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Tesla to Cut 7% of its Workforce to Help Lower the Costs of Model 3 Production

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【Summary】Electric automaker Tesla, fresh off its best sales year in the company’s history, announced today it will lay off about 7 percent of its full-time workforce. Tesla CEO Elon Musk said the move is necessary to help lower the costs associated with production of the Model 3

Eric Walz    Jan 18, 2019 11:59 AM PT
Tesla to Cut 7% of its Workforce to Help Lower the Costs of Model 3 Production

Electric automaker Tesla, fresh off its best sales year in the company's history, announced today it will lay off about 7 percent of its full-time workforce. Tesla CEO Elon Musk said the move is necessary to help lower the costs associated with production of the Model 3, so the car can made more affordable.

In a memo to employees, Musk wrote: "Unfortunately we have no choice but to reduce full-time employee headcount by approximately 7% (we grew by 30% last year, which is more than we can support) and retain only the most critical temps and contractors. Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months."

This is the second big layoff at the automaker in six months. In June 2018, Tesla eliminated 9 percent of its workforce as a cost cutting measure.

Musk wrote that 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.

Tesla delivered almost as many cars as last quarter of 2018 as it did during the entire year of 2017. The Model 3 also became the best-selling premium vehicle of 2018 in the U.S. However, Tesla said needs to cut costs further in order to sell a lower priced Model 3 and still turn a profit.

"We face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels. 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. The net effect is that Tesla must work much harder than other manufacturers to survive while building affordable, sustainable products."

The $35,000 Model 3 is Still Not Available

Musk said that although the company posted a 4 percent profit in 2018, the biggest in its 15 year history, Tesla was only able to do so by selling the more expensive version of the Model 3, the company's first mass-market electric car.

Musk promised the more affordable base Model 3 would cost around $35,000, however this variant has not been made available yet. Instead, Tesla offered only a new Mid Range Battery and Long Range Battery option, as well as the more expensive all-wheel-drive Performance version to reservation holders. All three variants cost significantly more that the Standard Battery $35,000 base model.

The Model 3 all-wheel-drive Performance starts at $62,000 before incentives while the Long-Range Battery variant starts at $50,000. The Mid-Range Battery rear-wheel drive version cost $44,000, before incentives.

Tesla begin taking reservations for the Model 3 in March 2016, and production on the car began in July 2017. Tesla received deposits of $2,500 from nearly 450,000 people wanting to reserve a Model 3. However many of these customers requested refunds after they learned that delivery of the entry-level $35,000 Model 3 would be delayed numerous times.

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The Tesla Model 3

Another concern about Tesla's sales going forward is the elimination of the federal EV tax credit, which offered a tax credit of up to $7,500 on the purchase of an electric Tesla. The tax credit is offered to each automaker building qualifying electric and plug-in hybrid models, but it is capped at 200,000 vehicles from each manufacturer. Once that number is reached, the tax credit begins to phase out, essentially making Tesla's cars more expensive for consumers.

Tesla hit 200,000 units sold in July 2018, boosted by strong demand for the Model 3. The tax credit for Tesla was halved to $3,750 on Jan 1. It will be halved again on July 1, 2019, before being phased out entirely after Jan 1, 2020.

General Motors has reached sales of 200,000 qualifying electric vehicles as well, and the tax credit for the automaker will be halved in March.

The lower-priced standard battery Model 3 will not be available for another 4 to 6 months according to Tesla's website. Musk wrote that by May 2019 Tesla will need to deliver at least the mid-range Model 3 variant in all markets, including Europe, "in order to reach more customers who can afford our vehicles."

Despite announcing layoffs, Musk remains optimistic about Telsa's future, including the release of the rumored Model Y crossover.

"For those remaining, although there are many challenges ahead, I believe we have the most exciting product roadmap of any consumer product company in the world. Full self-driving, Model Y, Semi, Truck and Roadster on the vehicle side and Powerwall/pack and Solar Roof on the energy side are only the start." he wrote.

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