by Wolf Richter, Wolf Street:
Most everyone in the US who ever wanted & could afford a high-priced Model 3 now has one? Pent-up demand for luxury cars in the era of Carmageddon is a tricky thing, especially when tax credits phase out.
Details trickling out over the 3,200-plus layoffs Tesla announced on January 18 are starting to paint a picture of what is happening on the demand side for the Model 3 in the US. According to two laid-off employees cited by Reuters, the company has gutted its delivery team of 230 people at its Las Vegas facility that delivered tens of thousands of Model 3s to buyers mostly in the US but also in Canada.
About 150 of the 230 employees on the team have been let go, the two sources said who were among those let go, as the company struggles with deliveries that have plunged from the pace in the fourth quarter last year.
The federal tax credit of $7,500 was cut in half to $3,750 at the beginning of the year after Tesla’s EV sales rose past the 200,000-threshold in 2018. Yet the $35,000 Model 3 that CEO Elon Musk promised in 2016 remains a distant promise.
The company already slashed its Model 3 price twice this year to stimulate demand, yet the least expensive Model 3 still has a price tag of $42,900.
“There are not enough deliveries,” one of the laid-off employees told Reuters. “You don’t need a team because there are not that many cars coming through.”
The two laid-off employees said that in the first quarter, delivery targets for North America – mostly buyers in the US but also in Canada – are down 55% to 60% from what they were in Q4 2018.
After a herculean effort late last year, Tesla delivered 145,610 Model 3s in 2018, all of them high-priced luxury versions. During this effort to deliver as many Model 3s as possible while the full federal tax credit of $7,500 was still in effect, the reservation list was “plucked clean” of American buyers “willing to pay current prices,” as Reuters put it, citing those two laid-off employees on the delivery team.
“We sold through just about every car we had on the ground and we called almost every being on the planet who had ever expressed desire to own a Tesla to let them know the tax credit was expiring,” said the other laid-off employee. Late last year, employees around the company were reassigned to pitch in, the source told Reuters.
Reuters said that “Tesla declined to comment on the job reductions in the delivery team.”
Of the 3,200-plus full-time employees to be laid off, at least 1,017 are at facilities in California, according to required disclosures that Tesla filed with the California Employment Development Department, reported by the San Francisco Chronicle on February 6. The layoffs in California will start on March 20:
- 802 employees at its plant in Fremont, Alameda County (East Bay), across the board, human resources, quality assurance, delivery experience, sales advisers, service technicians, production associates, 37 manufacturing supervisors, and some manufacturing engineers and technicians.
- 137 employees at its warehouse in Lathrop, San Joaquin County (Central Valley); most of them production associates.
- 78 employees at its Palo Alto headquarters, Santa Clara County (Silicon Valley), most of them in engineering, including hardware, software, and data engineers.
So what happened to all the reservations Tesla received for Model 3s? Back in July 2017, Musk was out there, being his usual self, promoting the dickens out of Tesla’s stock, saying that over half a million buyers had put down deposits to get their reservation in place for the Model 3, which caused shares to surge. Alas, in 2018, when Tesla actually started selling the Model 3, it delivered 145,610 during the entire year. And now demand is drying up. What happened to the other 300,000-plus reservations? What happened to that pent-up demand?
Analysts wanted to know this too during the earnings call on January 30. And CFO Deepak Ahuja, whose resignation Musk announced minutes later, said: “Reservations are not relevant for us. We are really focused on orders.” And those orders don’t appear to be forthcoming.
Musk shed some light on part of the reasons: “The demand for Model 3 is insanely high. The inhibitor is affordability. It’s just like people literally don’t have the money to buy the car.”
Duh. Yes, that’s a simple fact of life: high-priced luxury goods occupy a small niche in the overall US market.
And then there is this: Americans have veered away from buying “cars.”They’re buying pickup trucks, SUVs, compact SUVs, and vans. Since 2014, annual sales in these “truck” categories have surged 21%, reaching 11.8 million units in 2018, while car sales have plunged 31% to just 5.5 million units – a situation I have come to call “Carmageddon.”
So, Tesla is heroically trying to mass-market expensive luxury “cars” into a small niche of the rapidly shrinking car market.
Now Tesla is focusing on selling the Model 3 in China and Europe, it said. And that’s where most of the Model 3s now being built in Fremont are headed.