Subscription Model: The Secret Cash Generator for the EV Industry?

Curious about how electric vehicles drive their cash? Let’s peek under the hood at their DSO and other key financial metrics!

Electric vehicles (EVs) are becoming more common throughout the U.S., with millions now cruising on roadways alongside their gas-powered counterparts. As more companies join EV giants like Tesla, Chevrolet, and Hyundai competition for the burgeoning EV market share is likely to intensify.

However, behind all the flashy new models and promises of a zero-emissions future, how are the financials of these EV startups and legacy automakers holding up as they undergo massive transitions?

In this article, we'll be taking the EV industry for a spin and checking under the hood some key financial metrics like Days Sales Outstanding, Days Payable Outstanding, Days Inventory Outstanding, and Cash Conversion Cycle that reveal how efficiently these companies are converting sales into cash.

We'll see if they are cruising along smoothly or if any are sputtering when it comes to managing working capital. By analyzing trends in account receivables, payables, and inventory levels, we'll gain insights into which automakers have a firm grip on the financial steering wheel as they race down the road to an electrified future.

Strap in for an energizing ride!

U.S. EV Sales Hit 918,500 in 2022

Let’s explore the trends in the electric vehicle (EV) industry in the United States over the last few years:

Record-Breaking Sales:

• In 2022, the U.S. electric vehicle market witnessed remarkable growth, with just under 918,500 light electric vehicle sales. This number was over two and a half times more than in 2018.
• The strong demand for Tesla’s Model 3 played a significant role in driving this surge. The Model 3 remains one of the best-selling electric vehicles in the U.S. market.

Exponential Growth:

• Over the past five years (from 2017 to 2022), global EV sales skyrocketed from around 1 million to more than 10 million. This exponential growth underscores the rapid adoption of electric vehicles worldwide.
• In the U.S., the total number of EVs increased by an astounding 3,713% between 2012 and 2022, despite the challenges posed by the pandemic. In 2012, the U.S. had only 75,000 EVs in total.

Market Share and Infrastructure:

• The share of EVs in total car sales in the U.S. surged from 0.4% to 7.7% in the last 5 years.
• Tesla ranked as the largest EV brand in the USA at 56% market share.
• Chevrolet ranked as the second-largest EV brand in America at 5.9% market share, with Ford close behind at 5.8%

Overall, the U.S. electric vehicle market has experienced substantial growth, driven by technological advancements, environmental awareness, and supportive policies.

CCC Down by 20% from 2019 to 2023

The Cash Conversion Cycle (CCC) in the electric vehicle (EV) industry has consistently decreased over the past five years, showing marked improvements in operational efficiency. 

Starting at 20 days in 2019, the CCC reduced annually—19 days in 2020, 18 days in 2021, 17 days in 2022, and 16 days in 2023. This trend highlights the industry’s enhanced ability to manage inventory and finances, turning investments into cash flows more quickly.

With a five-year average CCC of 18 days, the 2023 figure of 16 days not only beats the average but also shows a significant improvement from 2019.

Now, let’s delve into the specific metrics—Days Sales Outstanding (DSO), Days Payable Outstanding (DPO), and Days Inventory Outstanding (DIO)—to understand better what drove these CCC scores.

DSO Drops by 26.7% to 11 Days by 2023

The Days Sales Outstanding (DSO) metric in the electric vehicle (EV) industry has demonstrated a downward trend from 2019 through 2023, indicating more efficient accounts receivable management.

There is a consistent annual decrease in the DSO, showing a gradual improvement from 15 days in 2019 to 11 days in 2023. This reduction represents a 26.7% decrease over the five years, signaling that companies are collecting receivables more quickly each year.

The industry average DSO over these five years stands at 13 days. By 2023, the industry has bettered this average with a DSO of 11 days, showcasing enhanced efficiency compared to the median performance.

In 2023, the DSO of 11 days is significantly lower than the starting point in 2019 and also below the five-year average. This improvement is crucial as it indicates that the industry is not only maintaining but accelerating its capability to manage credit and collections amid potentially challenging economic conditions.

How Does the EV Industry Maintain a Lower DSO?

Direct-to-Consumer Sales Model: Companies such as Tesla exemplify this model by selling directly to consumers, bypassing traditional dealerships. This eliminates delays in sales reporting and payment processing, often resulting in a DSO of around 20 days.

Subscription Models for Advanced Features: Tesla offers a Full Self-Driving (FSD) capability feature for $199 per month, instead of a $10,000 one-time payment. This subscription model ensures regular cash inflow and can help reduce the DSO by aligning payments with ongoing service delivery.

Government Incentives and Immediate Reimbursements: EV purchases often qualify for government incentives like the U.S. federal tax credit of up to $7,500, applied directly at the point of sale. This reduces the purchase price instantly, allowing EV companies to collect payments more quickly and positively impacting the DSO.

