Blog Report: Musk Orders Company to Cut Costs

Tesla Chief Executive Officer Elon Musk told employees on Thursday that the company will run out of cash in 10 months if it can’t cut costs.

In a letter seen by Reuters, Musk explained that every expense will receive review in an effort to hit breakeven.

Tesla closed earlier this month a $2.7 billion offering of stock and convertible notes. That came a week after the carmaker said it lost $700 million in the first quarter, and is now down to about $2 billion in cash.

This isn’t the first time the company has sent out a red alert about expenses. An April 2018 memo also mentioned cost-cutting measures including a more thorough review of expenditures. Musk said the plan was to “cut everything that doesn’t have a strong value justification,” and any expenditure above $1 million for the next year was to be personally approved by him.

He echoed that financial diligence in the note reported by Reuters.

“That is why, going forward, all expenses of any kind anywhere in the word, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must (be) reviewed,” Musk said in the letter.

Unfortunately, cost-cutting has impacted the Tesla team in the past year. Tesla laid off 9 percent of its workforce in June 2018, then 7 percent of its team in January.

 

[lolder]

I think Musk's e-mail may have killed the company. When the CEO says you're going to be broke in 10 months, who's going to buy a high tech device that has 4 to 10 year warranties and needs an electronic communications support network to keep many of it's features functioning like navigation, supercharging and software repairs.
In the past when companies like airlines that depended on advance bookings admitted troubles like this their advance bookings collapsed. This wording was the stupidest thing he has ever done. There are parts of marketing that he doesn't understand. I think the only hope is acquisition.

 

[Tam]

...I think Musk's e-mail may have killed the company. When the CEO says you're going to be broke in 10 months...

On the contrary, we are used to hear that Tesla is on its final deathbed for the past 13 years so now, Elon has just resuscitated the company for another 10 long months!

 

[lolder]

If sales plunge it will be nowhere near 10 months and that's what Musk's company e-mail may cause. Musk said "at the Q1 rate" where sales were down 30%. Tesla's outgo is about 5-6 billion a quarter. Perception is everything. How do you change that? Service is already sub-par. New Service Center's are not being opened to fill in huge gaps. Their magnificent products are being poorly supported. I hope I'm wrong but the CFO departures look ominous.

The robotaxies will not come soon enough.

 

[hydro 481]

Serious question but what happens to us if Tesla goes under? No one's gonna want to buy our car if we decide to sell.

 

[Lozza12]

I think Musk's e-mail may have killed the company. When the CEO says you're going to be broke in 10 months, who's going to buy a high tech device that has 4 to 10 year warranties and needs an electronic communications support network to keep many of it's features functioning like navigation, supercharging and software repairs.
In the past when companies like airlines that depended on advance bookings admitted troubles like this their advance bookings collapsed. This wording was the stupidest thing he has ever done. There are parts of marketing that he doesn't understand. I think the only hope is acquisition.

Oh calm down. Do the math - $700 million Q1 loss x 3 quarters (10 months) = $2 billion. That’s about how much cash they have in the bank. He’s just stating the obvious - that Q1 losses like that can’t continue.

The only hope is not acquisition - it is more profit and getting better at building cars. That’s what they are trying to do. CEOs are obliged to talk about cost cutting in these situations to assure investors.

Companies on the verge of bankruptcy don’t buy other companies (Maxwell). Companies on the verge
of bankruptcy don’t build new factories in China. Companies on the verge of bankruptcy don’t spend money on new V3 superchargers or new drive motors or new product lines (Model Y).

Have confidence that Tesla will successfully work through this situation just like they’ve done for more than a decade.

 

[Lozza12]

If sales plunge it will be nowhere near 10 months and that's what Musk's company e-mail may cause. Musk said "at the Q1 rate" where sales were down 30%. Tesla's outgo is about 5-6 billion a quarter. Perception is everything. How do you change that? Service is already sub-par. New Service Center's are not being opened to fill in huge gaps. Their magnificent products are being poorly supported. I hope I'm wrong but the CFO departures look ominous.

