Tesla's mass layoffs and reduced car production have Wall Street panicked

Last year was a tough year for Elon Musk's electric automaker. Photo/Getty Images.

Elon Musk's electric-auto giant Tesla said Wednesday it has curbed production for some of its most expensive vehicles after its second mass layoff in seven months, fueling concern over the company's ability to survive without making as many of the top-dollar cars that helped it become a household name.

Tesla said it has trimmed the production hours for its Model S sedan and Model X SUV at its sole car-making factory, a rare pullback for a company that became one of America's most valuable automakers due partly to its rapid manufacturing ramp-up of battery-powered cars. Tesla stock fell roughly 4 per cent Wednesday.

The drawdown will help shift Tesla's production away from the more profitable luxury cars that helped it upend the auto industry and further toward its cheaper Model 3, which the company has long promised would be key to attracting a mass-market audience.

But Tesla has struggled for months to handle production, cost and delivery issues surrounding the Model 3, and Musk has said the company can't sell the car at its long-promised price of US$35,000 while remaining profitable. Wall Street analysts have said the company has not yet proven it can lose out on those premium sales and still function in a competitive market.

"While the strategy ... to bring cost down for the low end had good intentions, we believe Tesla underestimated the cost curves and manufacturing side of the equation," RBC Capital Markets analyst Joseph Spak wrote in a note to clients this week titled, "Waking up from the dream." Thirty-four months after Tesla promised a $35,000 Model 3, "the car still does not exist."

Tesla has made changes, but some are questioning whether they're enough. Photo/Getty Images.

The company last week laid off roughly 7 per cent of its full-time employees and all but its "most critical (temporary workers) and contractors," Musk said in a company email. A Tesla official said the layoffs were across the organization, likely affecting sales and production staff.

Those thousands of job cuts come only seven months after Tesla laid off another 9 per cent of its workforce. Factory employees are critical for the company, where an overreliance on car-making robots last year sparked the costly delays of what Musk called Tesla's "manufacturing hell." "Humans are underrated," he tweeted last spring.

Musk has said the layoffs are critical to helping the company save money as it shifts away from selling the pricier, more profitable cars that have helped it stay afloat. Musk tweeted earlier this month that the company would stop selling the cheapest versions of the Model S and X, effectively setting the base prices for both models at more than $90,000 and helping the company differentiate the upscale cars from the cheaper, lower-battery Model 3.

The cheapest Model 3 today starts at around $45,000, about $10,000 more than the typical new car sold in the United States. And the company faces a growing challenge in making affordable electric cars at a time when larger automakers such as General Motors are accelerating production on electric competitors that could rival Tesla's in price, size and style.

The company said in a statement Wednesday the drawdown was due to efficiency improvements on its factory line and "would give us the flexibility to increase our production capacity in the future as needed."

Tesla earned a record quarterly profit last year, but Musk warned this month that its most recent quarter would "with great difficulty, effort and some luck" likely only show "a tiny profit." The company will offer more detail when it reveals its newest quarterly financial report next week, a spokesman said.

"Everything we're seeing with Tesla's behaviour in the last month suggests they don't want to build their future on high-end cars," said Gene Munster, managing partner at the investment firm Loup Ventures. "The real opportunity is to hit the sweet spot of the curve, at $35,000, and they're a long way away from that today."

- Washington Post