Palo Alto, California – Tesla Motors plans to cut 7% of its workforce and projects falling profits this year as it transitions from higher-priced versions of its electric vehicles (EVs) to the mid-range models it promised buyers nearly three years ago.
“Right now, our most affordable offering is the mid-range (264 mile) Model 3 with premium sound and interior at $44k. 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,” CEO Elon Musk said in a letter to employees.
Tesla announced the Model 3 in 2016, calling the EV a mass-market offering that would cost as little as $35,000. However, it can’t build a low-priced model profitably and has been shipping $50,000+ models to customers since production began at the end of 2017.
After a miserable start to production that year and struggles throughout 2018, the company managed to hit volume numbers in the final quarter of the year. As Musk noted in its letter to employees, “We delivered almost as many cars as we did in all of 2017 in the last quarter alone and nearly as many cars last year as we did in all the prior years of Tesla’s existence combined.”
In the third quarter last year, Tesla produced a 4% profit margin. Musk said preliminary numbers show the company remained profitable in the fourth quarter but at a lower rate.
“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 said, referring to the first three months of 2019. “However, 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 7% job cuts, along with minimizing the use of contractors, will be key to maintaining profitability as the company’s average vehicle price falls, 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 $35,000 and still be a viable company,” Musk said. “There isn't any other way.”