After a string of successes, Tesla is making sharp maneuvers in 2019 ahead of clouds that are gathering on the horizon. The automaker kicked off the year with price cuts across the board, followed by more price cuts and a reorganization of the model range options. After a modestly profitable fourth quarter of 2018, Tesla CEO Elon Musk issued a gloomy outlook for 2019, warning of new challenges even as Model 3 production has finally hit its stride.
"In Q3 last year, we were able to make a 4 percent profit," Musk said in a blog post in January. "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."
The company has rushed to cut prices ahead of the expiration of the $7,500 federal tax credit and to field less expensive variants of its vehicles to stimulate demand. The automaker finally announced the long-promised $35,000 Model 3 last week, delivering on a target made years ago, one that Tesla could not afford to pursue in previous months as it chased per-car profit.
At the start of the year, Tesla also slashed its workforce by approximately 7 percent, believed to represent some 3,000 employees, in an effort to cut costs.
"Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months," Musk indicated in a blog post earlier this year. "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."
Just last week Tesla made another sharp turn, announcing that it will close most of its stores after making a decision just in December to boost the number of stores by a significant portion, now saying it will shift sales to the internet. Store closures, of course, will mean even more cost and personnel cuts, in an effort to achieve an even leaner financial position. It is clear that Tesla is looking for radical ways to cut costs, but are such moves necessary just weeks after the automaker announced a boost in store count? These decisions appear to be made week by week when it comes to vehicle price cuts, model lineup and store count, painting an uncertain picture in the control room of the company.
On a conference call with the media days ago, Musk sounded skeptical of profit in the first quarter of 2019, reversing a previous outlook of modest profit in the quarter that will wrap up at the end of March.
"Given that there is a lot happening in Q1, and we are taking a lot of one-time charges; there are a lot of challenges getting cars to China and Europe; we do not expect to be profitable in Q1," Musk said on the call, days before Tesla announced orders for the long-awaited $35,000 model. "We do think that profitability in Q2 is likely."
What is driving this current wave of changes?
While Musk's skepticism about profitability in the first quarter of 2019 is linked to a $920 million one-time convertible bond payment that it had to make in cash, many of the other moves, including a mass store closure, are aimed at events a little further down the road.
In regard to the store closure itself, the move will certainly change Tesla's main conduit to new buyers and the public, which had used if not entirely relied on Tesla stores for familiarizing themselves with the brand. But the move has plenty of data to back it up: Musk indicated that 78 percent of Tesla Model 3 buyers bought the sedans online, rather than after a store visit, and an ever greater percentage had never even driven the car before buying it. Based on that claim, it does not appear that stores are really doing the selling, given that Model 3s are being bought like electronic appliances on Amazon, sight unseen. A number of automakers concur with this future footprint model, but Tesla is clearly the first to experience such high purchase rates entirely online.
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