

        The McDonald's down the street from me has a PV covered parking structure, with four EV chargers. Hell, the entire building is almost entirely solar-powered, the only thing that isn't are the gas-based deep fryers.

    • Re: (Score:3, Insightful)

      by OldMugwump ( 4760237 )
      "Burning cash" simply means using up cash reserves, without replenishing them from sales. Cash can be 'burnt' wastefully (throwing parties) or usefully (investing in production machinery), but it's still called 'burning' if you're using it up faster than it's coming in. That's just how the term is used.
    • by AlanObject ( 3603453 ) on Thursday August 03, 2017 @11:11AM (#54933405)

      it's buying hardware and services to set up the production facility... big difference

      Absolutely. This post should be modded up 1000.

      What this also represents is a near perfect case study as to why most Republicans are sheer nonsense when it comes to the economic of taxation. They will try to convince you that if rich people and rich corporations accumulate enough cash they will start to "create jobs." So we need tax cuts or else nobody will create jobs.

      Pure BS. There is one reason and one reason only that a (well run) corporation will spend money to create jobs. It is because they are following a business plan to get customers to buy their service or product. Because they see a market they can win at. Anything else and they will turtle up and hoard cash and lay people off if necessary to stop bleeding.

      In this case Tesla has a $1B backlog. They know the customers are there and they are using a lot of its available cash to employ people. Either directly or by buying stuff from their vendors. Tesla has nowhere near the amount of cash on hand than many companies that are looking for a tax cut.

      So this is why they are not "burning cash." They are generating revenue. Profitable revenue which they will likely spend, not burn, creating the next generation product to expand their market space.

      • by jimtheowl ( 4200185 ) on Thursday August 03, 2017 @11:16AM (#54933427)
        "This post should be modded up 1000."

        That would be burning mod points.
      • by Rei ( 128717 ) on Thursday August 03, 2017 @11:30AM (#54933511) Homepage

        $1B backlog? There's nearly half a million reservations on a $35k-base vehicle (average expected sale value after options (luxury, performance, extended range, etc) = $43k). The Model S has a profit margin of about 25% per sale and they expect similar on the 3. You're looking at nearly $20B in sales and $5B in profit just from the already accumulated waiting list, which is increasing by about 1800 new reservations net every day.

        If Tesla manages the "production hell" ramp-up without any serious glitches that cause excessive delay / QA problems / expense, they've got it made.

        • If Tesla manages the "production hell" ramp-up without any serious glitches that cause excessive delay / QA problems / expense, they've got it made.

          I'm betting they will. Literally. I've been buying a little more TSLA every month for some time now. Lots of analysts have been rating it as overvalued on the fundamentals, but I think most of those analysts have one serious deficiency in their understanding: They don't know what driving an electric vehicle is like. Unless the traditional automakers can make the transition much, much faster than I think they can possibly do, Tesla is going to vault from being a niche player to a major automaker, and its val

          • I have to agree with you. I think the car business is great, but I think the real money is in the power business -- solar panels, home batteries, and I'd venture at some point power production from other means.

          • by Gorobei ( 127755 )

            The problem is that Tesla needs to transition from a niche player to a production automaker, meanwhile they are trying to finance themselves like a software company. Cars don't scale like software:

            One serious design flaw that starts surfacing three years from now could kill them (and they're already betting the farm here - they think their tooling is production ready and are budgeting accordingly, normal automakers would still be using lower cost, beta quality machinery while they work the kinks out.)

            They h

            • Yep, it's risky. I think they'll make it, and I expect a handsome reward when they do. Or I may lose a few thousand dollars if they don't. That's the game. The bulk of my retirement portfolio is in safer, more consistent bets, of course.
          • Tesla's current stock price is valued as if they already are a major automaker. Their market cap is higher than GM.
        • $1B backlog? There's nearly half a million reservations on a $35k-base vehicle (average expected sale value after options (luxury, performance, extended range, etc) = $43k). The Model S has a profit margin of about 25% per sale and they expect similar on the 3. You're looking at nearly $20B in sales and $5B in profit just from the already accumulated waiting list, which is increasing by about 1800 new reservations net every day.

          If Tesla manages the "production hell" ramp-up without any serious glitches that cause excessive delay / QA problems / expense, they've got it made.

          That's really a big "if".

          It's a ramp-up like Apple does for the iPhone - but really Foxconn is doing it.

          I doubt, though, that they can pull it off. They've got enough problems in their factories pushing out the current number of cars.

          Still waiting for the Tesla-Minivan or Station-Wagon anyway ;-)
          Though, they'll come last. SUV-buyers have more money...

      • by King_TJ ( 85913 ) on Thursday August 03, 2017 @11:56AM (#54933683) Journal

        As an Independent (yet a fiscal conservative who is repelled more by most Democratic tax plans than Republican ones), I'd question your assertion that "most Republicans" believe in the theory that rich people and corporations will start to "create jobs" only when they accumulate enough cash.

