Transcription
And I'm telling you, and I've been telling people this for almost a year, something's going on in China. They're not paying. I mean, it's not so much that the days payable are different between the U.S. because they are. Tesla's at 60-some or like low 60 days in the U.S. to pay their suppliers, and they're like at 90 in China.
So there's definitely an upset. There's definitely an understanding in China. But what you have to look at is the yearly progression. What Tesla's done over the last couple of years is they went from 120 to 110 to 100 to 90 or something. That's where they're at right now. They've been coming down.
The BYDs, the NIOs of the world have ballooned. They're all the way up at like 250 to 270 days. Is it really that bad? Yeah, and this is not—I'm not aware.
Yeah, well, I mean, we have a media that doesn't like sometimes to go into this. Although I will give Bloomberg credit; they did a story on this. It just doesn't get picked up. Like, people understand, like, the patient is sick. Like, something is wrong.
Okay, so let's, as Chamath would say, let's double click on this. So what is going on? Is it simply a—so let me take a guess, and then you tell me if I'm going down the right path. For a long time, it's been dubious if the Chinese automakers were actually making these cars profitably.
The only reason why you would be so late in paying your suppliers is because you don't have enough funds to pay them, right? I mean, what else will be going on here? And so that reinforces the fact that even though the Chinese manufacturing system is creating a lot of cars that are specifically electric vehicles, who knows how much they're being subsidized when it comes to the suppliers?
They're building stuff for the Chinese automakers, but they're not getting paid. So the only thing that could be happening here is that these automakers don't have the money to pay them, right? Even if they're being subsidized, they don't have the money to pay their suppliers, which paints a really grim picture.
At some point, something's going to break, right? At some point, you're going to have to say, "Okay, we can't make these anymore. We have to dramatically lower production, or we need the government to subsidize even heavier," right? Am I going down the right path?
I am. I simply find it too much. Help us understand.
Yeah, part—well, this is where it gets weird and twisted. Not only are they not paying their suppliers in net aggregate later, but what they're also doing is they've set up funding and financing agreements between the OEM and the supplier, where they're actually funding the supplier.
Like, the supplier's like, "I mean, you have to just—like, we have to do business where I make a part, you pay me. I make a part, you pay me." And then that's how the whole cash conversion cycle is created. But it's broken.
So you have BYD or name any other China OEM. Part of it is the CCP funding, but part of it—and we don't know to the extent of what that is; we just know it's there. But then part of it is the OEM themselves financing the supply and setting up financing terms.
In the U.S., if you work with a U.S. OEM, whether it's in auto or whether it's in consumer electronics, like, you want to be onboarded. I've been onboarded. I've been on the OEM side, and I've been on the supplier side, and it's a very grueling process to understand what are you building, who do you ship to, and are you healthy?
Like, there's a health portion of being onboarded as a supplier. And in China—and by the way, I'm not anti-China. I've run a supply chain in China. I have a good understanding and appreciation for the people.
Yeah, I have a good understanding. I'm not anti-China. I'm just saying, like, in this case of automobiles, none of us—this is the other thing. When people start reporting on BYD and they're like, "BYD, they're going to be the EV King." Oh, okay. Has anybody looked at stock and channel? Like, is it healthy?
Do we know, like, how many cars are at dealers? How much inventory do they have in their factory? Is anybody looking at those health metrics? We don't know. And it wouldn't be the first time that a company in China or a company in country X shipped a bunch of built and shipped a bunch of stuff and spit-flashed onto the screen only to light themselves on fire, whether it's months or years later, of just taking on too much inventory and just kind of having this facade of, like, we have an amazing business.
But this isn't a conspiracy theory. Someone needs to go in and answer the question: Do we understand stock and channel for these OEMs? One, so we understand their inventory position because we see the sales numbers.
Okay, and then, by the way, we don't know if those sales are to intermediate locations or to end consumers, but we see it. But we don't know the stock and channel. And now we see their payment terms have been expanding since COVID. Since 2021, they've been adding upwards of four to six weeks every year to payment.
These are catastrophic numbers. Back to the U.S., like Ford and GM, even with all of their issues, they're still in the upper 50s, low 60s for—maybe upper 60s, I think GM—for days payable to their suppliers.
So there's something going on here. And again, it's not clean. It's not like these suppliers either self-fund or they go to the CCP for money. There's also this funding loop that's going back and forth between the OEM and the supplier.
And there's this investment going on, and it's beyond—you will—there's investment going back and forth between supplier and OEM all the time, like CapEx. But I think it's beyond that, and we'll just have to see what's happening.
But I think back to, like, why did we get on this topic? We're just trying to understand, like, are we competing on a level playing field? And I just have a completely different theory about the kind of what's going to happen with China auto in the world.
The companies that I would be watching very closely are Xiaomi. I've competed against Xiaomi in the mobile phone world. They are spectacular. Their CEO is smart. They entered the car business with one model—one model.
And they also—the way they built that model, it's—I mean, you're seeing the videos online. It looks like it's 100%—nothing's 100% automated, but a high amount of automation. They are the antithesis to how some of the other major Chinese automakers make cars—very high labor intent, very high labor content.
