Tesla Is Cutting Model S and Model X Production in Pursuit of $35K Model 3

Tesla says these changes give it 'the flexibility to increase [its] production capacity in the future as needed.'

The Washington Post/Getty Images

On Wednesday, Tesla announced a reduction in production hours for higher-priced Model S and Model X vehicles, following statements that the automaker would instate severe job cuts to ramp up consumer affordability of Model 3 sedans, Reuters reports

As expected, the announcement had a significant impact on the company’s stocks, with shares falling 4.2 percent to $286.09 per. The automaker has found itself in the difficult position of either raising vehicle prices and thereby losing customers, or instead, cutting production costs and subsequently laying people off. 

“As a result of this change and because of improving efficiencies in our production lines, we have reduced Model S and X production hours accordingly,” a Tesla spokesperson told Reuters via email. “These changes, along with continuing improvements, give us the flexibility to increase our production capacity in the future as needed.”

Next week’s earnings call will surely reveal further, more specific details on the company’s conundrum and whatever strategies it’s considering to employ and willing to publicly share. 

Ultimately, much of the automaker’s business decisions in the past few weeks have been the result of Tesla’s electric vehicle tax break beginning to come to a close. From Jan. 1 onward, the reduction in this tax credit added $3,750 to the price of each vehicle. The U.S. tax credit will be cut in half once again starting in July, making the automaker's need to reduce costs on Model 3 production stronger by the day.

With a reliance on bringing the company’s new Gigafactory in Shanghai to fully operational status, and maintaining trust in the brand’s capabilities to reach ambitious benchmarks in established timeframes, Tesla is in a precarious situation this year, which some analysts posit could “make or break” the company. For now, the auto industry lies in wait, anticipating the carmaker’s next business moves and analyzing their ramifications. Stay tuned.