Tesla was right to lay off 7% of its employees as big expenses loom, experts say (TSLA)

Tesla is laying off 7% of its employees, CEO Elon Musk said on Friday in an email to employees, the second round of cuts the automaker has made in less than a year.
The layoffs were the right move for a company that has major expenses ahead as it prepares to build a new factory and introduce a range of new vehicles, said David Whiston, an automotive analyst at Morningstar, and Michael Ramsey, an automotive analyst at Gartner.
"I think that this shows that finally, the company or Elon … recognizes that they cannot continue burning cash at the rate that they had been, or the money faucet will turn off," Ramsey said.

Tesla is laying off 7% of its employees, CEO Elon Musk said on Friday in an email to employees, the second round of cuts the automaker has made in less than a year.

Tesla had expanded its workforce by 30% in 2018 as it ramped up production of its Model 3 sedan, Musk said, even as it laid off 9% of its employees in June. Musk suggested the most recent cuts were necessary as Tesla seeks to become consistently profitable while introducing lower-priced vehicles like the long-awaited $35,000 version of the Model 3.

"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," Musk said in the email, which was posted on Tesla's website.

Tesla has big expenses ahead

The layoffs were the right move for a company that has major expenses ahead as it prepares to build a new factory and introduce a range of new vehicles, said David Whiston, an automotive analyst at Morningstar, and Michael Ramsey, an automotive analyst at Gartner.

"They're still a young company, and they have a lot of growing pains," Whiston said. "Sometimes, unfortunately, you have to make adjustments and people lose their jobs."

[Were you affected by the Tesla layoffs? Have a Tesla news tip? Contact this reporter at mmatousek@businessinsider.com.]

To finance the factory, which will be located in Shanghai, and upcoming vehicles like a semi-truck, pickup truck, and a new version of its Roadster sports car, Tesla needs to make profits, raise money from Wall Street, or use a combination of the two. If Tesla relies at all on debt, it will have to show Wall Street it is making an effort to control its expenses, Ramsey said.

"I think that this shows that finally, the company or Elon … recognizes that they cannot continue burning cash at the rate that they had been, or the money faucet will turn off."

Elon Musk expects a small profit in Q1

Tesla surprised Wall Street analysts by posting a $312 million profit in the third quarter of 2018, just the third quarterly profit in the automaker's 16-year history. But the year preceding the quarter had been marked by widening losses as Tesla struggled to ramp up Model 3 production.

Musk said it appears the automaker will report a profit for the fourth quarter of 2018, and he predicted a "tiny" profit for the first quarter of this year that will depend in part on luck.

But the layoffs are not an act of desperation, Ramsey said, pointing out that General Motors announced in November that it would cut 15% of its salaried North American workforce despite later saying that it expects its 2018 profit to beat Wall Stree projections.

"I don't think it's desperation. I think it's something that had to happen," he said of the Tesla layoffs.

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