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Tesla logo on wheel of Tesla car

Musk Pledges Belt-Tightening as Tesla Cuts Prices, Warns of Loss

March 1, 2019
Shift to online-only orders reduces prices about 6% on average.

Elon Musk is delivering on one big promise -- a $35,000 Model 3 -- while falling short on another: that Tesla Inc.’s days of losing money are over.

Tesla probably won’t post a profit in the first quarter, the chief executive officer told reporters Thursday, contradicting several of his past predictions that the company would earn money from now on. He made the comments while announcing the long-awaited cheaper Model 3, along with a plan to trim costs by closing stores and cutting more jobs.

“Given that there was just a lot happening in Q1, and we’re taking a lot of one-time charges and there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable in Q1,” Musk said on a call with reporters. “But we do think that profitability in Q2 is likely.”

Tesla shares fell 4.9% to $304.07 in pre-market trading Friday. The stock is still up from where it was on Tuesday, before Musk tweeted the company would have news to share.

Shifting to online-only ordering will enable Tesla to lower the prices of all its vehicles by an average of about 6%, according to a blog post. That’s helping Musk deliver the $35,000 version of the Model 3 for the first time, almost three years after the company started taking orders for the car.

Tesla will also be “significantly reducing” its spending on sales and marketing, which will help make the announced price changes possible, Musk wrote in an email to employees. Some jobs will be cut and some employees will transition to different parts of the company, he said.

All About Service

“Tesla pioneered direct-to-consumer sales, and the stores were always more of an advertising portal than an actual transaction portal,” said Mike Ramsey, an automotive consultant with researcher Gartner Inc. “Closing the stores themselves is not that crazy; the real issue for Tesla is their service capability.”

The company will wind down many of its stores over the next few months, Musk said. Some of the roughly 130 outlets will remain in high-traffic locations as galleries, showcases and information centers, and others will become service and repair centers.

“There’s no other way for us to achieve the savings required,” the CEO said.

Musk reiterated that improving service in 2019 is Tesla’s top priority and said the company will be adding jobs worldwide to address what’s become one of the biggest concerns of new customers. He said moving away from stores will be “incredibly helpful” toward boosting deliveries.

“In many parts of the U.S., we are unable to sell effectively because of franchise laws,” he said. “Now anybody can buy the car online anywhere in the U.S., immediately. This substantially opens up our ability to sell the cars.”

Production Forecast

Model 3s on backorder now will all be delivered by the end of June, in time to claim a $3,750 federal tax credit, as the company ramps up production, Musk said. As of July 1, Teslas will be eligible for only an $1,875 U.S. incentive.

Musk later tweeted that the standard-range Model 3 will be available in Europe in about six months and in Asia after Tesla’s Shanghai factory begins production, which he estimated will be within six to eight months.

Musk issued yet another forecast for how many vehicles Tesla will produce this year, predicting somewhere in the range of 420,000 and 600,000. Three days ago, the U.S. Securities and Exchange Commission asked a federal judge to hold him in contempt of a settlement reached last year over a tweet in which he said the company would make as many as half a million cars.

The CEO doubled down on his defense against the SEC’s claims by reiterating comments he made on a Jan. 30 earnings call that Tesla would sell as many as 500,000 Model 3s this year.

“350,000 to 500,000 Model 3s is what I said in the earnings call,” Musk told reporters. “And we expect to make somewhere between 70,000 to 100,000” Model S sedans and Model X crossovers.

Musk, 47, settled a lawsuit in September with the SEC and agreed to get company approval before communicating material information to investors. The agency alleges he breached that deal with a Feb. 19 tweet, which he corrected hours later with the help of a company lawyer.

By Dana Hull and Tom Randall

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Licensed content from Bloomberg, copyright 2016.

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