Palo Alto, California-based electric car maker Tesla, Inc., headed by the tech-wunderkind Elon Musk, has announced that the company has “no choice” but to reduce its headcount by approximately 7% or about 3,000 employees. Somewhat reminiscent of the time in June, 2018 when Elon Musk announced a “difficult but necessary” reorganization that saw approximately 9% of its salaried workforce or about 4,000 employees laid off.
What game is Elon Musk playing?
There is no doubt that Elon Musk, one of America’s greatest entrepreneurs and financial engineers who parlayed a propitious investment and a knack for self-promotion into a mélange of “big concept” companies that rely on constant infusions of venture capital, shareholder investment, and government subsidies. But when one looks behind the curtain, one sees a morass of poor executive decisions, crazy cross-capitalization of assets, and a micro-manager who gets involved in crises of his own making.
The truth is that Tesla has been profitable for only 3 quarters of its 15-year history and that was primarily due to selling pollution tax credits and reducing headcounts. As numerous well-credentialed and experienced automotive executives has noted, Tesla headcount, relative to its production levels and sales numbers in more than excessive. Gross inefficiency that can be explained and forgiven for a start-up, but not for a maturing company that could hire some of the best production people in the industry. Of course, part of the problem is that Musk regards Tesla as a technology company rather than an automaker, which focuses attention on products, people, and procedures not affiliated with the production line.
What Musk has not said in his email is that there is a $900 million bond payment coming due in March 2019 which would trigger serious ramifications if the company defaulted on the payment. There is little or no doubt that one of the oldest tricks in the CEO playbook is to shore up your share price and stockholder sentiment with an austerity plan, mass layoffs, an a promise to do better in the future.
Musk’s email to employees …
18 January 2019
This morning, the following email was sent to all Tesla employees:
As we all experienced first-hand, last year was the most challenging in Tesla’s history. However, thanks to your efforts, 2018 was also the most successful year in Tesla’s history: we delivered almost as many cars as we did in all of 2017 in the last quarter alone and nearly as many cars last year as we did in all the prior years of Tesla’s existence combined! Model 3 also became the best-selling premium vehicle of 2018 in the US. This is truly remarkable and something that few thought possible just a short time ago.
Looking ahead at our mission of accelerating the advent of sustainable transport and energy, which is important for all life on Earth, we face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels. While we have made great progress, our products are still too expensive for most people. 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.
In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit.
However, starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles. Moreover, we need to continue making progress towards lower priced variants of Model 3. Right now, our most affordable offering is the mid-range (264 mile) Model 3 with premium sound and interior at $44k. 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.
Sorry for all these numbers, but I want to make sure that you know all the facts and figures and understand that the road ahead is very difficult. This is not new for us – we have always faced significant challenges – but it is the reality we face. There are many companies that can offer a better work-life balance, because they are larger and more mature or in industries that are not so voraciously competitive. Attempting to build affordable clean energy products at scale necessarily requires extreme effort and relentless creativity, but succeeding in our mission is essential to ensure that the future is good, so we must do everything we can to advance the cause.
As a result of the above, 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. Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months. 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.
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.
For those remaining, although there are many challenges ahead, I believe we have the most exciting product roadmap of any consumer product company in the world. 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.
I am honored to work alongside you.
Thanks for everything,
There are no guarantees in life, or promises for a bright future. Just because something bad hasn't happened yet, doesn't mean it won't. It can happen to anyone, anytime, anywhere ... are you now wondering, Am I Next?