Tesla may have just raised $ 2.7B in additional funding, but the company’s cash burn rate is so high, even that amount won’t keep the lights on for very long. According to CEO Elon Musk, the company is instituting “hardcore” cost-cutting rules and scrutinizing every penny that leaves the firm. The absolute need to save money, Musk wrote, “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.”
The email, which was published by Electrek, quotes Musk calling these efforts “hardcore,” but also labeling them as absolutely essential to Tesla’s continued survival. Zach Kirkhorn, Tesla’s new CFO, will review and sign every single page of expenses to be paid. Elon Musk himself will review every tenth page. He said that the company’s current, seemingly healthy cash reserve of $ 2.2B won’t last with their burn rate, according to the email: “This is a lot of money, but actually only gives us about 10 months at the Q1 burn rate to achieve breakeven!”
Musk apparently gave employees a few weeks to take ownership of various expenses and find ways to reduce them. To some extent, these kinds of episodes are normal at Tesla. The company fired 9 percent of its workforce in June 2018 and 7 percent in January 2019. Electrek reports it also may have fired between 100 and 150 people from its global recruiting team in March.
According to Musk: “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.”
How Much Fat Is Left to Cut?
It’s hard to figure out exactly what kind of expenses Tesla wants employees to trim, or how much leeway they reasonably have for doing so. Musk has already laid off 16 percent of the company’s employees over the past 12 months. He banned the use of contractors last year unless employees were specifically willing to speak up for why specific firms needed to be used.
But if we assume that Tesla has been correctly choosing the right people to lay off and correctly targeting its largest costs first in reducing cash burn, it may be quite difficult for the company to realize major improvements here. When a company announces that it’s making an effort to reduce cost, it typically states what large-scale moves it will take to accomplish this — idling factories, laying off workers, restricting travel to only absolute necessity, and so on. Companies know they can reassure investors about their plans to cut costs if they are explicit about where and how they intend to find the savings.
Musk’s email doesn’t actually identify any specific areas where the company intends to save money, at least not based on the characterization above. It seems to mostly exhort employees to find these savings themselves. But if we assume that Tesla employees have done several rounds of this already, it’s worth asking just how much fat is still on the bone to cut.
The math here is inescapable. Assume, for a moment, that a company has $ 100M in wasted spending per month (regardless of how one chooses to define “waste.”) It engages in aggressive cost-cutting and efficiency-improving measures, cutting overall waste by 50 percent, to $ 50M. Even if the company can reduce the amount of wasted expenditure by the same 50 percent by going through an equivalent process for the second time, the amount of cash it will save is equivalently reduced as well. Two rounds of equal improvement will produce savings of $ 50M and $ 25M per quarter, respectively. Unless Tesla has taken actions that dramatically drove its overall level of inefficiency back up, or has temporarily incurred major expenses it can quickly shed, it’s going to be harder and harder for the company to save its way back to profits.
Tesla deliveries by quarter. The steep decline in Q1 2019 was driven by multiple factors.
This is not to imply that something we don’t otherwise know about is wrong at Tesla. The company is facing a cash crunch after it sold a huge number of vehicles in Q4 2018, but it faced a steep decline in sales driven partly by expiring tax credits, partly by seasonality, and partly by generally weak demand in foreign markets. It also wasn’t able to deliver all of its vehicles at the end of Q1, which made its already-down quarter look even worse than it would have otherwise. It’s facing multiple expensive vehicle ramps on new designs. Its stock had fallen almost 8 percent by the end of day on Friday, thanks to news of another Autopilot fatality and the email we’ve been discussing in this story. The company’s repeated pivots and changes in the past four months around its sales strategy, product plans, and pricing have not produced a sense of smooth continuity.
Tales of Tesla’s demise have been repeatedly told and greatly exaggerated, but the company is genuinely struggling. There will need to be some fairly significant and as-yet-unrecognized cost efficiency improvement opportunities to reduce the firm’s cash burn rate.