Tesla 'efficiency' drive confounds analysts
EV leader faces the more pressing problem of a delayed product renewal and Musk's autonomy tunnel vision
BEV market leader Tesla made waves this week with the news that it has cut over 10pc of its global workforce. With the news coming on the heels of reports denied by CEO Elon Musk that the automaker had shelved plans for its affordable next-generation EV, the markets have punished Tesla for the uncertainty circling around the firm.
The fact the company has strong cash flow levels and is still one of the few companies making EVs profitably has left some commentators confused by the rationale for the cutbacks — with suggestions that they come from a genuine desire for greater efficiency, rather than any immediate financial tribulations.
Gene Munster, CEO of investment firm Deepwater Asset Management, is one analyst who is relatively sanguine about the move.
"The business has slowed, and it makes sense to adjust headcount for 2024. I expect deliveries will be down around 3pc this year. I believe the street is looking for about 5pc growth in deliveries," says Munster.
Munster believes Musk's attribution of the job cuts to a desire to 'trim the fat' is genuine. "Elon loves efficiency and is likely overcutting to see if output per person will increase," he suggests.
Indeed, Musk indicated in a post on social media site X that this efficiency drive is extending to Tesla's direct sales infrastructure. "We are simplifying and streamlining the whole Tesla sales and delivery system. It has become complex and inefficient," he says.
But Munster does not expect the layoffs to have an immediate impact on Tesla's bottom line. "It is going to be a year plus before gross margins expand from current approximate 17pc levels," he predicts.
This view is supported by the relatively small impact the immediate cost savings from the layoffs will have on Tesla's balance sheet, as pointed out by Bloomberg columnist Liam Denning.
"As of 2022, Tesla’s global median employee compensation was about $34,000. Assuming a 10pc increase since then — inflation has been sticky — and 14,500 layoffs, that’s about $550mn before severance costs and taxes. Based on the current consensus forecast, that’s maybe 4-5pc of 2024 earnings," Denning says.
Bet the farm
While Tesla's recent moves appear not to indicate any looming financial difficulties, analysts remain concerned that the strategic direction of the company towards autonomy and potentially away from mass market EV sales, is a worrying sign. Munster, however, believes that Tesla's improved profitability lies in a hybrid business model.
"I still believe the combination of increasing deliveries in 2025 and beyond plus FSD will get gross margins to 30pc," he says.
But it appears it is not just gross margin that Tesla hopes to get out of FSD. The layoffs, in conjunction with reports that Tesla has scrapped — or at least postponed — plans for its next generation affordable EV that had previously been earmarked as the firm's key to growth, signal that Musk is going all in on autonomy. Indeed, Musk liked a post on social media platform X which described him as in "wartime CEO mode" and that he had "bet the company on robotaxi".
Tesla's more pressing problem, though, is one perhaps motivating Musk's insistence on a new efficiency drive. The company is suffering from demand slowdown for its current range of cars. This, at a time when deliveries are under pressure, cost cutbacks to maintain gross margin make sense for Musk.
However, the deeper problem of ongoing delays to a refreshed vehicle line-up underlies this slowing demand. And it is a problem which will be only exacerbated by developments such as pushing back timelines on a new compact car, in cutting staff and in losing influential executives.