Integrated Payment Systems and Digital Transactions: Newer EV companies like Rivian and Lucid facilitate instant payment through modern online systems supporting credit cards, PayPal, and Apple Pay. These technologies ensure immediate fund transfer, helping to maintain a DSO well below 30 days.

DIO Drops by 22.2% to 14 Days by 2023

The Days Inventory Outstanding (DIO) metric for the electric vehicle (EV) industry has exhibited a decreasing trend from 2019 through 2023, reflecting improvements in inventory management efficiency. 

The DIO has consistently decreased each year, showing a gradual reduction from 18 days in 2019 to 14 days in 2023. This trend represents a 22.2% decrease over the five years, indicating that the industry is becoming more efficient at managing and turning over inventory.

The industry average DIO over these five years is 16 days. By 2023, the industry’s DIO of 14 days is below this average, suggesting better performance in inventory management relative to the typical industry standard.

In 2023, achieving a DIO of 14 days marks the industry’s strongest performance in the past five years, demonstrating the effectiveness of inventory control strategies and the capability to adapt to market demands more swiftly than in previous years.

What Reduces Inventory Days in the EV Industry?

Just-In-Time (JIT) Manufacturing Processes: Many EV companies, like Tesla, employ JIT manufacturing to closely align production with demand, minimizing inventory levels. This reduces capital tied up in unsold inventory. Tesla’s implementation of JIT has enabled it to maintain a DIO of about 10 days, significantly lower than the traditional automakers’ average of 30 to 50 days.

Vertical Integration of Supply Chain: Tesla’s vertically integrated supply chain, including in-house production of battery cells at its Nevada Gigafactory, minimize reliance on external suppliers and reduce inventory durations. This synchronization of production steps lowers DIO by decreasing the amount of unused inventory.

Modular Design and Shared Components Across Models: Companies like the Volkswagen MEB platform allows the sharing of up to 80% of components across different EV models. This modular approach reduces the variety of parts needed in inventory, facilitating faster turnover and reducing DIO. Fewer unique parts streamline both manufacturing and inventory management.

DPO Decreases by 30.8% to 9 Days

The Days Payable Outstanding (DPO) in the electric vehicle (EV) industry demonstrates a decreasing trend from 2019 to 2023.

There is a consistent annual reduction in the DPO, from 13 days in 2019 to 9 days in 2023. This trend suggests that the industry is settling its trade payables more quickly over time, with a total reduction of 30.8% over five years.

The average DPO for the five years stands at 11 days. By 2023, the DPO has decreased to 9 days, which is 2 days below this average, indicating an acceleration in the payment process compared to the overall industry trend.

Achieving a DPO of 9 days in 2023 represents the industry’s fastest payment rate in the past five years. This could reflect a strategic shift in financial management, potentially aiming to leverage early payment discounts or improve supplier relationships to secure more favorable terms.

What Led to a Lower DPO in the EV Industry?

Strategic Supplier Payments During Shortages: During critical shortages, companies like Rivian adjusted their payment strategies to secure key components like semiconductors by reducing their DPO. This proactive measure ensured uninterrupted production and maintained supplier favor during the semiconductor crisis, as reflected in their 2023 financial statements.

Utilization of Supply Chain Financing Programs: By implementing financing programs that incentivize early payments, brands like Rivian reduced costs and strengthened supplier relationships. Their 2023 quarterly reports highlight how these early payment discounts have streamlined operations and lowered their DPO, enhancing their supply chain efficiency.

Localization of Supply Chains: Companies like Lucid Motors shifted to domestic suppliers for better control and reduced lead times in component delivery. This shift significantly lowered their DPO in 2023, as they quickly managed payments to maintain strong local supplier relationships, per their latest financial disclosures.

Improved Financial Stability: With improved financial health, NIO used its enhanced credit status to negotiate more favorable payment terms, reducing its DPO. This adjustment is part of a broader strategy to demonstrate liquidity and operational efficiency, as seen in NIO’s financial reports from 2023.

Charging Ahead Into the Future

As the EV industry continues its blistering growth trajectory, manufacturers are adapting their financial strategies to keep pace and stay ahead of the competition. From 2019 to 2023, improvements in key working capital metrics demonstrate enhanced operational efficiencies across the board.

By streamlining accounts receivable, inventory, and accounts payable management through innovative processes, integrated supply chains, and strategic payment adjustments, companies are cruising along more smoothly. With CCC declining 20% over five years, inventories turning faster, receivables and payables cycles tightening, and balance sheets reacting swiftly to market changes.

As the transition to electrification accelerates, maintaining financial momentum will be crucial for automakers. While disruptions may lie ahead, early signs indicate the industry has a firm grasp on the financial steering wheel. By charging ahead with optimized working capital practices, EV companies are well-positioned to navigate future road bumps and storms. The electrified roads of tomorrow are theirs to own as charging into the future remains their energizinggoal.

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