        That's another way of talking about the "trickle down economics" which were out of the 1980's Reagan era, and were really just based on an untested economic theory at the time. Reagan's cabinet members succeeded in selling him on and supporting, so they could try it. It didn't work, primarily because they underestimated how many successful companies have little or no interest in more growth. (Even giants like Apple exhibit this tendency today. No matter how much money they make? They still cling to a business model that says it's perfectly acceptable to build computers that only cater to a relative niche in the marketplace. Apple doesn't even try to build Enterprise gear for server rooms anymore, leaving that whole sector to other companies. It doesn't even attempt to make its own mail server -- opting instead to build its Mail and Calendar clients around Microsoft's Exchange solution. Sometimes, adding too many new employees and expanding into too many areas just dilutes the formula that makes you successful. So profits aren't sensible to dump back into business expansion.)

        I have no problem with Tesla's business model right now. I think Elon Musk is a very intelligent guy and a pretty decent leader, who really believes in the technologies he's trying to develop and market. That said though? He's definitely operating a company that greatly benefits from government loans, perks, subsidies and initiatives. In a more libertarian society, I'd like to see much less of that happening. But today, it is what it is. We voted for a bigger government than I personally like, and it's one that likes to take a lot of our tax dollars and spend them, directed at specific things it thinks are "best for all of us". So many subsidies have gone to fossil fuel based companies, it makes it really difficult to single out Tesla as the "bad guy" for receiving some now.

      • There is one reason and one reason only that a (well run) corporation will spend money to create jobs. It is because they are following a business plan to get customers to buy their service or product. Because they see a market they can win at. Anything else and they will turtle up and hoard cash and lay people off if necessary to stop bleeding.

        You should read a book on basic economics.

        Capital seeks returns. Always. It never "turtles up". Oh, a company will absolutely lay people off if they are not generating income. This frees up the capital to flow to other ventures where it can generate income... which it will do by buying capital equipment, hiring people, etc. to produce products that people want to buy.

        This is a Good Thing. Employing people and dedicating resources to produce stuff that no one wants to buy is bad for everyone. Oh, it appe

      • What this also represents is a near perfect case study as to why most Republicans are sheer nonsense when it comes to the economic of taxation. They will try to convince you that if rich people and rich corporations accumulate enough cash they will start to "create jobs." So we need tax cuts or else nobody will create jobs.

        You're trying to understand this from the perspective of an employee, not a business owner. Rich people and rich corporations don't "create jobs" in some cause and effect manner. It's

        • Your argument is interesting. I think that your description of the profit cycle is being undermined by automation, however. It seems predicated on the idea that labor is the source of capital/wealth.

          But to a business owner, the best way to increase your take-home pay (profit) is not by taking home the money saved due to a tax cut. It's from reinvesting that saved money into the business so your business can grow.

          Or you're Jeff Bezos. At some point the concept of take-home pay gets hazy. Perhaps you can extrapolate a bit.

          If you don't mind, I would also appreciate your position on capital gains/investment taxes and/or estate/death taxes.

    • Re: (Score:2, Interesting)

      by Anonymous Coward

      The Ford Taurus, in 1980s dollars, cost ONE BILLION DOLLARS. Which is roughly TWO POINT FIVE BILLION DOLLARS today.

      "Development for the first-generation Taurus started in the early 1980s to replace the Ford LTD,[2] at the cost of billions of dollars, with a team led by vice president in charge of car development Lewis Veraldi dubbed "Team Taurus."

      https://en.wikipedia.org/wiki/Ford_Taurus_(first_generation)

      Ford spent more money bringing the Taurus to market than it cost to research, develop, and deliver the

    • You're right -- it's not "burning cash." Both the headline and summary clearly say "burning through cash," which is a well-known [idiomeanings.com] idiom [cambridge.org] for spending lots of money quickly.

      Your straw man has certainly generated a vigorous discussion, though. Well done.

  • Borrow whatever you have to do but I want my Tesla 3. I'll do my part by spending an unnecessary amount of money on a supposedly entry level car, just make it happen.

  • by hackertourist ( 2202674 ) <hackertourist AT xmsnet DOT nl> on Thursday August 03, 2017 @11:40AM (#54933585)

    It's not unusual for a car company to spend this kind of money developing a new car and getting ready for production. The first time I can remember a company publicizing a figure of over $1B was Volvo for the first generation 850, so about 20-25 years ago.

    • by ledow ( 319597 )

      That's because Volvo sold 2.8m units of its predecessor model.

      It's a little different to be sinking a few billion into tooling and initial production, with little history, few sales (only tens of thousands of Tesla actually SOLD already), and lots of other things on the go (the summary even mentions batteries, trucks, etc.).

      Again, let's throw money at the problem. We don't have money left? Great, let's throw debts at the problem. To end up with a car that has few paying customers (reservations don't mean

      • I think US made trucks and SUV's are passable but when is the last time they made a decent car? They really are awful (hint they want you to buy a higher profit margin SUV or truck). Why would that change going to electric?
  • Aerospace companies like Airbus and Boeing invest in their products and expect payback to take decades. The difference with Tesla is it doesn't have as long a history of churning out products, but that doesn't mean that there will be no payback.

  • Going for my model S test drive next week. Still not sure whether the expenditure is sensible, but if if not I'll hold off a year and go for a model 3.

    No other manufacturer has a sensible alternative. Indeed everything else on the market at the moment is a conventional car with added battery.

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