In preparation for the release of the Model 3 sedan this year, Tesla has announced that it will reduce its workforce by 3,200 employees. This series of layoffs is due in part to lower the price of the midsize sedan, making it more accessible to the average consumer.
Founder and CEO of Tesla, Elon Musk, is no stranger to employee layoffs. This layoff of 7% of its full time employees is following a previous layoff period in June of 2018 when Tesla reduced their full time staff by 9%. At Musk’s other company SpaceX, Musk plans to layoff 10% of his workforce totaling 600 employees to maintain a profit this month.
Musk has said layoffs are critical to help Tesla bring down the cost of production. The cost of production is the issue at the epicenter of this debacle. The lowest cost currently available to purchase a Tesla vehicle is set at $44,000. Musk would like the cost of the mass-market Model 3 sedan to start at $35,000. This price cut is due in part to the depletion of its U.S. tax credit incentive.
As many know if you purchased a Tesla vehicle last year you were privy to a tax credit of $7,500. That credit was reduced to half its value totaling $3,750 as of January 1st, and will be decreased to $1,875, before being phased out altogether.
Due to federal law, the tax credits are available for the first 200,000 vehicles sold in the U.S. by an automaker. Tesla reached this limit last year, and thus the credit will be reduced by 50% every six months until it’s gone completely.
These circumstances caused Tesla shares to fall by 13 percent, closing out at $302.26, especially troubling as Tesla hopes to receive a convertible cash bond of $920 million on March 1st. The only way this conversion to equity can take place is if Tesla’s average share price is $359.87 or higher for twenty continuous days of trading.
In October of 2018 Tesla reported a $312 million profit for the third quarter of 2018. This profit was due in part to a rise in production and sales of its Model 3. This was a welcome surprise to investors and Wall Street alike who were all expecting a loss.
Tesla has continued to defy expectations as they announced a profitable Q4, albeit a smaller profit. Tesla’s Q4 earnings will not match their record breaking third quarter profits, but will keep the company in the green. The final Q4 numbers will be released by Tesla on January 30th 2019.