Tesla vs General Motors -Who wins the AR war?

Tesla leads GM with 2-1 in the AR war. But the battle is just heating up!

Tesla is the Apple of the automotive industry. Not just in terms of technological advancements, but also in how it sells its cars and makes money.

I was curious to see how this rather unique 'car' company fares against established automotive giants like General Motors in accounts receivable (AR) management.

Here’s a comprehensive working capital metrics analysis of GM vs Tesla.

Tesla collects receivables 6X faster

Tesla’s average (2018-2022) accounts receivable turnover (ART) ratio, a metric that quantifies how effectively a company collects its receivables, is 23% against GM’s 4%. This means Tesla collects 6X faster than GM and has a higher operating cash flow.

Here are 4 reasons why Tesla is able to crack this!

Direct sales: Tesla cuts the intermediaries and sells directly to customers. Since 2019, it has closed its showrooms and sells exclusively via online channels. Tesla, typically, collects customer payments before vehicle delivery. GM, on the other hand, has to wait till its dealers/distributors sell the cars to receive payments.

Fewer sales on credit: Tesla does fewer credit sales compared to GM. Only 5% of Tesla’s sales are made on credit while almost 30% of GM’s sales are credit sales. 

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Stringent credit policy: Tesla strictly reviews customers’ credit applications, credit history, and credit bureau information (e.g. FICO scores) before extending credit terms. According to Tesla, generally, all its customers have strong creditworthiness at loan origination. 

Lower credit risk: The primary component of Tesla’s AR consists of payments owed by financial institutions, representing car loans provided to customers. These payments are relatively easier and faster to collect. For GM, the majority of its AR is payments owed by dealers. The associated credit risk and complexity are higher.

Tesla has one of the lowest DSO in the automotive industry

Days Sales Outstanding (DSO) measures the number of days it takes for a company to collect payments from customers. 

Tesla’s average DSO for the last five years was 14 days compared to 21 days for GM. Interestingly, both GM and Tesla have DSO that are lower than the automotive industry average(~53 days).

Tesla’s lower DSO is possible because of its direct-to-customer business model and higher ART(Accounts Receivable Turnover Ratio).

Tesla’s DSO is, in fact, comparable to many of the tech giants such as Apple and Amazon. No wonder, Tesla is often referred to as a tech company that makes cars! 

With a low DSO, we expected Tesla to also have a better (lower) cash conversion cycle than GM. But, we were wrong here!

GM vs Tesla on cash conversion cycle

General Motors had a negative Cash Conversion Cycle (CCC) throughout the last five years (-14 days average). This means that GM’s cash on hand is higher and it pays its suppliers much after it collects its receivables.

Tesla, on the other hand, had an average cash conversion cycle of 8 days between 2018-2020. But in the last two years (2021-22), it has been able to reduce its cash conversion cycle to -9 days.

GM’s lower DIO (37 days vs 54 days) helps it have a better CCC than Tesla’s inventory turnover ratio. 

• Dealer network: GM’s dealer network helps it push its finished products away from its inventory records and onto distributors. Tesla, on the other hand, has to hold its finished products because of its direct-to-customer sales model. Finished goods accounted for 30% of Tesla’s inventory in 2022.
• Raw material holding: Tesla anticipates growing its car volume by 50% every year. It has increased its raw material holding (as a percentage of total inventory) from 30% in 2018 to 50% in 2022, likely, taking cognisance of the volatile supply chain conditions and its growth plans. 

GM, on the other hand, mentions that it does not carry excess raw materials. In 2022, it had to temporarily stop production because of supply issues.

On the left, we have GM and Tesla’s inventory charts and other ratios.

Tesla, at the same time, has increased its DPO from 61 days in 2018 to 76 days in 2022. This is the key factor that has helped it reduce its cash conversion cycle in the last three years.

While at a glance it may look like Tesla is able to keep cash in hand longer, it also raises several questions. Tesla’s cash on hand decreased 8% YoY in 2022 while its accounts payable (AP) have climbed over 50% during the same period. 

The trend has been similar since 2020, with AP increasing 2.5X between 2020-22 and cash assets decreasing by 16%.

Tesla’s inability/delay in paying suppliers can hamper relationships and affect its production volume and sales in the long run. 

The competition in the EV market is going to be intense

The EV market is witnessing intense competition as GM, Ford, VW, and other traditional players expand their offerings in this market and up their sales & marketing strategy.

Many, including GM, have adopted Tesla’s strategy of online sales. This can help them reduce their DSO and improve their ART.

Last year, GM spent close to $10 billion (almost 90% of its operating expenses) towards R&D, primarily for enhancing its EVs.

Newer EV models from GM and other established players can force Tesla to lower its car prices further, thus hurting its revenue and profitability. Tesla has already cut its prices six times so far this year. 

It waits to be seen if Tesla can outplay more experienced players like GM to win the AR war and keep its market position in the EV segment intact in the next 5-7 years.