The layoffs Tesla announced Tuesday shouldn’t come as any surprise. Similarly, you shouldn’t be shocked if the company makes other dramatic moves in the coming months.
You see, Tesla CEO Elon Musk is caught in a kind of bind. His company is hemorrhaging cash as it has been struggling to ramp up production of its new Model 3 car. The company has said it won’t start generating profits from the vehicle until it’s making 5,000 of them a week; at last check, it could only sustainably make 3,500 per week.
Meanwhile, Musk has essentially promised investors Tesla won’t have to go back to the public markets for more funding, because it will start generating positive cash flow by the third quarter this year.
So, cash flow has become all-important at Tesla, and if the company can’t get its production up to its target, it’s likely to be looking for more places to cut.
Tuesday’s job cuts, which Musk vaguely forecast on the company’s earnings call last month, were fairly steep as these things go. Tesla announced it would cut 9% of its workforce, or more than 4,000 of its 46,000 workers.
The job cuts will save Tesla some money — but not enough
Company representatives declined to say how much Tesla expects to save from the job cuts, but it could be substantial. In a statement, Musk made a point of noting that Tesla wasn’t laying off any production workers as part of the reorganization. Instead, the layoffs will “almost entirely” hit salaried workers. If you assume for a nice round figure that those salaried workers make around $100,000 a year, the company could save $400 million a year as a result of the cuts, or around $100 million a quarter.
Unfortunately for Musk, his company has been burning through a heck of a lot more than that. In the first quarter, Tesla’s free cash flow — the amount of cash it generates or uses up in its operations minus what it invests in things like property and equipment — was negative to the tune of $1.1 billion. That’s after the company’s free cash flow was in the red by $4.1 billion last year.
That’s got to be disconcerting for Musk and his colleagues, given that by the end of the first quarter, Tesla had less than $3 billion in cash left — or fewer than three quarters’ worth at its first-quarter burn rate.
Musk been able to keep Tesla afloat in large part by repeatedly returning to the public markets for more funds, whether by selling stock or issuing new debt. Last year alone, Tesla raised $400 million in a stock offering. It netted another $3 billion by issuing debt — after paying off older notes.
Musk is under pressure to post a profit
But there have been signs that investors are growing tired of this game and are wanting Tesla, which has never posted a full-year profit, to finally show that it has a sustainable business. It’s clear that Musk is starting to feel that pressure. In his note to employees, he said as much.
While Tesla’s mission is to help drive the transition to a sustainable energy future, “we will never achieve that mission unless we eventually demonstrate that we can be sustainably profitable,” Musk said. “That is a valid and fair criticism of Tesla’s history to date.”
Musk has repeatedly said the Model 3 is the key to creating that sustainably profitable business. The vehicle was touted as the company’s first mass-market car, and the company has clearly hit a nerve with the public, with pre-orders topping 500,000. The company hopes to eventually make 10,000 or more a week, but right now it’s shooting for 5,000 a week, the point at which Musk says it will start making money from it.
But the company has struggled to meet that target, repeatedly pushing it back. Tesla has had to shut down its Model 3 production line at least twice this year to make changes in an effort to increase production. And Musk has admitted to making numerous mistakes on the line, most notably trying to automate processes that were better handled by human workers.
The 5,000-a-week goal is finally in sight, Musk said at the company’s annual meeting last week. The company expects to hit it by the end of this month. Assuming that works out and that the 5,000-a-week total is really what’s needed for the company to start generating cash, that timeline would be right in line with Musk’s forecast that Tesla will start generating a profit in the third quarter.
There are good reasons to be skeptical
But there are good reasons to question those assumptions. The company has repeatedly failed to meet its production goals, not just with the Model 3, but also with the Model X and the Model S when it was ramping up manufacturing with them.
Also, Tesla has had a, shall we say, loose definition of production rates. When Musk has announced that Tesla has hit certain level, sometimes he seems to have meant that Tesla hit that for a day and is extrapolating out over the course of the week. Other times, the company may have reached that level for a week or two but wasn’t able to maintain it for an entire month.
So if Tesla does make 5,000 cars in the last week of this month, whether it will be able to sustain that pace week after week going forward into the future is another question altogether.
Additionally, it’s unclear whether Tesla really has a firm grasp on the economics of each Model 3. The company’s Gigafactory production facility has been wasting up to 40% of the raw materials that go into its batteries, according to a Business Insider report, costing the company $150 million so far this year. That kind of waste level is bound to increase the costs of each car — making it harder for Tesla to turn a profit on them.
If Tesla can’t meet its production targets on time in a sustainable way or it can’t cut down on the waste it’s generating, its path to posting profits is going to be pushed back again. That could force the company to go back, hat in hand, to Wall Street yet again or force it to make more — and even more painful — cuts.
That may not be the bright future Musk’s painting for Tesla, but it may be its grim reality.
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