In an open letter to Tesla staff today, CEO Elon Musk announced the automaker is laying off 7 percent of its full-time work force, more than 3,000 people. It’s an effort, Musk wrote, to streamline the company and prepare it for tough times ahead.
It can also seem surprising, given Tesla’s blockbuster, profitable finish to last year. In 2018, Tesla also sold nearly as many cars as it had in its entire existence. The Model 3 sedan became the best selling luxury vehicle of the year, handily beating even the SUVs that giants like BMW, Mercedes, Audi, and Lexus build to suit American tastes.
That recent success, though, threatens to hide the fact that Tesla is still a young entrant in a brutally difficult industry. As much as the Silicon Valley native is disrupting transport with zero emission vehicles and big promises around self-driving, its core business is building and selling cars. And that’s really hard, even for the established players. Last year, General Motors and Ford announced they would stop building sedans for America, to focus on the more lucrative SUV and truck segments. GM plans to close at least three assembly plants and lay off 14,000 people. Morgan Stanley predicts Ford’s job losses could be worse .
“This year will be challenging for all automakers as we are forecasting a dip in new vehicle sales,” says Michelle Krebs, an industry analyst at Autotrader. Tesla already cut around nine percent of its workforce in a round of layoffs in June 2018, but despite that, Musk says staff numbers actually swelled by 30 percent last year. By cutting staff now and finding other savings where it can, Tesla can prepare.
In his letter, Musk said that to grow, Tesla has to stop relying on selling high-end vehicles. “While we have made great progress, our products are still too expensive for most people,” he wrote. That includes the Model 3, whose base price runs between $44,000 and $70,500, depending on the version and options. Those prices have allowed Tesla to make a profit even while slogging through “production hell.” The company is now expanding Model 3 sales to Europe and Asia, again starting with the high-end versions.
Musk wants Tesla to be a major player, competing with the likes of Toyota, Ford, Volkswagen, and GM, which requires achieving the economies of scale that make selling into the mass market a profitable business. Tesla’s all-electric lineup makes that extra hard—batteries are expensive. (This is why most of its competition comes at the luxury end, from vehicles like the Jaguar I-Pace, Audi e-tron SUV, and Mercedes EQC.)
But Tesla can’t go back to its loss-making ways to do it. Now that it has shown it can make a profit, it has set a precedent—and an expectation amongst its shareholders. “The car business is less cyclical than say airlines, which are OK to show profit over summers, and maybe losses over winter when travel slows down,” says says R. A. Farrokhnia, a business and engineering professor at Columbia University. “If Tesla shows a profit, it should sustain momentum.” Turning a profit is supposed to indicate that it is running smoothly, not relying on unsustainable, year-end sales pushes.
Along with the job cuts, Tesla is ending a program that rewarded customers who referred new buyers with chargers and even free cars. (Some writers on news, fan, and video sites shared their codes so widely, 40 people are due a $250,000 Tesla Roadster. Another 20 will get two each.
To keep sales moving, Tesla cut the price of all its vehicles by $2,000 at the start of the year to offset that fact that its buyers can no longer take advantage of a full $7,500 federal tax credit. It’s currently $3,750 and, as Musk writes, only dropping from there. “The need for a lower priced variant 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.”
Never one to be satisfied with the status quo—Musk ends the letter by forecasting more great things to come. “Full self-driving, Model Y, Semi, Truck and Roadster on the vehicle side and Powerwall/pack and Solar Roof on the energy side are only the start,” he writes. Just don’t expect the road to get there to be totally smooth.
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