NEW YORK, Jan 19, 2019 (BSS/AFP) – Elon Musk’s electric car manufacturer
Tesla Motors announced Friday it was cutting its workforce by about seven
percent in a push to keep the Model 3 affordable for middle-income consumers.
Shares plunged following the announcement, which also signaled a tough
profit road ahead for Tesla.
The round of job cuts — which follow an earlier downsizing announced in
June — comes as the envelope-pushing company faces pressure in its home
market on prices from the phasing-out of a tax credit for electric car
purchases.
Musk did not release an estimate of the employment hit but the company had
45,000 employees in October, suggesting about 3,150 would be cut.
Musk, who originally conceived of the Model 3 as a reasonably priced
option for consumers who could not pay the lofty prices of its first two
vehicles, said action was needed if the company was to succeed in its mission
of challenging conventional autos.
“While we have made great progress, our products are still too expensive
for most people,” Musk said in a blog post announcing the layoffs.
“We need to continue making progress towards lower priced variants of
Model 3.”
– Loss of US subsidy –
Tesla’s most affordable offering is currently a less-endowed version of
the Model 3 at $44,000, a car that sells for as much as $59,000 with more
features. Tesla originally discussed a price-tag of $35,000 for the car.
Selling the Model 3 at the higher price has enhanced profitability at the
expense of access to the vehicles’ intended market.
Complicating matters further is the phasing down from $7,500 per vehicle
of a US tax credit to encourage more sales of the environmentally friendly
cars.
The need for “lower-priced variants of Model 3 becomes even greater on
July 1,” when a US tax credit drops by half, making the car $1,875 more
expensive, and again at the end of the year when it goes away entirely, said
the flamboyant Musk, who also heads SpaceX.
Rival automakers such as General Motors and Volkswagen are introducing
more electric models that are priced competitively, a dynamic made possible
by their fleets of conventional autos, including sport utility vehicles and
pickup trucks, which have wide profit margins.
Tesla shares sank 13.0 percent to $302.26.
“Tesla probably increased its employee base by more than it needed to last
year and is laying off some of those workers to bring down costs,” said CFRA
Research analyst Garrett Nelson.
“For most auto manufacturers, the cost-cutting would be received
positively but in Tesla’s case, investors start to second guess whether the
real issue is demand.”
– Grim profit outlook –
The job cuts announced Friday follow Tesla’s move in June to trim its
workforce by about nine percent. Musk described that round of belt-tightening
as necessary to enhance profitability, a goal that he said was essential to
demonstrate that environmentally friendly autos could be a viable business.
In October, Tesla reported third-quarter profits of $312 million.
In Friday’s blog post, Musk said preliminary results indicated that
fourth-quarter profits would be smaller than in the prior quarter and that
the outlook was tougher still for the first quarter of 2019 as it delivers
its first Model 3 sales in Asia and Europe at higher price points.
Musk hopes for a “tiny profit” in the current quarter, something that will
require “great difficulty, effort and some luck,” he said.
“Musk is right to say in the memo that Tesla’s products are ‘still too
expensive for most people,'” said Morningstar analyst David Whiston, who
predicted the company would face more “growing pains” and competition.
“If it can stay viable, we think (Tesla) can enjoy strong momentum with
the Model 3 for a while because the vehicle is just now being sold in foreign
markets and the entry-level version is not available anywhere,” Whiston said.
Tesla last month named two independent directors, Oracle co-founder Larry
Ellison and Walgreens Boots Alliance Executive Vice President Kathleen
Wilson-Thompson, as part of an agreement with the US Securities and Exchange
Commission to settle fraud charges against Musk after his quickly aborted
effort last summer to take Tesla private.
Musk has been a polarizing figure in corporate America over the last
couple of years, winning praise from many over his trailblazing
entrepreneurship but frequently turning heads over his unconventional and
sometimes bizarre behavior, as when he appeared to be smoking marijuana
during an interview that was webcast.