Tesla’s decision to cut 9% of its workforce is a sign that its cash crunch is getting serious.
As dramatic as the cuts are, the savings they provide are likely a small fraction of the cash Tesla is bleeding.
They come as the company is struggling to ramp up production of its Model 3 to the point where it can generate cash so Tesla won’t have to go back to the public markets again for more funds.
There’s good reason to believe Tesla will see further delays in meeting its production goal — which could mean more cuts, or yet another return to the public markets.
The layoffs Tesla announced Tuesday shouldn’t come as any surprise. Similarly, you shouldn’t be shocked if the company makes other dramatic moves in the coming months.
You see, Tesla CEO Elon Musk is caught in a kind of bind. His company is hemorrhaging cash as it has been struggling to ramp up production of its new Model 3 car. The company has said it won’t start generating profits from the vehicle until it’s making 5,000 of them a week; at last check, it could only sustainably make 3,500 per week.
Meanwhile, Musk has essentially promised investors Tesla won’t have to go back to the public markets for more funding, because it will start generating positive cash flow by the third quarter this year.
So, cash flow has become all-important at Tesla, and if the company can’t get its production up to its target, it’s likely to be looking for more places to cut.
Tuesday’s job cuts, which Musk vaguely forecast on the company’s earnings call last month, were fairly steep as these things go. Tesla announced it would cut 9% of its workforce, or more than 4,000 of its 46,000 workers.
The job cuts will save Tesla some money — but not enough
Company representatives declined to say how much Tesla expects to save from the job cuts, but it could be substantial. In a statement, Musk made a point of noting that Tesla wasn’t laying off any production workers as part of the reorganization. Instead, the layoffs will “almost entirely” hit salaried workers. If you assume for a nice round figure that those salaried workers make around $100,000 a year, the company could save $400 million a year as a result of the cuts, or around $100 million a quarter.
Unfortunately for Musk, his company has been burning through a heck of a lot more than that. In the first quarter, Tesla’s free cash flow — the amount of cash it generates or uses up in its operations minus what it invests in things like property and equipment — was negative to the tune of $1.1 billion. That’s after the company’s free cash flow was in the red by $4.1 billion last year.
That’s got to be disconcerting for Musk and his colleagues, given that by the end of the first quarter, Tesla had less than $3 billion in cash left — or fewer than three quarters’ worth at its first-quarter burn …read more
Source:: Business Insider