By Ener Tuition -Re-Blogged From Seeking Alpha
“In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit.”
“However, starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles. Moreover, we need to continue making progress towards lower priced variants of Model 3. Right now, our most affordable offering is the mid-range (264 mile) Model 3 with premium sound and interior at $44k. The need for a lower priced variants of Model 3 becomes even greater on July 1, when the US tax credit again drops in half, making our car $1,875 more expensive, and again at the end of the year when it goes away entirely.”
“As a result of the above, we unfortunately 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. 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.”
The problem is that Mr. Musk’s narrative, as usual, is not credible.
Note that Model 3 has been in “production” for over a year now and has gone through many fixes and tweaks. The production line has also been improved considerably in the same time period. Most of the easy cost improvements in parts and manufacturing process have already been made. In the near term, it is extremely difficult to squeeze another 20% or so in costs necessary to make the $35K Model 3 profitable at a net profit level. The 7% workforce employee layoffs will help but will not a big difference as direct and indirect labor is only a small fraction of Model 3 cost structure. Our assessment is that the situation is much direr than the CEO is predicting, and the solutions being proposed do not come close to solving Tesla’s problems. If, as Mr. Musk says, “there isn’t any other way”, then Tesla will die.