FT, January 19, 2019
by Richard Waters & Myles McCormick
Elon Musk has warned that Tesla faced a struggle to make a profit this quarter as he cut more than 3,000 jobs from the electric carmaker.
More than 10 per cent was wiped from Tesla’s share price in afternoon trading in New York — setting the stage for another volatile year for the carmaker — after Mr Musk published a blog post warning of “an extremely difficult challenge” in making its products cost-competitive.
Mr Musk last year defied short-sellers on Wall Street as Tesla finally managed to reach the early production targets he had set for the Model 3, its first attempt at building a mass-market vehicle. This year, with tax incentives for US customers waning and pressure to bring down prices to reach a bigger market with the Model 3, Tesla faces a new set of challenges.
Mr Musk said the company had “no choice” but to cut staff numbers, adding that Tesla needed to lower the price of the Model 3 “as we need to reach more customers who can afford our vehicles”.
Tesla will cut full-time staff by 7 per cent, or about 3,400 employees. The headcount grew by 30 per cent last year, “more than we can support”, Mr Musk added. He also said the company would “retain only the most critical [temporary workers] and contractors”.
Mr Musk said this quarter Tesla would “with great difficulty, effort and some luck” target “a tiny profit”. The cautious comments appeared to point to a lower figure than the net profit of about $250m that most analysts have predicted.
Mr Musk said preliminary, unaudited results for the fourth quarter indicated that the company had made a smaller profit than the previous three months — something most investors had been expecting.
Pierre Ferragu, an analyst at New Street Research, said the comments were directed at workers rather than Wall Street and did not appear to point to any change in outlook at the company.
Tesla’s move followed job cuts last week that hit 10 per cent of workers at SpaceX, Mr Musk’s private space company, which is also racing to meet highly ambitious goals that it warned had bankrupted other companies.
The job cuts are not a sign of problems at Mr Musk’s companies, according to Mr Ferragu, but reflect Mr Musk’s normal approach of trimming costs at moments when businesses moved into a new phase.
“Getting a portion of the workforce out at important breaking points is part of his model,” he said.
Tesla cut 10 per cent of its staff in the middle of last year and underwent an overhaul of its management structure at a critical time in the ramp-up of the Model 3, yet still managed to exceed most investors’ expectations.
The news came in a blog post directed at employees, in which Mr Musk said that “there are many companies that can offer a better work-life balance”.
The intense pressure on workers as Tesla has tried — and often failed — to hit Mr Musk’s lofty targets have led to high turnover among senior staff over the past year, adding to the challenges.
The job cuts come after a $2,000 price cut for the Model 3 in the US ate into profit margins. Mr Musk said the price of Tesla’s “most affordable mid-range” vehicle was now $44,000, compared to the $35,000 price target it still had for the Model 3.
“While we have made great progress, our products are still too expensive for most people,” he wrote.
Mr Musk said the need for lower-priced variants of Model 3 will become “even greater” after July when a US tax credit drops in half, making its cars $1,875 more expensive. At the end of the year, the tax credit will disappear entirely.