Is Tesla laying off 10% of its workforce a harbinger of doom?


Tesla

Earlier, there were reports that Tesla CEO, Elon Musk, “feels super bad” about the economy in the U.S. He claims that the auto industry could be a “canary in the coal mine” moment. This seems to suggest that the auto industry is in recession. However, there is no show of any significant concern from the major players in the automobile industry. For this reason, he already has advanced plans to cut down 10% of Tesla’s workforce.

Tesla Shanghai Gigafactory
Tesla Shanghai Gigafactory

The canary in the mine refers to a harbinger of danger. The canary is more sensitive to harmful gases than the human body, so the canary becomes the alarm for the miners. Tesla needs to cut about 10% of its workforce, Musk said in an email to executives. He later told employees that the company’s white-collar class was too bloated and needed to “skin down,”. However, he would continue to hire workers to make cars and batteries.

Musk’s body language seems different

Musk’s warning is the first openly and loudly disparate voice in the auto industry’s current unified stance. The auto industry agrees that the underlying demand for cars and trucks remains strong despite the global pandemic for two years. An auto executive also claims this week that demand is “extremely high.”

“Tesla is not an ordinary canary in a coal mine. It’s more like a whale in a lithium mine,” Morgan Stanley analyst Adam Jonas said in a research note. Lithium is the metal used in the production of electric vehicle batteries.

“If the world’s largest electric car company warns about jobs and the economy, investors should reconsider their forecasts for profit margins and revenue growth,” he added. Tesla shares closed down 9 percent on Friday.

Supply Chains Are Already Frustrated

Two years ago, the auto industry was hit hard by the outbreak of the pandemic, and factories were forced to close. That shutdown later led to a shortage of semiconductor chips, further hampering car production.

Today, the Russian-Ukrainian war has added to supply chain disruptions and dragged down auto sales. According to data from industry data firm, Wards Intelligence, the annualized sales of new vehicles in the United States in May was only 12.68 million vehicles, far below the glory days of 17 million vehicles per year before the outbreak.

However, these issues mainly affect supply, with inflation posing a threat to demand. “The risk of a recession is high, so he certainly isn’t saying extremes,” Jeff Schuster, president of global forecasting at consulting firm LMC Automotive, said of Musk’s warning.

Ride-hailing companies, Uber and Lyft said last month they would scale back hiring and spending. Online used car retailer Carvana said it would cut 12% of its workforce.

Less pessimistic

Other companies are also closely monitoring the economic situation. “We’re not as pessimistic as Musk, but we’re cautious about our hiring and spending,” said John Dunn, CEO of Clean Energy Systems U.S., a Plastic Omnium subsidiary and maker of fuel and emission reduction systems.

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However, industry executives fear a possible recession. “The auto industry is racing to unleash pent-up demand that could drive sales in the years ahead,” said Tyson Jominy, vice president of automotive data analytics at market intelligence firm, JD Power. Clouds are gathering and could destroy much of the demand.”

Fund manager Greenhaven Associates, one of the big investors in GM stock, has chief investment officer Josh Sandbulte in New York this week for the Alliance Bernstein conference. He believes that financial industry CEOs are far more pessimistic about their prospects than other business leaders.

While Musk’s emails sound far more pessimistic than other manufacturing leaders, Sandbulte said he has learned not to ignore the Tesla CEO’s remarks because “he’s done making a sharp turn when others are making a sharp turn. Turn around, and it turns out he was right.”

“We’re in a chaotic time, and frankly the financial and business leaders don’t share that,” Sandbulte said. “At some point, we’ll know who’s right.”

Tesla’s own problem?

Many other automakers have said publicly that underlying demand remains strong. When reporting monthly U.S. sales on Thursday, Ford said its inventory continued to turn around at a record pace.

“Consumer demand is very high right now. Manufacturers don’t have inventory,” Allyson Witherspoon, Nissan’s U.S. marketing chief, told the Reuters Auto Retail Conference in Las Vegas on Wednesday.

Industry executives also point out that Tesla has its own problems, including the possibility of hiring too quickly, and faster than its growth rate.

According to Tesla’s annual report, the company has doubled its workforce since the end of 2019. Morgan Stanley noted that Tesla’s $853,000 per employee isn’t much higher than the $757,000 at larger Ford.

In addition, Tesla’s sales in the United States are mainly concentrated in California, especially the San Francisco Bay Area where Silicon Valley companies gather. The wealth of high-tech employees are based on stocks and is an important customer base for Tesla. But now, some big tech companies are laying off staff, and smaller startups are finding it harder to get funding.

Barry Engle, a former Ford, and General Motors executive, believes all of this may be true, but Musk’s concerns cannot be ignored. Engel founded Qell, an investment firm focused on transportation.

“An economic downturn is becoming increasingly likely,” he said. “Elon and everyone else knows it. The difference is that as an entrepreneur he’s just naturally more prone to action and voicing the truth, even if unpopular.”

Conclusion

There is clearly some downturn hitting the automobile industry. From an expert’s point of view, a recession is coming and Tesla is just getting ready. There is no certainty that this 10% will be Tesla’s last batch of lay-offs. The company may still need to lay off more staff for more technical crew.

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