Tesla to make cheaper models of cars
Tesla Inc’s chief financial officer will leave the company as the automaker on Wednesday promised cheaper Model 3 sedans, the launch of Chinese production this year and profits in every quarter in 2019.
The departure of Deepak Ahuja as well as missing Wall Street profit targets for the end of 2018, sent Tesla shares down nearly 6 percent after hours. Zach Kirkhorn, Tesla’s vice president of finance, will replace Ahuja, who is about 56 years old.
Chief Executive Elon Musk touted strong demand for the Model 3, as the company begins to ship the car to Europe and Asia from its Fremont, California factory. But he acknowledged it was paramount to cut costs to lower the price of the vehicle for a wider customer base.
“We have to be relentless about costs in order to make affordable cars and not go bankrupt,” said Musk on a conference call with analysts.
While the company expressed optimism that it could post a profit in the first quarter despite fewer deliveries of its flagship S and X vehicles, Tesla warned of challenges such as logistics and global deliveries of its new Model 3.
Tesla said plans to lower the price of the Model 3 were contingent on quickly building its factory in China. It hopes to produce 500,000 vehicles a year there by the last quarter of 2019 and the second quarter of 2020, a goal it originally expected to meet in 2018.
To start, the Shanghai factory will build 3,000 Model 3s per week, while production at Tesla’s Fremont plant will rise to 7,000 Model 3s per week by year’s end, the company estimated.
“Bottom line is we need the Shanghai factory to achieve that 10,000 rate and have the cars be affordable,” Musk told analysts. “The demand for Model 3 is insanely high. The inhibitor is affordability.”
Musk announced a 7 percent workforce reduction earlier this month, saying it was crucial to cut costs to roll out a lower-priced, yet still profitable, Model 3.
Tesla results are somewhat weak
The cheapest today is priced at $44,000. Musk gave a “rough guess” that Tesla would begin building its originally promised $35,000 version around the middle of this year.
Roth Capital Partners analyst Craig Irwin called Tesla’s results “somewhat weak, but largely as expected.”
“We think people have been too bullish about Tesla showing earnings power, and sustained positive cash from operations,” he said.
Investors have wondered whether Tesla, which has never posted an annual profit, will seek more capital to fund a planned Model Y SUV, the building of factories in China and Europe, and the expansion of Tesla’s existing Nevada battery plant, the Gigafactory.
Tesla said it ended the quarter with $4.3 billion in cash and said it could pay a $920 million convertible bond maturing in March.
“Tesla has a fantastic brand, and by all accounts a fantastic product, but we’re worried it’s also fantastically expensive,” said Nicholas Hyett, Equity Analyst at Hargreaves Lansdown. “2019 could prove a make-or-break year.”
The winding down of a U.S. tax subsidy this year will make all Tesla cars more expensive and could hurt sales.
Tesla said it expected lower S and X deliveries in the first quarter, given a “pull-forward in demand” in 2018 for those vehicles when the full subsidy was still available. Tesla recognizes revenue once a vehicle is delivered.
In the fourth quarter, customer deposits decreased by $113 million from the prior quarter to $793 million. Tesla said it was working through its Model 3 backlog without clarifying further.
Asked about Model 3 reservations, Ahuja said that number was “not relevant.” Tesla last disclosed in May that net Model 3 reservations – accounting for new orders and cancellations – exceeded 450,000.
The company made a net profit of $139.5 million in the three months ended Dec. 31, compared with a $311.5 million in the third quarter, when it benefited from regulatory credits.
Excluding items, Tesla earned $1.93 per share, missing expectations of $2.20 per share, according to IBES data from Refinitiv.
Tesla’s total revenue rose 5.9 percent to $7.23 billion, beating the analyst average estimate of $7.08 billion.