Yesterday, Elon Musk announced substantial layoffs at Tesla (9% of its workforce). Successful, high-growth companies typically do not let go of that many employees. What's wrong at Tesla? Clearly, the company has struggled with production of the Model 3. Many analysts have said that Tesla will need to raise significant amounts of capital in the near future. Musk has denied that such a move is necesssary. His recent announcement regarding the scaling back of capital expenditure spending plans, and now the layoffs, suggest an ambitious effort to conserve cash. Tesla's challenge is not the lack of profitability (it has not been profitable for 15 years). Instead, it's problem is cash. Many investors clearly have not been worried too much about the lack of profitability. However, they would become very concerned if the company started running out of cash and then faced challenges raising new capital at attractive terms.
Peter Eaves of the New York Times has an interesting take on the dilemma that Tesla now faces. He writes,
"Still, sizable layoffs and moves to conserve cash typically are not the acts of growth companies that are having just a little trouble achieving their goals.And there is a danger for Tesla if it starts to behave like a normal company: Investors may start to value it as one, and its highflying stock may tumble.
Eaves' point is that investors have ignored the lack of profitability for years. They have expressed profound belief in the growth story, and they have been willing to fund huge capital expenditures in pursuit of that growth. If investors suddenly started valuing the company differently, then the stock price would face significant pressure.
Tesla's competitors must watching this situation with much curiosity. After all, the incumbent car companies have faced their own dilemma for years. Consider a company such as BMW. Investors have valued the strong profitability it has generated over the years. It cannot simply persuade investors to absorb hugeTesla-like losses for years in pursuit of an electric vehicle future. Somehow, BMW has to invest in the future while still maintaining enough profitability to placate investors. In some ways, Tesla has had a huge advantage over firms such as BMW, because investors have given Musk essentially a license to lose money for years in pursuit of an EV future. Is that changing now, and will it change the competitive dynamic in the industry? We will learn a lot more in the coming months, as we see whether Tesla can ramp up Model 3 production successfully without raising more capital.
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