Tesla cuts 7% of its workforce, and Elon Musk sees a 'very difficult' road ahead as investors hammer the stock

  • "Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months," Musk says.
  • The company discontinued the cheapest versions of its Model S sedans and Model X SUVs this week, and Musk says it will ditch its customer referral program.
  • Musk says Tesla faces "an extremely difficult challenge" in making its products a competitive alternative to traditional vehicles and energy products.

Tesla is cutting its full-time staff headcount by about 7 percent, as it ramps up production of its Model 3 sedans, CEO Elon Musk said Friday.

The announcement follows recent cost-cutting measures the company has made in a bid to reduce the price of its products and boost margins.

Tesla shares fell 13 percent by the end of trading Friday.

In an email to employees, Musk said the company faces a "very difficult" road ahead in its long-term goal to sell affordable renewable energy products, noting the company is younger than other players in the industry.

"Tesla will need to make these cuts while increasing the Model 3 production rate and making many manufacturing engineering improvements in the coming months," Musk said.

"Attempting to build affordable clean energy products at scale necessarily requires extreme effort and relentless creativity, but succeeding in our mission is essential to ensure that the future is good, so we must do everything we can to advance the cause."

You can read the full text of Musk's note to employees here.

The exact number of employees who will be laid off has not been disclosed. However in an October tweet, Musk said Tesla had a staff count of 45,000. If still true today, that would mean 3,150 layoffs.

Earlier this week, the company discontinued the cheapest versions of its Model S sedans and Model X SUVs. And Musk said on Thursday that the electric car maker would also ditch its customer referral program, which rewarded perks likes six months of free charging, because it was "adding too much cost to the cars."

Musk said Friday that Tesla faces "an extremely difficult challenge" in making its electric vehicles and solar products a competitive alternative to traditional vehicles and energy products that rely on fossil fuels.

"Starting around May, we will need to deliver at least the mid-range Model 3 variant in all markets, as we need to reach more customers who can afford our vehicles," Musk said.

"Moreover, we need to continue making progress towards lower priced variants of Model 3."

The cheapest version of Tesla's Model 3 costs $44,000, and the company is looking to release a $35,000 version. Musk said in a CBS interview in December that the company was "not that far from being able to produce the $35,000 car," adding that it would "probably be ready in about five or six months."

Q4 profit likely lower than Q3

In its last quarterly financial statement, Tesla posted its first profit in two years, reporting a net gain of $311.5 million and $881 million in free cash flow.

Musk said profit in the fourth quarter is likely to come in lower than in the previous quarter but added that he hopes Tesla will achieve a "tiny profit" in Q4.

"In Q4, preliminary, unaudited results indicate that we again made a GAAP [generally accepted accounting principles] profit, but less than Q3," Musk said. "This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit."

The company disappointed investors earlier this month after it announced it delivered a lower-than-expected 90,700 vehicles in the fourth quarter. That figure could foreshadow the company's fourth-quarter results, which it's due to release at the end of the month.

The automaker has faced pressure from big rivals in the industry, with companies like Ford, Nissan and General Motors committing to investments in the EV space and launching new vehicles in a challenge to Tesla.

Last year was a wild one in terms of news about Tesla and its boss. Musk's infamous U-turn on a tweet announcing he would take the company private eventually backfired, with the Securities and Exchange Commission landing both Tesla and Musk with respective $20 million fines.