Profitability trails Toyota, Tesla is taking more money to invest quickly

According to reports, the latest financial data shows that Tesla is accelerating the rate at which cash is converted into products and sales, leaving more resources to invest in the future.

Tesla’s strategy appears to be paying off. In the January-March quarter, Tesla’s net profit jumped more than sevenfold from a year earlier to $3.3 billion, not far off industry leader Toyota’s $3.93 billion.

In fiscal 2021, Tesla’s cash conversion cycle fell to -15 days. This is the first time the cycle has turned negative since the company started mass production in 2012. This is very rare for an automaker. The cash conversion cycle refers to how long it takes a company to convert inventory investments and other resources into sales revenue.

Automakers often need large working capital on hand to stay afloat. However, a negative cash conversion cycle means that the need for working capital no longer exists, and companies can instead use those funds for investment. That compares to a 31-day cash conversion cycle for Toyota and 74 days for Volkswagen, before accounting for financial operations.

Tesla has been very efficient in generating revenue. Ryosuke Izumida, an analyst at financial services provider Monicle, said: “Tesla operates like a build-to-order. The company has received cash before production starts.”

Previously, Tesla managed to slash its inventory turnover rate from a peak of 152 days to 45 days. This achievement is achieved by aggressively simplifying component requirements and assembly processes. In fiscal 2021, Tesla Motors’ gross profit margin was 26.5%, beating Toyota’s 16.7% and Volkswagen’s 18.7%.

Tesla’s popular Model 3 has a minimalist interior and replaces the usual gauges and buttons with a unified touchscreen. Currently, the Model 3 and Model Y account for 95% of Tesla’s total production.

These Tesla models require only a small number of electronic control units (ECUs) to control functions such as steering and braking, reducing the need for wiring in the vehicle. In the past, ordinary cars needed to use 50 to 70 ECUs, while the number of ECUs in luxury cars could reach about 100. Tesla also uses large casting equipment to make complex parts in one shot, eliminating the need to assemble based on smaller parts. Typically, an electric car requires about 20,000 parts, compared with 30,000 for a gasoline car. It is reported that Tesla has further reduced the total number of parts to about 10,000.

These simplifications allow Tesla to lessen the impact of a global chip shortage. Between January and March, Tesla’s inventory valued at $20,000 per vehicle it produced, about 20% less than VW’s.

Also, Tesla’s lead times are short. Elon Musk, the company’s chief executive, sees a localized supply chain and quick turnaround from sourcing to delivery as the key to generating more revenue quickly. Tesla’s newest Gigafactory in Texas opened in April with a complete line from battery manufacturing to vehicle assembly. At the same time, Tesla sells cars through the Internet, without the need for a physical store.

The extra cash allows Tesla to make big investments and get a return on it. Tesla has built several new factories in China, Europe and elsewhere, and developed new electric vehicle batteries. Its benefit-to-cost ratio (FY21 operating cash flow divided by FY2020 investing cash flow) is 3.7, well above Toyota and Volkswagen’s 0.9 and 1.5.

Still, Tesla’s stock is down about 40% from the start of the year. Tesla’s revenue has doubled almost every year since it went public. Recently, Tesla also announced product price increases, signaling optimism about the business. It’s unclear, however, whether Tesla can sustain such growth amid growing concerns about slowing economic growth. Tesla’s future depends on whether the company can explore a new growth path while maintaining its ability to generate cash.