Tesla cuts 9% of workforce

Electric car maker Tesla Inc CEO, Elon Musk, has announced that the company is laying off about 9% of its workforce as part of a comprehensive organizational restructuring. The company has noticed duplications of roles and job functions and seeks to reduce costs to become profitable.

Background

Tesla is an American automaker founded in 2003 by Elon Musk. It specializes in electric cars, lithium-ion battery energy storage, and more. It is predominantly known for manufacturing luxury electric cars. In 2008, it released the world’s first electric sports car called the Tesla Roadster. One of its models, Model S has been the world's best-selling plug-in electric car in 2015 and 2016.

Elon Musk is a South African-born Canadian American business magnate, investor and inventor. He is listed by Forbes as the 53rd richest person in the world. As of January 2018, his net worth was $20.9 billion. Best known as the Founder, CEO and CTO of SpaceX, a private aerospace manufacturing and space transport services company, Musk is known for his aspiration to enable the colonization of Mars and reduce costs of space travel within the next two decades.

Experts have begun sounding alarms regarding Tesla’s financial condition. The electric-car maker’s stock TSLA, has slumped 16% since its closing peak this year at $357.42 in February. Tesla was unable to execute orders of more than 400,000 cars and will consequently miss production targets for the second quarter as well.

Analysis

Tesla Inc is cutting several thousand jobs across the company as it seeks to reduce costs and become profitable without endangering the critical production ramp-up for its Model 3 sedan. In an email sent to Tesla’s staff, Chief Executive Elon Musk said the cuts were part of a simplification of Tesla’s management structure promised last month.

“As part of this effort, and the need to reduce costs and become profitable, we have made the difficult decision to let go of approximately 9% of our colleagues across the company,” the email read. “These cuts were almost entirely made from our salaried population and no production associates were included, so this will not affect our ability to reach Model 3 production targets in the coming months.”

Tesla aims to hit a 5,000 per week production target of its Model 3 sedans after facing initial production hiccups. Last week, Musk said the company should achieve its target by the end of June.

The layoffs mean there likely will not be more job cuts in the near-term, said CFRA Research analyst Efraim Levy, adding that Tesla will probably raise capital early in 2019. “I don’t think if Tesla becomes profitable in Q3 and Q4, that will be sustainable because of ramping up of the production. The layoffs may help them to achieve profitability in the near-term but not sustain it.”

Tesla has been burning through cash as it continues to spend on its assembly line and prepares for new investments on projects such as the Model Y crossover and its Gigafactory. The company’s free cash flow, a key metric of financial health, widened to negative $1 billion in the first quarter from negative $277 million in the fourth quarter, excluding costs of systems for its solar business. Several Wall Street analysts predict a capital raise this year despite Musk’s statements that it will not be necessary due to profitability and positive cash flow in the third or fourth quarters.

Tesla said it began notifying impacted workers. A spokesman said it would reduce overall employment back to around 37,000 - roughly in line with numbers at the end of last year. Musk also stated that Tesla had decided not to renew a residential sales agreement with Home Depot and would focus on selling its solar products through its own stores and website. The company will seek to re-employ most Tesla employees at Home Depot stores at its own locations.

Assessment

Our assessment is that the job cuts are part of restructuring as the company contends with production problems, senior staff departures, and recent crashes involving its electric cars. The layoffs should help reduce cost and make the company profitable. Tesla stock is 40% up from the 52 week low it hit in April. We believe that Musk could address a significant part of Tesla’s present woes by collaborating with a company with core expertise in manufacturing and supply chain.

Read more: Tesla in trouble