Elon Musk
© Rebecca Cook / Reuters
Elon Musk is cutting Tesla Inc.'s workforce by 7 percent -- or more than 3,000 jobs -- warning that the "road ahead is very difficult" in making electric cars more affordable for the mass market.

Tesla shares fell as much as 7.7 percent shortly after the start of regular trading. Musk wrote in a blog post that the Palo Alto, California-based company managed to eke out a profit in the final three months of 2018, though narrower than the hard-won third-quarter earnings it reported in October.

Tesla is under pressure to limit spending as it emerges from what Musk called the "most challenging" year in its history. While it succeeded in scaling up output of its Model 3, the company missed analysts' production targets during the fourth quarter, and it's cut prices to partially make up for the halving of a U.S. tax credit that's acted as a buyers' incentive. The credit is set to drop again in July before going away entirely at the end of the year.

Tesla increased staff by 30 percent last year, which is "more than we can support," Musk said early Friday. It's absorbed some of the cost challenges by initially selling only higher-priced versions of the Model 3, its first vehicle billed as a car for the masses. Until now, the cheapest configuration available of the vehicle has cost $44,000, Musk said. As production increases over the next few months, the company will need to sell lower-cost versions, he said.

"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," Musk said. "Moreover, we need to continue making progress towards lower priced variants of Model 3."

The chief executive officer has tweeted before about the risks involved with selling cheaper versions of the Model 3 too soon. He warned in May that Tesla would "lose money & die" if it shipped a $35,000 version of the sedan right away.

Tesla had about 45,000 employees, Musk tweeted in October. Based on that figure, the 7 percent cut works out to be about 3,150 jobs lost. The company is also expanding in Europe and China, which will be costly, said Sven Diermeier, a Frankfurt-based analyst at Independent Research GmbH.

"With rising Model 3 sales, margins are deteriorating with a weaker model mix," Diermeier said. "Compensating for this will be difficult, so job cuts are logical."

Tesla Fighters

The company will also see a significant increase in competition for electric cars as established automakers have started to roll out an array of products that will be measured against its pioneering lineup. Daimler AG unveiled its EQC electric crossover last year. Audi followed with the E-Tron and its parent, Volkswagen AG, plans to introduce more than 50 purely battery-powered vehicles through 2025 across the group.

Tesla shares dropped to as low as $320.40 shortly after the open, costing Musk more than $800 million on paper, according to the Bloomberg Billionaires Index. The stock was little changed over the past year, though it gyrated dramatically during 2018 as Musk careened from crisis to crisis, warring with analysts over Tesla's cash needs, smoking marijuana in an interview and losing his chairman's role in an SEC settlement over his tweeted buyout offer that never materialized -- all while working furiously to ramp up production of the Model 3.


The company's 5.3 percent bonds due 2025 opened trading Friday sharply lower, one of the biggest losers in the high-yield market. The notes fell just under 1 cent on the dollar to 88.75 cents, according to Trace bond price data.

Tesla's overarching challenge is making cars, batteries and solar products cost-competitive with fossil fuels, Musk said Friday in the blog post.

"While we have made great progress, our products are still too expensive for most people,"
Musk said. "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."

Incumbent carmakers are also struggling with the high cost of making electric cars. On top of record investment in new electric-car lineups, high battery costs are crimping margins and buyers worried about charging and driving range largely remain on the fence.

Auto Job Cuts
  • GM will close plants and eliminate more than 14,000 positions, though most hourly workers will be offered positions elsewhere
  • Ford will cut thousands of jobs in Europe; Morgan Stanley has estimated the company's worldwide total reductions could reach 25,000
  • Jaguar Land Rover will cut 4,500 jobs, most of them in the U.K.
  • Nissan announced 700 job cuts at its Mississippi plant this week
Tesla's layoffs mark the second shedding of workers in a matter of months. In June, Tesla dismissed 9 percent of its workforce after misjudging how quickly it could ramp up mass-manufacture of the Model 3 -- only to go on an aggressive hiring spree shortly after.

The company must now make rapid gains in its manufacturing processes as it increases the production rate of the Model 3, 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," he said. "There isn't any other way."