Despite record sales last year and posting profitable quarters of late, Tesla is reducing its full-time employee headcount by seven percent. CEO Elon Musk made the announcement in an email to Tesla employees last Friday. Tesla’s headcount grew by 30 percent last year, which was more than the company can support, Musk said in the note. The email discussed the company’s current challenges, namely making its products more cost-competitive.
Right now, the least expensive Model 3 costs $44,000 before tax credits. This model has the mid-range battery with an estimated 264 miles per charge. Tesla has reached the threshold of 250,000 total units sold, which means the federal tax credit for its vehicles has begun to phase out. The credit dropped from $7,500 to $3,750 on January 1, and will fall again to $1,875 on July 1. Meanwhile, consumers are still waiting on the entry-level Model 3, which Musk has promised will cost $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 the statement. “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. There isn’t any other way.”
Tesla made a four percent profit in Q3 last year. Preliminary results indicate the company will post a profit again for Q4, albeit lower than in the previous quarter. The automaker also expects to post a profit in the first quarter of this year on the back of higher-priced Model 3 deliveries globally. Despite production bottlenecks, the Model 3 was the best-selling luxury vehicle in the U.S. last year.
This is the latest round of layoffs after Tesla dropped nine percent of its workforce last June. The company noted the duplication of some roles, and said it needed to reduce costs and focus on profitability. It said production of the Model 3 would not be affected by these cuts. You can read the entire statement from Musk here.