What Steps Is Tesla Taking In Its Path To Profitability?

by Trefis Team
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Earlier this week, Tesla (NYSE:TSLA) indicated that it would cut about 9% of its global workforce, in a move that would impact about 3,500 salaried staff. The layoffs come at a time when Tesla is looking to eke out its first profit in its fifteen years of existence while refraining from raising additional capital to fund its operations. Below, we take a look at some of the other steps Tesla has been taking to reach profitability.

We have also created an interactive dashboard analysis which outlines how Tesla’s revenues, operating profits and free cash flows could trend over the next three quarters.

Building Economies Of Scale As Model 3 Production Is Ironed Out

Elon Musk has projected that Tesla would reach a goal of making 5,000 Model 3 sedans a week by the end of June, up from just about 2,000 units towards the end of the last quarter. The company intends to produce about 10,000 cars per week next year. The relatively exponential production ramp may be attainable, as the company has deployed a significant amount of automation in building the new vehicle. As production scales up, cost absorption should improve, helping gross margins. Tesla is targeting gross margins of 25% on the Model 3 by next year, which would be roughly in line with its premium vehicles.

Focusing On Higher Variants

Tesla indicated that it would continue to prioritize the production of higher variants of its mass-market Model 3 sedan (extended-range, with the luxury package) which have thicker margins, with the base versions only likely to see shipments towards the end of this year. Most Model 3 vehicles that are being delivered currently likely have average selling prices of upwards of $50,000, per our estimates (related: Tesla Is Smart To Prioritize Premium Versions Of The Model 3). The higher mix of luxury vehicles is likely to help Tesla bolster its profits.

Battery Costs Could Continue To Decline

Batteries account for a meaningful part of an EV’s cost, and Tesla has been working on improving its battery technology as well as the supply chain. Tesla, along with Panasonic, is producing a new variety of battery cells, the 2170, which are being used in the Model 3 sedan. These cells replace the smaller 18650 cells, which have been in use for decades and allow for higher energy densities and lower production costs. As the company scales up production of these cells in its Gigafactory, using them in newer models, it could reduce battery costs and reduce battery imports from Japan. Tesla indicated that it could get below the $100/kWh level (for battery pack) within two years. For perspective, battery costs stood at about $400/kWh when the Model S was launched in 2012.

Restructuring Company, Reducing CapEx

Tesla noted that it would be scaling back its planned capital expenditures this year to less than $3 billion from $3.4 billion last year. That said, this reduction could be a temporary measure, as the company has multiple other projects in the pipeline including the Model Y and the semi truck. Tesla is also planning on carrying out a significant restructuring operation, under which it is making its management structure flatter and more efficient.

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