Job cuts are needed to reach sustained profitability, Elon Musk said. Tesla is cutting nine percent of its workforce, CEO Elon Musk announced today in a memo to staff. "We are a small company in one of the toughest and most competitive industries on Earth," Musk wrote. He argued that cost cutting was necessary to turn Tesla into a sustainably profitable company. The layoffs are "almost entirely" in salaried positions and won't impact Tesla's efforts to increase Model 3 production, Musk said. Tesla didn't give an exact figure for the number of layoffs. But Tesla had 37,543 full-time employees at the start of the year and has hired more since then. So a nine-percent cut means letting more than 3,000 workers go. That makes these layoffs much more significant than the hundreds of workers Tesla fired last fall. At the time, Tesla had 33,000 employees, suggesting that Tesla's headcount is still on an upward trajectory overall. Tesla's announcement comes a month after Musk announced a restructuring of Tesla's organizational chart. Musk wants to flatten the management structure at the company to make it less bureaucratic. Tesla has been burning cash almost continuously since it was founded 15 years ago. The company has enjoyed positive cash flow and profits for only two brief periods in the last eight years—one in late 2013 and another in mid-2016. Each time, after a few quarters of positive cashflow, Tesla would ramp up production of another car model—first the Model X, then the Model 3—and rack up more big losses, as this chart of free cash flow from Bloomberg shows. This isn't too surprising. We'd expect any startup in a capital-intensive business to spend heavily as it scales up. But Tesla obviously can't keep losing money forever. In recent months, Musk has pledged that Tesla will reach sustained profitability by the third quarter of 2018—just a few months from now. That prediction has been met with skepticism by many analysts. But Musk has promised an acceleration of Model 3 manufacturing, which will allow the company to bring in a lot more revenue. At the same time, the job cuts announced today will reduce Tesla's costs, allowing the company to reach profitability more easily.
The job cuts are part of a restructuring CEO Elon Musk said was coming earlier this year. Tesla hasn't produced nearly as many of its vaunted Model 3 affordable EVs as it expected, which has led to a quarter of those who preordered the vehicle to demand refunds. As early as this year's first-quarter earnings call, Elon Musk told employees that a reorganization was coming -- and it came today. Musk published an internal email on Twitter revealing that the automaker is cutting around nine percent of jobs across the company. Difficult, but necessary Tesla reorg underway. My email to the company has already leaked to media. Here it is unfiltered: In the email, Musk stated that Tesla's aggressive growth resulted in duplicated roles, and these layoffs will help the company reduce costs and become profitable. " These cuts were almost entirely made from our salaried population and no production associates were included, so this will not affect our ability to reach Model 3 production targets in the coming months," Musk wrote, forestalling concerns that the job cuts would affect the already-delayed EV from coming out. The company still expects its Model 3 gross margins to break even in Q2 and be positive in Q3 and Q4 of this year, Tesla told Engadget over email. In the middle of the email, Musk also took the opportunity to announce that Tesla is ending its sales agreement with Home Depot to sell its solar power products, which the company originally announced in February. These will still be sold in Tesla's online and retail stores. In general, the layoffs come after sustained personnel growth for the company, which ended 2017 with roughly 37,000 employees around the world, the company told Engadget over email. Given its 15 percent increase in headcount year-on-year, even after today's job cuts, Tesla still has more employees than it did when the year started. Further, the company will continue to hire 'outstanding talent in critical roles' and that there's still a need for production personnel, Musk wrote in the internal email. Musk repeatedly thanked the departing employees and those who remained for "the difficult job that remains ahead." Just surviving in the automotive industry is a victory, he wrote.