Musk Backslides on Profit Every Quarter Pledge, Will Cut 7% of Workforce

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Tesla shares slide after Elon Musk warned in a blog post that making a profit would be difficult.

Elon Musk sounds a bit more cautious about profitability in his latest Tesla Update. Here are a couple of pertinent snips.

Looking ahead at our mission of accelerating the advent of sustainable transport and energy, which is important for all life on Earth, we face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels.

I want to make sure that you know all the facts and figures and understand that the road ahead is very difficult.

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.

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.

Another Musk Whiplash

Bloomberg has some interesting profitability quotes in its report Elon Musk's Whiplash in Tone on Profit Sends Tesla Shares Sliding.

Profitability Comments

  • 2Q earnings call (Aug. 1): “I really want to emphasize our goal is to be profitable and cash-flow positive for every quarter, going forward. I feel comfortable achieving a GAAP income positive and cash flow positive quarter every quarter from here on out. That’s a -- there may be occasional quarters, where we pay back a big loan or something, where there may be just because we paid back a big loan. But absent that, it would be cash flow positive.”
  • 3Q earnings call (Oct. 24): “We expect to again have positive net income and cash flow in Q4. And I believe our aspirations I think will be for all quarters going forward. I think we can actually be positive cash flow for all quarters going forward, leaving aside quarters where we may need to do a significant repayment; for example, in Q1 next year. But I think, even in Q1, I think we can be approximately flat in cash flow by end of quarter.”
  • 3Q earnings shareholder letter (Oct. 24): “Our earnings profile has flipped dramatically. Sufficient Model 3 profitability was critical to make our business sustainable -- something many argued would be impossible to achieve.”

It's a mystery why anyone believes anything Musk says.

Mike "Mish" Shedlock

Comments (44)
No. 1-8
Curious-Cat
Curious-Cat

"It's a mystery why anyone believes anything Musk says."

Also President Trump.

JonSellers
JonSellers

Elon's darn close to pulling this thing off. But he has two problems, and one is fixable.

  1. Manufacturing skills. Everyone notes that Tesla's are often having to be hand made because of the poor manufacturing design. Old line auto manufacturers have this down pat (well maybe not the French). There are a lot of engineers out their with the requisite skills. Hire them, pay them well, and listen to them. This is fixable.

  2. Batteries. Li-ion batteries are expensive. Mostly because they use a lot of cobalt and cobalt is expensive. And Tesla doesn't even make its own batteries. Would Ford be profitable if it couldn't make its own engines? Probably not. So Tesla needs to figure out how to make its own batteries, preferably with a lower need for cobalt in the chemistry. This may not be fixable.

The long-term key to success is making a battery that is comparable in cost to an ICE. Internal combustion engines are extremely complex, require lots of steel and aluminum, and lots of precision tooling and humans to put them together. They're not cheap. Batteries are vastly less complex but use expensive ingredients. This is where the Elon has to earn his "genius" tag.

Mish
Mish

Editor

Regarding Musk's two problems. Batteries: Musk is ahead, but for how long Production: His assembly line and quality are both a joke. The stories about his cars are believable and no other car manufacturer in the world has such quality issues.

Third problem - overall cost

I do expect electric will win out. With or without Musk.

But fourth problem - valuation is absurd even if Tesla does survive.

abend237-04
abend237-04

Watching Elon learn about cars reminds me of the first time I tried to hit a real fastball. Those idiots at Ford, GM, Toyota, Mercedes, etc. are looking a lot more like Ted Williams to him now, I'd bet.

2banana
2banana

The end of Tesla.

No more insane government (state and federal) tax credits.

More and more competition from "real" car companies.

The TINY demographics who want to pay $50,000 for a car with a 120 mile range is just about tapped out.

Low oil costs.

No profits. Massive debt.

How can it end ANY other way?