Tesla Inc. announced Jan. 18 that it will reduce its workforce by 7% as it seeks to cut costs and offer lower-priced Model 3 sedans.
Elon Musk, the U.S. electric-car maker's CEO, told employees in a memo that the company needed to work even harder to compete against long-established automakers with Tesla products "still too expensive for most people" and with the upcoming loss of tax credits which will be phased out over the course of 2019.
"We unfortunately have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors," Musk said.
"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 also said the profit for the fourth quarter of 2018 was likely to be lower than in the three months prior when its profit was nearly 4% of revenues.
The start of deliveries to Europe and Asia of higher-specification Model 3 in the current quarter would enable Tesla "with great difficulty, effort and some luck, to target a tiny profit," Musk said. Tesla shares were down 6% in pre-market trading.
Musk said 2018 had been the most challenging year in the company's history but also the most successful. The company ramped up production to deliver on a long list of Model 3 orders and reach the much-promised output of 5,000 cars per week by June. Some analysts criticized Musk for extravagant spending in order to meet the goal rather than focusing on longer-term profitability.
Musk's memo signals a shift in mindset and a sense of caution after the CEO's run of PR blunders and hubris in 2018 led to the SEC forcing him to relinquish his chairman role at Tesla after he tweeted that he had secured funding to delist the company, claims that he never convincingly substantiated.
"Tesla has only been producing cars for about a decade and we're up against massive, entrenched competitors. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products," Musk said.
The automaker has so far been unable to deliver a $35,000 entry-level variant of the Model 3 as it focuses on orders for more profitable, higher specification cars with optional extras. The most affordable Model 3 is a $44,000 car with premium sound system and interior, 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 $35k and still be a viable company. There isn't any other way," Musk said. The company was seeking to increase production volumes even though it was reducing its headcount, Musk said.
Tesla has had a dominant position in the higher-end electric car segment for many years, but a handful of mainstream automakers such as Volkswagen AG's Audi and Tata Motors Ltd.'s Jaguar have begun deliveries of their first fully electric premium cars, while other automakers have announced a slew of other battery-powered products now in development, from budget hatchbacks to luxury SUVs.
In a separate move designed to increase profitability, Musk announced Jan. 16 that it would end a referral scheme under which owners could give six months access to Tesla's public network of high-speed superchargers to five friends with the purchase of a Model S, the company's largest sedan.