Tesla trims work force as challenges grow

Tesla CEO Elon Musk laid out the electric-car maker's future in stark terms last week, telling employees that "the road ahead is very difficult."

Navigating the path forward will require Tesla to shed 7 percent of its work force while simultaneously increasing sales of its Model 3 sedan across the globe.

Musk announced the reduction in full-time employees in a letter on the company's website. Though Tesla did not disclose a precise figure, 7 percent amounts to roughly 3,150 employees based on statements from Musk. Earlier in the week, Musk said Tesla is ending its customer referral program, in which owners give their friends a code that allows six months of free charging on Tesla's Supercharger network.

Analysts greeted the developments with mixed reviews. Some suggested the productivity gain achieved with the layoffs is in line with a maturing company, but others reiterated concerns about sales of electric vehicles in a competitive market.

"We believe cost management is important to introducing the lower-priced Model 3 and an important earnings driver as Tesla transitions to its next phase of growth," wrote Ben Kallo, research analyst at Baird Equity Research.

The developments come amid a confluence of challenges for Tesla: reduced U.S. taxpayer credits for EV purchases, shrinking profit margins and a need to achieve greater scale with the Model 3.

Tesla achieved the largest quarterly profit in its 15-year history in the third quarter last year, but preliminary results suggest the profit would dwindle when the company reports fourth-quarter results early next month. Musk foreshadowed that Friday, Jan. 18, noting shipments to Europe and Asia would "hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit."

Tesla is not the only automaker facing a more challenging environment. U.S. new light-vehicle sales are expected to decline to 16.8 million this year from 17.3 million in 2018, according to Cox Automotive, as credit tightens and a threat of tariffs remains.

Starting around May, Musk wrote Friday, Tesla will need to deliver the midrange Model 3 variants in all markets, with an emphasis on Europe and Asia. Deliveries are expected to begin in February in Europe and in March in China, according to UBS analysts.

The cadence of Model 3 deliveries in the first quarter has been a central focus for investors, according to a research note by Baird Equity Research. The research firm wrote that although deliveries will be down in the first quarter, the decline apparently is a matter of timing and not one of longer-term concern.

But the broader challenge is more fundamental.

"We need to reach more customers who can afford our vehicles," Musk wrote. "While we have made great progress, our products are still too expensive for most people. Tesla has only been producing cars for about a decade, and we're up against massive, entrenched competitors."

At the same time, Tesla has reduced the price of its least expensive Model 3 trim level to $44,000 from $46,000 in the U.S. for a vehicle with a range of approximately 264 miles. Musk says the need for lower-priced variants remains, with tax credits of $1,875 per vehicle set to expire July 1.

Years ago, Musk hailed the introduction of the Model 3 as the first electric car available for everyday car buyers, and aspired to sell the car for $35,000. But that hasn't happened.

"It has always been hard to make affordable electric cars. That's why all car buyers and taxpayers have to subsidize them through taxes and government incentives," said Brian Moody, executive editor of Autotrader. "Tesla should never have promised affordability in the first place. The real future for EVs is luxury cars like the Jaguar I-Pace and automated delivery and taxi services."