Elon Musk, the CEO and founder of Tesla Inc. (NASDAQ: TSLA), said he could cut his workforce 7%, even though the company needs to increase production of its inexpensive Model 3. Musk did not make it clear how he could both cut staff and increase production.
According to a letter Musk sent to his employees, Tesla may have a “tiny profit” for 2018. That means that after a profitable third quarter, bottom-line results for the final quarter may not be as good. Among the reasons is that Tesla increased its workforce by 30% last year, which Musk said was too much to make a profit under current circumstances.
Production of the Model 3 to fulfill demand is only part of the math Musk explained. As the company cannot offer federal tax credits, which have helped drive demand higher, it will need to provide lower prices on its Model 3 to remain competitive in the market. This, in turn, means that costs will need to be lowered. “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 wrote. Federal credits fall as electric car companies sell more vehicles. Tesla’s customer credits dropped at the start of this year from $7,500 to $3,750, as it hit the 200,000 cars sold level. That falls in half again at midyear and disappears in 2020.
How does Musk plan to increase production with a smaller work staff? He says it will be via “making many manufacturing engineering improvements in the coming months.” There are no facts that show that the plan is assured. However, Musk said the company could not make more Model 3 vehicles and deliver them at $35,000 with a range 200 miles this year and maintain push toward profits.
For those who will be forced to leave, Musk offered this farewell, “To those departing, thank you for everything you have done to advance our mission. I am deeply grateful for your contributions to Tesla. We would not be where we are today without you” To those who will stay, there will be more challenges ahead.