Why will a fast-growing company like Tesla eliminate 7% of its labor force?
There’s an official and an unofficial answer. The official answer is to cut production cost and price for its Model 3 Sedan and make it affordable to the masses.
Marketing experts would agree. A lower price will help Tesla cross the “tipping point” — the moment its products will reach a critical mass of consumers, as described in the marketing literature by the Rogers Curve.
Everett Rogers argues that the spread of new products is a multi-stage process, which begins with awareness, interest, evaluation, trial, and adoption. In the beginning, product awareness is slow, as “innovators,” a small consumer group, adopt the product. Then, the rate of diffusion picks up, as “early adopters,” another small group of consumers in contact with innovators, adopts the product too.
Both groups are buying the product out of excitement and curiosity – which is why they aren’t price sensitive.
Eventually, diffusion may reach the “tipping point,” during which the “early” and the “late majority” fuel a cascade (exponential sales growth), which is associated with the commercial success of the new product.
Both groups are buying the product because they see value in it, compared to alternative products. That’s why they are price sensitive.
Simply put, price is a key factor for a new product to reach the masses.
Tesla is no exception to this rule. Thus, it makes a great deal of sense for the company to cut its production costs, which will make room for lower prices for its products.
But there’s an unofficial story, in my opinion.
Tesla has a big debt. And serving it absorbs almost all its Earnings Before Interest, Depreciation and Amortization (EBIDA) – see exhibit. That’s why it needs to cut costs, and cut them fast, by laying off part of its workforce.
Tesla’s Long-term DebtKoyfin
Tesla’s EBITDA/Interest ExpensesKoyfin
Then there’s Tesla’s big investment in China. Back in August, the company announced the building of a $5 billion factory, which needs to be funded, too, by cutting expenses at home.
As an alternative to cost-cutting, Tesla could issue new shares to cover its financial needs. But that would be dilutive to its current stockholders.
Meanwhile, there’s competition from mainstream manufacturers like Volkswagen. If Tesla cuts prices for its vehicles they would have a harder time entering the market.
The bottom line: Cutting labor costs can serve may purposes for Tesla in the short-run, though it may come back to haunt it in the long-run.