A few years back, experts in the transportation sector predicted a sizable portion of the world’s population would have adopted EVs. Certainly, there has been a significant increase in electric vehicle sales since that time, but those projections haven’t quite been realized. This is especially true in the U.S. where interest rates and high EV prices have deterred potential buyers. EV sales are slowing over the past year as a result, and it has some companies making some pretty major changes. Specifically, Tesla’s sales drop recently is forcing Elon Musk to cut his workforce by a rather large percentage. This has come at a time when competition in the EV market has become fiercer and EV sales more challenging.
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In examining Tesla’s sales drop and planned layoffs, there are a couple of different perspectives to consider. On the one hand, this could be a sign that EV sales are slowing in general and that past predictions were wrong. Or it could reflect natural growing pains of an industry in its infancy. Despite incentives, a small percentage of drivers actually own and operate an electric vehicle. Certainly, Elon Musk would have you believe the latter, particularly in light of the fall in Tesla’s share prices lately. And he may in fact be right, especially since some global EV markets are doing rather well. By taking a deeper dive into Tesla’s current situation, the answer to this debate might be found.
“About every five years, we need to reorganize and streamline the company for the next phase of growth. As we prepare the company for our next phase of growth, it is extremely important to look at every aspect of the company for cost reductions and increasing productivity.” – Elon Musk, CEO of Tesla
Tesla’s Recent EV Woes
In looking back over the last year, it’s evident why Tesla had to consider letting some employees go. In 2022, there was evidence that a Tesla’s sales drop was looming. As a result, the company discounted all of its EV models significantly. This include not only its popular Model 3 but also Tesla models X, S, and Y. More than 20% off the previous asking price was promoted in hopes that sales and consumer demand would increase. But as it turns out, EV sales are slowing still despite these efforts by Tesla. In the first quarter of 2024, Tesla reported a year-on-year decrease in EV sales by 8.5%. That equates to about 387,000 EVs that weren’t sold compared to baseline. And it was the first Tesla’s sales drop since the beginning of the pandemic. Clearly, Tesla’s strategy to trigger EV demand failed based on the numbers.
To add insult to injury, Tesla’s sales drop in EVs weren’t the only thing to decline. The company’s share price also fell significantly over this period of time. Overall, Tesla has seen its shares decrease by a third of their original value. This occurred at a time when other carmakers share prices increased. For instance, Toyota’s share increased 45% during this same period with GM’s shares climbing 20%. Given that EV sales are slowing in the U.S., shareholders were already concerned about the company’s share value. But with the most recent quarter’s EV sales report, concern evolved into skepticism. With profits and sales declining, and share value falling, costs had to be reduced. And ultimately Musk determined this meant that major layoffs were inevitable.
Other Factors at Play
While it is evident that EV sales are slowing in the U.S., that’s not the case in China. China represents one of Tesla’s major markets, and it even has a production factory in Shanghai. However, Tesla’s sales drop has occurred here as well. This isn’t because of resistance among Chinese consumers in adopting electrical vehicles. Instead, it’s because rising competition in China has dented Tesla’s market share. BYD, a major EV producer in China, is selling electric vehicles at a much lower price. Even with Tesla’s price discounts, BYD still performed well with increasing EV sales numbers. Likewise, in Europe, BMW saw gains in EV sales as did Kia and Hyundai in South Korea. Thus, rising competition in the EV market is another reason Tesla EV sales are slowing.
(Can China make EVs the US wants? Find out in this Bold story.)
In addition to these developments, Tesla has struggled with producing new models as of late. Specifically, the company was supposed to release its Model 2 in 2024, which would sell for $25,000. However, the company cancelled the launch and postponed it until 2025 presently. This is interesting since a cheaper model could better compete with the rising competition abroad. It would also be ideal with Tesla planning to move into India this next year for EV sales. India represents the third largest automobile market and could help Tesla’s sales drop recently. However, Musk appears to have other ideas while acknowledging EV sales are slowing for the company. One involves laying off 10% of Tesla’s workforce, equating to 14,000 employees. Others, however, involve directing greater investments into robo-taxis and autonomous vehicles.
Pruning to Grow?
Many of the market indicators suggest that Tesla’s layoffs represent a knee-jerk reaction to the fact that U.S. EV sales are slowing. With Tesla’s sales drop this past year, this seems like an explanation on the surface. But this isn’t the first time that Tesla and Musk have cut back to redirect the company’s trajectory toward success. If Musk is indeed putting the Model 2 on the backburner, then cutting down on staffing seems logical. And if Tesla needs additional resources to innovate and invest in autonomous vehicles, pruning for growth makes sense. The layoffs at Tesla may not be as much as a reaction as they are strategic choices for the company.
To support this notion, it must also be recognized that Tesla made more EVs last year than it sold. This means Tesla’s sales drop likely resulted in increased inventories, which means production does not need to be as robust currently. This to supports layoffs, especially in Tesla’s production factories. At the same time, Musk has announced Tesla will be no longer continuing prior EV discounts. This may initially be counterintuitive since EV sales are slowing. But it will enable Tesla to earn greater profits from units sold. Combined with lower human resource and production costs, this could help the company financially. Based on these additional insights, it’s a strong bet that Musk is indeed cutting back to grow in the years to come.
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