The robotaxies will not come soon enough.

CFO departures (plural)??? The Tesla CFO is Zach Kirkhorn. The previous guy retired (again). Nothing to see here.

 

[Watts_Up]

... every expense will receive review

This announcement is not very clear.
Are we talking about some unjustified travel expenses or the worthwhileness of some R&D projects?

Quite often, some accidental and unintended scientific discoveries changed the world.

 

[ev-ethusiast]

I think Musk's e-mail may have killed the company. When the CEO says you're going to be broke in 10 months, who's going to buy a high tech device that has 4 to 10 year warranties and needs an electronic communications support network to keep many of it's features functioning like navigation, supercharging and software repairs.
In the past when companies like airlines that depended on advance bookings admitted troubles like this their advance bookings collapsed. This wording was the stupidest thing he has ever done. There are parts of marketing that he doesn't understand. I think the only hope is acquisition.

Tesla won’t be aquired. And Elon never said the company will go broke. All these media outlets are giving it a negative spin. They are still expanding at a rapid pace. Nothing wrong with being cautious about finances. Fiat is going to pay then 2b this and next year.

 

[SO16]

Tesla won’t be aquired. And Elon never said the company will go broke. All these media outlets are giving it a negative spin. They are still expanding at a rapid pace. Nothing wrong with being cautious about finances. Fiat is going to pay then 2b this and next year.

Just finalized the purchase of another company.

Added several service centers in the last 6 months.

Yeah.....sounds like a company about to go under.

 

[Unpilot]

If sales plunge it will be nowhere near 10 months and that's what Musk's company e-mail may cause. Musk said "at the Q1 rate" where sales were down 30%. Tesla's outgo is about 5-6 billion a quarter. Perception is everything. How do you change that? Service is already sub-par. New Service Center's are not being opened to fill in huge gaps. Their magnificent products are being poorly supported. I hope I'm wrong but the CFO departures look ominous.

The robotaxies will not come soon enough.

They just opened a service center near me. I live in the middle of Illinois....fly over country. Your post is wrong.

 

[Barklikeadog]

Tesla won’t be aquired. And Elon never said the company will go broke. All these media outlets are giving it a negative spin. They are still expanding at a rapid pace. Nothing wrong with being cautious about finances. Fiat is going to pay then 2b this and next year.

His email went public and everyone said: Oh -poop-! No spin needed. Only a year ago the Model 3 was going to make Tesla profitable going forward... now a million
robotaxis will be what keeps tesla profitable going forward... and make them a 500billion dollar company. What?!? Nobody is buying this.

Back in January Musk suggested a 'tiny' profit for the 1st quarter. Way way waaaaaayy off. I'd like Tesla to be profitable, I'd like to buy a Tesla truck... but all of this is self inflicted.
Big Oil or Ford isn't twisting his arm. Negative articles aren't forcing Tesla to burn cash. Nobody called up Elon and said: Price the car at $35,000 or else!!! Getting $$ from Fiat is
like a guy getting some $ from his grandma to help pay the rent. Hey that's nice, but the problem is he still needs to make more money.

 

[Navin]

WUTF TMC Editorial Board - you are taking the internal email way out of context. He is not saying that Tesla only has 10 months of runway -- he was merely taking the burn rate from Q1 and interpolating it into the future to make a point that cash is important and costs should be kept under order to make sure things business is sustainable going forward. He has done this many times in the past..

 

[glide]

Serious question but what happens to us if Tesla goes under? No one's gonna want to buy our car if we decide to sell.

That’s the chance you take buying from a startup.

