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COMMENTARY

David Robinson: Tesla hits a fork in the road as it cuts jobs

David Robinson

Elon Musk sees a very difficult road ahead for Tesla Inc. – and those challenges are leading to cutbacks at its solar panel factory in Buffalo.

The job cuts that Tesla announced Friday will slash the company's workforce by 7 percent, or upwards of 3,000 people. Tesla isn't saying what that means for the 400 or so people it employs in Buffalo, but a 7 percent reduction would eliminate about 30 jobs, and sources familiar with the plans say the firings, at worst, would affect fewer than 50 people.

Regardless, the job cuts will make Tesla's job-creation challenge in Buffalo even more challenging. Tesla promised to have 1,460 jobs at the factory by April 2020 in return for the state spending $750 million to build and buy equipment for the plant.

To reach that goal, the plant's workforce — now topping 800 between Tesla and its partner, Panasonic — would have to grow by about 80 percent over the next 15 months or else Tesla could face a $41.2 million penalty from the state for falling short — assuming the Cuomo administration has the political will to try to collect it.

Cutting jobs now will put that goal even farther away.

As it is, Tesla's solar energy business has been shrinking — not growing — largely because the company has been doing the same kind of cost-cutting there that it is now trying to do at its electric vehicle business.

Tesla more than a year ago stopped selling rooftop solar systems door-to-door because it cost too much. It stopped relying on no-money-down leases in favor of having customers take out their own loans to buy solar panels, eliminating the need for Tesla to borrow money to pay the upfront costs of solar installations.

It also dropped the growth-at-any-cost approach that SolarCity had used to grow rapidly and grab a third of the residential rooftop market. It's now the nation's No. 2 installer, with a vastly reduced 9 percent share of the residential solar market, according to analysts at Wood Mackenzie Power & Renewables.

Tesla's Buffalo partner, Panasonic, makes solar panels at the South Park Avenue facility and has about 400 employees of its own. The Panasonic workforce would not be included in the Tesla job cuts.

Tesla's Buffalo operations are built around production of its solar roof, which looks like a conventional roof but has solar cells inside. The roof, which costs more than twice as much as a conventional roof, is viewed by Musk as the next step in the evolution of solar energy that will move away from clunky solar panels attached to a roof in favor of an integrated system with solar shingles linked to batteries.

But production of the solar roof has been repeatedly delayed, most recently when Tesla announced in October that production wouldn't begin to ramp up until sometime during the first half of 2019.

State officials remain optimistic. "Tesla indicates that their company-wide actions do not alter their long-term commitment to Buffalo, and will not impact future production and plans for Tesla’s products, including the Solar Roof manufactured at RiverBend," Empire State Development said in a statement.

Now, the same cost-cutting mentality that has transformed the solar energy business is coming to its much bigger — and far more important — electric vehicle operations.

"We face an extremely difficult challenge: making our cars, batteries and solar products cost-competitive with fossil fuels," Tesla CEO Musk wrote in an email to employees Friday. "While we have made great progress, our products are still too expensive for most people."

Tesla is cutting costs and trying to be consistently profitable after racking up billions of dollars in losses as the company grew rapidly.

"Tesla is entering a 'fork in the road' situation that will ultimately define the future of the company for years to come," said Wedbush analyst Daniel Ives in a note to investors.

It needs to cut costs because it's only been modestly profitable as it ramps up production of the lower-priced Model 3 electric vehicles that it is counting on to put the company on sound financial footing.

But Tesla has only been selling the more expensive variants of the Model 3, which helped it earn $311 million in the third quarter and is expected to produce a slightly smaller profit during the fourth quarter.

By summer, however, Tesla needs to start selling its least expensive versions of the Model 3 — priced around $35,000 — to make up for a drop in the tax credit that U.S. buyers of electric vehicles receive. By the end of this year, that tax credit, which will drop to $1,875 in July, will disappear entirely, effectively increasing the price consumers pay.

The job cuts also come as Tesla has been making smaller efforts to reduce its costs. The company said it would end its customer referral program that offered participants six free months of charging, with Musk saying it was too expensive. Tesla also said it would stop selling the cheapest versions of its Model S sedans and Model X SUVs.

"The road ahead is very difficult," Musk wrote. "This is not new for us — we have always faced significant challenges — but it is the reality we face."

Most of Musk's email focused on Tesla's electric vehicle business, which depends on the Model 3 becoming a hit with consumers at a price point that also allows the company to operate profitably. Musk warned that increasing Model 3 production and selling more of the less-expensive versions of the sedan would make it harder for the company to make money.

"Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months," he said. "Higher volume and manufacturing design improvements are crucial for Tesla to achieve the economies of scale required" to produce a less expensive version of the Model 3 that is expected to sell for around $35,000.

"Attempting to build affordable clean energy products at scale necessarily requires extreme effort and relentless creativity, but succeeding in our mission is essential to ensure that the future is good, so we must do everything we can to advance the cause," Musk wrote.

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