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Tesla to Cut Costs (Again)

By Daniel Sparks – May 17, 2019 at 2:47PM

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Following a massive loss in Q1, the automaker is focusing on eliminating unnecessary expenses.

Tesla (TSLA 0.07%) is undergoing another round of cost cuts, electric-vehicle news website Electrek reported Thursday afternoon. In an email to employees, CEO Elon Musk detailed a concerted effort to eliminate all unnecessary costs.

This cost-cutting initiative follows several recent big programs from the company to reduce expenses and cut any avoidable capital expenditures. Amid the Model 3 production ramp-up last year, Tesla moved to 24/7 operations at its factory in Fremont Factory while simultaneously implementing a plan for the company's finance team to review all large expenses. Then, earlier this year, Tesla announced a 7% reduction to its full-time workforce.

The electric-car company's latest cost-cutting initiative comes as Tesla is trying to move closer to becoming sustainably profitable after reporting a big loss in its first quarter.

An employee working on a Model X at Tesla's factory in Fremont, California.

Model X in Tesla factory in Fremont, California. Image source: Author.

Getting "hardcore"

Executives at Tesla, including CFO Zach Kirkhorn and Musk himself, will be reviewing all expenses. It is "extremely important" to "examine every expenditure at Tesla, no matter how small," Musk said in the email, which was obtained by Electrek. The company only has "about 10 months at the Q1 burn rate to achieve breakeven!" Musk added.

Examples of payments to be examined as part of the program include "parts, salary, travel expenses, and rent," Musk said. He admitted the program is "hardcore," but said it's "the only way for Tesla to become financially sustainable and succeed in our goal of helping make the world environmentally sustainable."

Financial troubles

The capital-intensive nature of the automobile business is weighing heavily on Tesla as the company attempts to deliver its most affordable and highest-volume vehicle yet -- the Model 3 -- in more markets.

In Tesla's first quarter of 2019, the company lost $702 million. In addition, negative free cash flow and the repayment of a $920 million bond meant Tesla's cash position fell $1.5 billion sequentially to $2.2 billion. Worse-than-expected total vehicle deliveries as the company's overseas expansion faced more challenges than expected and as Model S and X shipments tanked didn't help.

Helping buffer its financial headwinds, the company raised $2.7 billion in capital through equity and debt earlier this month. But, as of Tesla's first-quarter update in late April, management doesn't expect to be profitable on a GAAP basis until the third quarter of this year. It's no surprise, therefore, that it's focusing intensely on reducing expenses.

Tesla investors should look for the automaker to eventually achieve a level of financial stability, allowing it to avoid such regular cost-cutting initiatives. Programs like this may take management's eye off the bigger picture and delay longer-term plans.

Daniel Sparks owns shares of Tesla. The Motley Fool owns shares of and recommends Tesla. The Motley Fool has a disclosure policy.

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