 

[TeeEmCee]

I think Musk's e-mail may have killed the company. When the CEO says you're going to be broke in 10 months, who's going to buy a high tech device that has 4 to 10 year warranties and needs an electronic communications support network to keep many of it's features functioning like navigation, supercharging and software repairs.
In the past when companies like airlines that depended on advance bookings admitted troubles like this their advance bookings collapsed. This wording was the stupidest thing he has ever done. There are parts of marketing that he doesn't understand. I think the only hope is acquisition.

Between this email and Andreas Hopf's piece the other day, any rational person will understand that this was it for the company in its current structure. Aside from a Chinese OEM or such, who might be interested in the perceived brand prestige, I don't see anyone who would want to pay real money for Tesla at this point. For a lot of reasons, that ship has sailed a while ago.

Perhaps the one outcome we could hope for is to see some court-supervised restructuring, with Musk departing and with some painful shedding of a large chunk of liabilities. Even with that happening, I think their chances of survival are slim. If they started now by offloading all the sales and service dead weight (horrendously inefficient organizations, both of them), doubled their addressable market by opening dealerships and pivoted toward proper manufacturing, where they did not attempt to reinvent and build everything ... then maybe they'll stick around. No chance of any of that with Musk in place.

 

[CalX]

His email said that the net 2.4 B from the raise would last 10 months at the last quarter burn rate. It did not say the company would be out of cash. If they continued to lose money at that burn rate, in 10 months they would still have the same cash as they do now plus the FCA deal money which should be around 1 B for a total of about 2.6B. This was factoring in the .5B convert in 11/2019. This is far from being bankrupt.

 

[mongo]

Full email per CNBC

From: Elon Musk
To: Everybody
Date: May 16, 2019

As mentioned at the company talk, it is extremely important that we examine every expenditure at Tesla no matter how small, and be sure that it is critical.

When making hundreds of thousands of cars, battery packs and solar systems, even a ten cent savings could be worth over $50,000 a year. There are over 10,000 unique parts and processes at Tesla, so making small improvements across the board has a giant cumulative impact.

At the same time, we must also continue to make our products subtly better in thousands of small ways.

It is important to bear in mind that we lost $700 million in the first quarter this year, which is over $200 million per month. Investors nonetheless were supportive of our efforts and agreed to give us $2.4 billion (our net proceeds) to show that we can be financially sustainable.

That is a lot of money, but actually only gives us approximately ten months at the first-quarter burn rate to achieve breakeven. It’s vital that we respect the faith investors have shown in Tesla, but it will require great effort to do so.

That is why, going forward, all expenses of any kind anywhere in the world, including parts, salary, travel expenses, rent, literally every payment that leaves our bank account must be reviewed, confirmed as critical and the top of every page of outgoing payments signed by our CFO.

I will personally review and sign every 10th page.

Please examine closely every expense where responsibility is, or probably should be, assigned to your group. If in doubt, assume it is on your plate, so that we don’t have anything slip through the cracks.

This will take at least a few weeks to get right. Please don’t worry if it isn’t correct at first.

This is hardcore, but it is the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable.

Thanks again for your excellent work,

Elon

 

[Nuclear Fusion]

It’s a simple but honest email urging cost cutting. Normal practice.

 

[KSilver2000]

It does not matter what the correct interpretation is. The general public heard it in a way they can interpret themselves, helped by the media (and even this board). You’re not going to convince each person what the email actually meant and how she or he should read it. You can’t just easily undo this type of negative perception from the average car buyer. There’s a lot of marketing firms that specifically do damage control, which would help in a situation like this. Unfortunately, Tesla doesn’t believe in traditional marketing.

 

[mongo]

It does not matter what the correct interpretation is. The general public heard it in a way they can interpret themselves, helped by the media (and even this board). You’re not going to convince each person what the email actually meant and how she or he should read it. You can’t just easily undo this type of negative perception from the average car buyer. There’s a lot of marketing firms that specifically do damage control, which would help in a situation like this. Unfortunately, Tesla doesn’t believe in traditional marketing.

I agree, Tesla did everything right.

See also: Humpty Dumpty
xkcd: Communicating