Business World

Sunday 21 July 2019

Tesla looks more like a normal car company as it hits the brakes and slashes headcount

Tesla founder Elon Musk hopes selling Model 3s in Europe and Asia will result in a “tiny profit”. Photo: AP
Tesla founder Elon Musk hopes selling Model 3s in Europe and Asia will result in a “tiny profit”. Photo: AP

Liam Denning

Just over a week ago, Elon Musk was tweeting about flying cars. Last Friday, he did something much more like a run-of-the-mill car executive: He announced layoffs.

Tesla is cutting 7pc of its full-time staff. This follows a 9pc cut in the middle of last year.

Remarkably, despite that earlier round of reductions, Musk said in his latest update that headcount expanded 30pc last year. Having ended 2017 with about 37,500 employees, the CEO tweeted an updated figure of 45,000 last October. So the latest cuts should affect around 3,000 to 3,500 people.

What makes this unusual is that Tesla is also supposed to be expanding at a rapid clip. Its pipeline includes a new factory in China, a pick-up truck, the semi truck, the Model Y and, lest we forget, those solar roofs. Plus, as Musk writes himself: Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months.

When GM announced sweeping cuts a couple of months ago, its stock actually jumped. Investors in automotive stocks are a fairly miserable bunch, you see; hardened by decades of wrenching cycles, they judge companies chiefly on how quickly management accepts the essential grimness of their reality. Plus, GM trades at just 6 times forward GAAP earnings.

Tesla, however, trades at a somewhat sunnier 133 times earnings, hence, its stock was down about 7pc in pre-market trading last Friday.

This isn't because of worries about profits. Musk wrote that "preliminary, unaudited results" indicate Tesla made a GAAP profit in the fourth quarter of 2018, but lower than the previous quarter's 4pc margin. Consensus forecasts imply a margin of 3pc anyway. The problem is dissonance. When Tesla reported surprisingly robust third-quarter results in November, it helped for many to draw a line under the "funding secured" debacle. Yet doubts about the sustainability of that performance linger, given Tesla sold a big slug of emissions credits and was selling higher-spec, higher-priced versions of the Model 3. Meanwhile, Tesla's operating expenses were remarkably flat despite a huge increase in vehicle deliveries.

To a Tesla bull, that quarter represented the pivot point, when economies of scale from surging Model 3 production kicked in. Yet, as the announcement shows, that is still a work in progress. For the current quarter, Musk hopes selling higher-end Model 3s in Europe and Asia will, with "some luck," result in a "tiny profit". For Tesla to fulfil the staggering growth required to justify its valuation, spending and capex should be increasing.

Striving to be more efficient is laudable. The problem for Tesla bulls is that big staff cuts are what ordinary car companies do.

Bloomberg

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