January 18, 2019 / 7:02 PM / in 3 months

Breakingviews - Musk’s rare dose of realism could serve Tesla well

A Tesla sign is seen during the China International Import Expo (CIIE), at the National Exhibition and Convention Center in Shanghai, China November 6, 2018. REUTERS/Aly Song

NEW YORK (Reuters Breakingviews) - Elon Musk is adding to the gloom that has enveloped much of the automotive sector in recent months. Tesla’s chief executive on Friday effectively issued the firm’s first profit warning. In an email to employees he wrote that he would be reducing staff by 7 percent.

In addition, he admitted not only that fourth-quarter profit would be lower than in the previous three months, but also that it would take “great difficulty, effort and some luck” to turn a “tiny profit” between January and the end of March. Shareholders immediately wiped almost 10 percent off the stock, reducing the company’s market value to $54 billion. But Musk’s rare dose of realism could serve Tesla well.

Usually he’s hyping up everything from the cars’ performance to how quickly the company can produce them. His Friday missive, though, makes it clear that Tesla is currently struggling to sustainably make – or have a durable market for - 5,000 Model 3 sedans a week. Raising production and sales to 10,000 a week, as he has promised so often in the past, will be far harder, even after bringing European and Asian markets into the mix.

That may change once the company finally introduces the more affordable $35,000 version of the Model 3; to date the average sale price has been $59,000, according to FactSet. Trouble is, Tesla will have to produce a lot more of the lower-priced cars to make up for the 41 percent sticker-price drop.

Culling some 3,400 employees would not help much. UBS reckons that would save some $200 million a year, which would boost Tesla’s estimated pre-tax margin for the year, all else being equal, by less than a percentage point to 2.4 percent, based on Refinitiv data.

Fewer staff could always make production harder. Sure, fast-expanding firms gather flab that needs trimming and Tesla has doubtless learned from its year or more of what Musk dubbed “production hell.” But the company also must address growing complaints about quality and after-sales customer service.

All of this sounds worrying – and it is. But if Musk’s unusual openness about the company’s current financial state is a sign of a more practical approach – whether by him alone or with a more engaged board of directors – that’s no bad thing.

Breakingviews

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