Elon Musk is pulling out the oldest trick in the executive playbook by laying off 3,000 Tesla workers
- Tesla announced that it would lay off 3,000 workers - 7% of its workforce.
- Tesla's headcount is bloated relative to its production - it's about time the company started cutting.
- CEO Elon Musk, with profits in his sights, is finally running Tesla like a real car company.
Tesla announced Friday, via a company email, that it would lay off 3,000 workers, about 7% of its headcount. Tesla also shed 9,000 workers last year.
It's about time.
For years, auto-industry veterans have commented on how Tesla's staffing levels are excessive, relative to its production and sales numbers. A company that will likely sell something in the ballpark of 250,000 vehicles in 2018 and that runs a single factory in California can't support 45,000 total employees.
On assembly line workers alone at its Fremont factory, Tesla has about twice as many people building half as many vehicles as the same plant cranked out in the 1980s, when it was known as NUMMI and was a joint venture between General Motors and Toyota. The level of efficiency is notably bad and couldn't last, especially given Tesla's profitability objectives going forward.
From the wording of Musk's email, it sounds like Tesla is concentrating on shedding contractor bloat, which is an obvious tactic in the car business if you're trying to drastically ramp up a less-expensive vehicle than you've been selling. There's no $35,000 Model 3 yet, and the car that Tesla has been making is going for around $50,000 - not bad, except that the company's average transaction price on its Model S and Model X luxury vehicles is twice that.
The oldest trick in the CEO playbook
Tesla shares slid of Friday, but that was because Musk telegraphed weaker profits on Model 3 than some investors had expected. Those investors were solidly in the fantasy camp, however. Smaller sedans make less money than big luxury sedans and SUVs, end of story. Tesla will report fourth-quarter and full-year 2018 financial results next month and is expected to post in the black for a second consecutive quarter - but the profit probably won't be a high as it was in the third quarter of 2018.
Usually, a head-count chop delights Wall Street. It's the oldest trick in the CEO book. And in the auto industry, it's typically greeted with an initial round of concern - GM caught some flak when it announced last year that it would idle five factories. But once the numbers are crunched, the industrial logic of doing the same or more work with less human resources is hard to argue with in a business that burns cash at a terrifying rate.
I've been saying for a few years now that the real reckoning for Tesla investors would come when investors figured out that it's a car company, not a tech company that just happens to operate a car plant of over five million square feet that's full of million-dollar robots and workers wielding power tools.
In this framework, Tesla has been a model of inefficiency - the worst run carmaker in the industry, from a production standpoint.
That was OK when Tesla was rising to its current manufacturing plateau. In fact, the efficiency was rewarded. It was also necessary. Tesla would have gained nothing by holding back on its Model 3 ramp, so the drunken sailor spending was warranted.
This attitude toward capital isn't going to fly anymore. Musk knows it. And he's finally starting to run Tesla like a real car company.