Elon Musk said he’ll cut Tesla Inc.’s workforce by 7%, or more than 3,000 jobs, warning that the “road ahead is very difficult” in making electric cars more affordable for the mass market.
The shares fell 7.2% in early U.S. trading after the Palo Alto, California-based company said it managed to eke out a profit in the final three months of 2018 -- though narrower than the hard-won third-quarter earnings it reported in October, according to a blog post on Friday.
Tesla (IW 500/99) is under pressure to limit spending as it emerges from what Musk called the “most challenging” year in its history. While it succeeded in scaling up output of its Model 3, the company missed analysts’ production targets during the fourth quarter, and it’s had to cut prices to make up for the halving of a U.S. tax credit that’s acted as a buyers’ incentive. The credit is set to drop again in July before going away entirely at the end of the year.
Model 3 Prices
The company increased staff by 30% last year, which is “more than we can support,” Musk said in the blog post. It has absorbed some of the cost challenges by initially selling only the highest-priced versions of the Model 3, its first vehicle billed as a car for the masses. Until now, the cheapest configuration available of the vehicle, which has a base price of $35,000, has cost $44,000, Musk said. As production increases over the next few months, the company will need to sell lower-cost versions, he said.
“Starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles,” Musk said. “Moreover, we need to continue making progress towards lower priced variants of Model 3.”
Tesla had about 45,000 employees, Musk told the publication Electrek in October, so the 7% cut works out to be about 3,150 jobs lost. The company is also expanding in Europe and China, which will be costly, said Sven Diermeier, a Frankfurt-based analyst at Independent Research GmbH.
“With rising Model 3 sales margins are deteriorating with a weaker model mix,” Diermeier said. “Compensating for this will be difficult, so job cuts are logical.”
The company will also see a significant increase in competition for electric cars, as traditional manufacturers have started to roll out an array of products that will be measured against its pioneering lineup. Daimler AG unveiled its EQC electric crossover last year. Audi followed with the E-Tron and its parent, Volkswagen AG, plans to introduce more than 50 purely battery-powered vehicles through 2025 across the group.
Tesla shares dropped to $322.40 in early U.S. trading. The stock is little changed in the past year -- though it gyrated dramatically during 2018 as Musk careened from crisis to crisis: warring with analysts over Tesla’s cash needs; smoking weed in an interview and losing his chairman’s role in an SEC settlement over his tweeted buyout offer that never materialized, all while working furiously to ramp up production of the Model 3.
Tesla’s overarching challenge is making cars, batteries and solar products cost-competitive with fossil fuels, Musk said Friday in the blog post.
“While we have made great progress, our products are still too expensive for most people,” Musk said. “Sorry for all these numbers, but I want to make sure that you know all the facts and figures and understand that the road ahead is very difficult.”
Incumbent carmakers are also struggling with the high cost of making electric cars. On top of record investment in new electric-car lineups, high battery costs are crimping margins and buyers worried about charging and driving range largely remain on the fence.
Recent Auto Layoffs
GM will close plants with more than 14,000 job cuts, though most hourly workers will be offered positions elsewhere. Ford will cut thousands of jobs in Europe; Morgan Stanley has estimated the total could reach 25,000 Jaguar Land Rover will cut 4,500 jobs, most of them in the U.K. Nissan announced 700 job cuts at its Mississippi plant on Wednesday
Tesla’s layoffs mark the second shedding of workers in a matter of months. In June, Tesla dismissed 9% of its workforce, after misjudging how quickly it could ramp up mass-manufacture of the Model 3 -- only to go on an aggressive hiring spree shortly after.
The company must now make rapid gains in its manufacturing processes as it increases the production rate of the Model 3, Musk said.
“Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range (220 mile), standard interior Model 3 at $35k and still be a viable company,” he said. “There isn’t any other way.”
By Anthony Palazzo and Elisabeth Behrmann