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Tesla announces plan to cut 7 percent of its workforce to aid Model 3 production

Tesla announced Friday that it is reducing its workforce by 7 percent, part of a money-saving effort as the company ramps up production on its Model 3 sedan. (Tyrone Siu/Reuters)

Tesla announced Friday that it is reducing its workforce by 7 percent, a cost-cutting measure designed to help the company make its Model 3 sedan more accessible in the mass market.

In a memo to employees, chief executive Elon Musk said the layoffs are a way to boost margins as the company plans to ramp up production on the Model 3 while also bringing down the price. Musk warned that the road ahead would be “very difficult.”

“While we have made great progress, our products are still too expensive for most people,” Musk wrote. “Tesla has only been producing cars for 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.”

Valued at $50 billion, the Palo Alto-based company has struggled for years to turn its sleek, battery-powered cars into mainstream products. Priced at $44,000, the Model 3 — Tesla’s bid for an affordable, mass market sedan — is still far from Musk’s stated goal of a $35,000 price tag. Yet despite Musk’s insistence that Tesla is an industry underdog, the company is still better situated than competitors like Audi, Jaguar and Porsche, which recently announced electric vehicles of their own but at a much higher price point, according to Gene Munster, a managing partner and analyst with Loup Ventures.

“Mainstream automakers (GM, Ford, Toyota, Honda) don’t yet have a scalable, affordable electric vehicle option,” Munster wrote in commentary Friday. “This year Tesla will begin to sell the most attractive sub $40k electric vehicle (accounting for battery range and integrated tech.)”

Tesla declined to specify how many employees will be affected, but it could be more than 3,100. Tesla had a workforce of 45,000 in October, according to a tweet from Musk. Last year, the company grew 30 percent — more than the company can support, Musk said in the memo.

Tesla’s shares sank about 13 percent Friday in regular trading after the cuts were announced.

This is Tesla’s second round of layoffs in less than a year — the company reduced its workforce by 9 percent in June to cut costs while it tried to pump out more Model 3s, despite significant delays. The bet paid off in the short term: The third quarter of 2018 brought record-breaking profits for Tesla after two years of negative cash flow. The company had $6.8 billion in revenue, despite a litany of production delays and delivery issues. Musk touted the results as a “historic quarter” but stressed in a letter to investors that sufficient profitability of the Model 3 was “critical to make our business sustainable.”

Tesla’s results for the fourth quarter have yet to be announced, but investors were disappointed earlier this month when the company revealed it delivered fewer cars than expected despite attempts to boost production.

In a December interview with CBS, Musk said a $35,000 Model 3 would “probably be ready in about five or six months.” Musk stressed the same deadline in the memo, telling employees Tesla would need to deliver a midrange Model 3 in all markets starting in May.

Musk’s leadership has been under fire in recent months, after the billionaire was hit with a lawsuit from the Securities and Exchange Commission over tweets in which he made comments about securing funding to take Tesla private at $420 a share. The lawsuit accused Musk of lying to investors and sought to ban him from serving as chief executive of Tesla, which rattled investors and sent the company’s shares down 14 percent after news of the suit spread. While Musk later said he was joking, he stepped down as Tesla’s chairman of the board. Both Tesla and Musk were fined $20 million.

Musk’s space-exploration company, SpaceX, will also reduce its workforce by 10 percent — or 600 employees — later this month.