Tesla Cuts 7% Of Workforce In Effort To Ramp Model 3 Production

Tesla Inc TSLA traded down Friday on news it will reduce its full-time workforce by 7 percent.

What Happened

CEO Elon Musk said the job cuts are intended to cut Model 3 production costs — and ultimately the final sales price to the promised, competitive $35,000.

"Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months," Musk said in an internal email.

Why It’s Important

Tesla has marketed the Model 3 as the most affordable electric vehicle on the market. However, a naturally high cost of production coupled with ostensible inefficiencies have kept Tesla from achieving the low sales price with acceptable margins.

Throughout its early production ramp, management prioritized higher priced sales — the cheapest being $44,000 — to capture capital and set the stage for later lower-cost models. Now, it’s pressured to expand its market share.

"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."

Friday’s news follows earlier announcements that Tesla will discontinue its cheapest Model S and X versions. How these advancements will affect Tesla’s Q1 margin guidance is yet to be seen.

What’s Next

Tesla will start with more than 3,000 layoffs, according to CNBC estimates, but additional changes may be coming. Musk told employees Tesla faces a “very difficult” road to scale and sell affordable renewable energy products.

Shares were down 6.8 percent to $323.45 at time of publication.

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