I think BYD is going to cross a million employees, by the way, here pretty soon. So very high labor content. And my theory is—not my theory; it's just regular knowledge of how stuff's made—that very high labor content manufacturing process is going to be next to impossible for them to export and localize in Western Europe or the United States and be profitable.
And be profitable. Xiaomi, on the other hand, highly automated. You can go duplicate that automation. You have less labor layer content at the higher labor level in the U.S. They could potentially do it.
So, and you don't have so many models, so you've got kind of concentration with your supply base. So my just—my theory on the whole China taking over the world thing, there are a couple to look out for.
The next one I'd look out for is Li Auto, but it's not the top two or three that people always talk about in China. I think it's different companies.
H, that's why you came off. You did. You wanted to—so I guess to go back to BYD for just a second, I think you were hinting at the possibility that there's also some shenanigans in—you know, not only are there some possible shenanigans backwards in the supply chain, but also forwards to whoever is selling those cars to the end consumers.
And I just was thinking about the math of, you know, usually if you're a high-growth company, if you have payment terms where you're getting paid by your customers before you're paying suppliers, then the faster you grow, the faster you're actually, like, cash flow positive, and you're benefiting.
Versus if you are paying your suppliers before you're getting paid by your customers, the faster you grow, the more money you waste. Just based on looking at the overall, like, sniff testing BYD, they seem like they're growing really fast.
If they're growing really fast, why are they having to extend their payment terms? Correct, with their suppliers. They're actually getting paid by their customers. And so I think this lends credence to the idea that they're probably not actually—money is not flowing from consumers into BYD faster than they're paying their suppliers.
Otherwise, their cash position would be—yeah, I don't know if there's anything nefarious happening at all. Definitely, in terms of when they sell a vehicle, they sell the vehicle.
I'm not saying that where they could be struggling is as they globalize. Those number of days—from, again, they're making parts and sub-assemblies in China, or they were making the whole car, and then they export it, and they put it on a boat.
It depends on the terms they have with the importer. If they have, like, if they have terms of, like, the importer takes ownership at the point of export from China before it gets on the boat, then they're okay.
But some of these importers have leverage based on the size of their distribution network, and maybe they'll take ownership either when it's received in their host country or maybe even when they sell it to a particular person.
And BYD could be getting in trouble there as they go more global. I'm not sure. All I know is when I look at the data from 2021—this is online too. I can probably republish a post on it. Bloomberg and others have done write-ups on it.
It's just expanding every year as the company expanded. Their payment terms are expanding, so something's going on. And just the other big thing we don't know with BYD is what the hell's going on in channel.
Like, what's the size of the channel? How old is the channel? You know, how quickly are they turning the channel? Yeah, and the thing you described, Hans, is called the cash conversion cycle in supply chain or finance lingo.
And that's basically how quickly are you receiving payment for the good you made to the time you actually have to pay your suppliers for what you received. So if you're really good at this—and Tesla is really good at this; they may be the best, to be honest with you—you’re trying to drive the cash conversion cycle to a very short number of days.
If it's a short number of days, very short number of days, that means you have very little time between somebody writing the check and wiring their money for their Tesla and all the parts that went into that Tesla that you have to go and aggregate and pay your suppliers for.
And as you crunch that time down, you turn your company into an ATM. And as you expand it, you become the ATM. And that's the difference. And that's where companies blow themselves up, and they get into real trouble.
And I will bring this back full circle. Tesla's Q4—and I call this like at some point in Q4, Tesla realized that they're not going to get to the 515k number. They know it, okay?
And they also looked forward and they said that new Model Y, it's on track. Like, the new product's coming in. And one of the things that Tesla is really good about—and one of the most destructive things in unit economics that could crush your product unit economics and it could crush your balance sheet—is called excess and obsolescence.
It's when you have too much stuff in the channel. You got to pay price protection on it, or you have stuff at suppliers or stuff in the channel that has been canceled out because the new stuff is on the way, and you need more of the new stuff.
Tesla's masterful at this transition. So at some point in the quarter, they said, "We're not going to go for that number. We're not going to get it." I want the stock and channel to be as close to zero as possible on the model.
Not going to get it to zero, but they took their stock and channel to such a low level. They took it beyond the threshold, and what supply chain PE people measure—they measure in stock percentage.
This would be the probability of you being able to walk into a Tesla center anywhere in the country and drive off with a car within that day or a day or two. And they took that probability way below the threshold of being able to sell more cars at the velocity they normally need to sell at.
I hope I'm explaining this in a way that's understandable. There's the days of inventory going down to 12 versus being up at 18 or 20 or 22. Or I'd be fine with 25 because many of those days are actually transit days from it leaving the factory to it arriving to a point where it can actually be purchased.
But the point is, Tesla took that number down so low that they actually dampened their ability to have their normal sellout level in those last couple of weeks. And that's why the 495k number to Tesla—what was more important was the cash position.
By going from 18 to 12 days, they created $1.4 billion of cash, and they didn't make a number for analysts to clap back and forth on. They don't give a—they want the cash. They want the money, and that's the decision they made.
And they knew the Model Y was coming. That's how the whole thing—that's—I mean, I'm 100% sure that's the decisions they made.
H, I think you're still muted.
Yeah, sorry. I'm—I'm sorry. Some of these answers are a couple—I'm—G, shorter. Jeff, please keep doing it.
No, keep doing it. We have all the time in the world.