Tesla is cutting its workforce by about 7 percent, CEO Elon Musk announced in a Friday morning email to employees. Musk said that the cuts are necessary to help Tesla cope with what Musk described as an "extremely difficult challenge: making our cars, batteries, and solar products cost-competitive with fossil fuels."
Tesla's stock price fell more than 9 percent on the news.
Tesla grew its workforce by 30 percent in 2018, according to Musk, but that growth turned out to be unsustainable. And Tesla is facing a number of headwinds in the coming months.
Tesla reported strong cash flow and profits in the third quarter of 2018—the first time that has happened in several years. These strong results were made possible in part by pent-up demand for the Model 3. With tens of thousands of Americans waiting for the vehicle, Tesla was able to offer the highest-priced versions of the Model 3 first and enjoy a correspondingly fat profit margin. (Another factor was the sale of almost $190 million in regulatory credits.)
But by the end of the third quarter, many of those affluent Tesla superfans had received their Model 3 deliveries. As a result, Musk said, profits in Q4 were smaller than in Q3.
Tesla is just beginning to sell the Model 3 outside the United States, with the company currently seeking approval to begin sales in Europe. That will give Tesla another temporary profit boost in Q1 2019 as it sells high-priced Model 3s to affluent customers in Europe and Asia. But Tesla's longer-term success will depend on bringing down Model 3 production costs, Musk argued.
"Our products are still too expensive for most people," Musk wrote.
Currently, the most affordable Model 3 you can buy costs $44,000—significantly above the target price of $35,000 Musk announced in 2016.
Meanwhile, the US federal government is phasing out subsidies for the Model 3. Until the start of 2019, an American Tesla customer got a $7,500 tax credit. The credit fell to $3,750 on January 1, and it will fall again to $1,875 on July 1, before disappearing altogether at year's end. From the customer's perspective, that's equivalent to a $7,500 increase in the Model 3's cost over the course of just one year.
Earlier this month, Tesla cut the price of all its cars by $2,000 to partially offset the $3,750 reduction in the federal tax credit that took effect on January 1.
"The road ahead is very difficult," Musk wrote.
Tesla is still aiming to offer a $35,000 version of the Model 3 with a range of 220 miles. Musk said that Tesla would need to achieve greater economies of scale to get there.
Tesla has been making other cost-cutting moves, too. On Thursday, Musk announced that Tesla was ending its referral program, which provided free use of Tesla's supercharger network for six months. Referring customers got a variety of generous prizes—up to a free Tesla Roadster for customers who rack up dozens of referrals.
Tesla also recently discontinued the lowest-price versions of the Model S and Model X.
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