Job cuts as Tesla stalls in mass market bid

20 January 2019 - 00:00

Elon Musk is cutting Tesla'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.
Tesla shares fell as much as 7.7% shortly after the start of regular trading. Musk wrote in a blog post that the Palo Alto, California-based company 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.
Tesla is under pressure to limit spending as it emerges from what Musk called the "most challenging" year in its history.
Though it succeeded in scaling up output of its Model 3, the company missed analysts' production targets during the fourth quarter, and it has cut prices to partially make up for the halving of a US tax credit that has acted as a buyers' incentive. The credit is set to drop again in July before disappearing entirely at the end of the year.
Tesla increased staff by 30% last year, which was "more than we can support", said Musk on Friday. It has absorbed some of the cost challenges by initially selling only higher-priced versions of the Model 3, its first vehicle billed as a car for the masses. Until now, the cheapest configuration available has cost $44,000 (about R606,700), said Musk.
As production increases over the next few months, the company would 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. Moreover, we need to continue making progress towards lower-priced variants of Model 3."
The CEO has tweeted before about the risks in selling cheaper versions of the Model 3 too soon. He warned in May that Tesla would "lose money & die" if it shipped a $35,000 version of the sedan right away.
Tesla had about 45,000 employees, Musk tweeted in October. Based on that figure, the 7% cut works out to be about 3,150 jobs lost.
The company is also expanding in Europe and China, which would be costly, said Sven Diermeier, a Frankfurt-based analyst at Independent Research. "With rising Model 3 sales, margins are deteriorating with a weaker model mix," said Diermeier. "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 established carmakers have started to roll out an array of products that will be measured against its pioneering line-up.
Daimler unveiled its EQC electric crossover last year. Audi followed with the E-Tron and its parent, Volkswagen, plans to introduce more than 50 purely battery-powered vehicles up to 2025 across the group.
Tesla shares dropped to as low as $320.40 shortly after the opening, costing Musk more than $800m on paper, according to the Bloomberg billionaires index.
The stock was little changed over the past year, though it gyrated dramatically as Musk careened from crisis to crisis, warring with analysts over Tesla's cash needs, smoking marijuana in an interview and losing his chair's role in a Securities & Exchange Commission settlement over his tweeted buyout offer that never materialised - 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 on Friday in the blog post. "While we have made great progress, our products are still too expensive for most people.
"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 line-ups, high battery costs are crimping margins and buyers worried about charging and driving range remain on the fence.
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 thereafter.
The company must now make rapid gains in its manufacturing processes as it increases the production rate of the Model 3, said Musk in the blog post.
"Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required to manufacture the standard range [354km] standard interior Model 3 at $35k and still be a viable company," he said. "There isn't any other way."

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