Tesla cuts 7 percent of its workers but wants to boost Model 3 production

After a rare stretch of profitability and record-setting production and delivery numbers, Tesla now says that it will cut 7 percent of its workforce as part of a cost-cutting effort — the second round of mass layoffs since summer 2018. While the automaker did not state the actual number of jobs being cut, analysts estimated a figure of 3,150 based on the 45,000 total number of employees that Tesla CEO Elon Musk said the company employed.

In a companywide email also posted on Tesla's blog Musk gave several reasons for the drastic cuts, in addition to tempering expectations of even a moderate profit for the first quarter of 2019.

"In Q3 last year, we were able to make a 4% profit," Musk said in a blog post. "While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit."

Musk cited the need for lower-priced variants of the Model 3 — something the company has avoided until now in the production of its smallest model — as well as Tesla's approaching wave of competitors. The CEO also cited the approaching end of the federal tax credit.

"Right now, our most affordable offering is the midrange (264 mile) Model 3 with premium sound and interior at $44k," Musk added. "The need for a lower priced variants of Model 3 becomes even greater on July 1, when the US tax credit again drops in half, making our car $1,875 more expensive, and again at the end of the year when it goes away entirely."

Musk also indicated the number of employees that Tesla hired — either as temporary workers or full-time workers to boost Model 3 production — was unsustainable for the company.

Still, the announcement of such severe cuts caught several industry observers off guard. It also seemed to confirm fears of an excessively expensive production process that reached pace too late to take advantage of the vast market share Tesla currently enjoys among EVs in the U.S.

At the same time he announced the job cuts, Musk also claimed Tesla will actually need to boost Model 3 production with that smaller workforce.

"As a result of the above, we unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors," Musk wrote in a blog post. "Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months. 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. There isn't any other way."

Overall, all of the issues cited by Musk were ones were ones that industry observers had warned about in recent years and months: An overly expensive production process, lack of an entry-level model, limited and largely satiated amount of demand for higher-priced EVs, the looming end of tax credits and an approaching wave of competitors.

This wave of competitors has yet to overwhelm Tesla, but the first direct challengers are landing now: The Porsche Taycan, Audi e-tron and Jaguar I-Pace are in this wave, aiming at the price ranges of Tesla's pricier offerings, while a larger wave of budget-aimed EVs priced far below the Model 3 gathers on the horizon.

Tesla's announcement today made several references to lower-priced EVs while ignoring competitiveness at the top end of the market — perhaps Tesla has already reconciled with losing market share among a group of more expensive electric vehicles while losing confidence in a never-ending pool of wealthy buyers who would consider Tesla.

"While we have made great progress, our products are still too expensive for most people," Musk admitted in the blog post. "Tesla has only been producing cars for about a decade, and we’re up against massive, entrenched competitors. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products."

Is this the sales ceiling that industry observers warned Tesla would hit? Musk admitted as much in this blog post — one doesn't even have to read between the lines. The question that remains is whether Tesla will be able to stay agile enough to survive a wave of competitors at lower price points while retaining some market share against an incoming wave at the top end of the market, a top end that Tesla appears to have mostly mined already.

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