Tesla CEO Elon Musk told employees Tuesday that the company will trim about 9% of its 46,000 strong workforce.

“These cuts were almost entirely made from our salaried population and no production associates were included, so this will not affect our ability to reach Model 3 production targets in the coming months,” Tesla CEO Elon Musk wrote in an email to employees.

Why such a hurry?

Tesla has been burning cash since it was founded 15 years ago and the pace accelerated in the last few months, thanks to Model 3 production ramp up.

Tesla has enough money on hand to continue the ramp up. But they will run out soon if they continue to bleed cash. Tesla can easily turn towards capital markets to raise more money, but that will address only one part of the problem.

Tesla is selling higher priced versions of Model 3 as current volume is not good enough to bring the costs down. Unless Tesla brings down the cost of Model 3 to $35,000 the odds of winning the US small luxury car segment is low.

  1. If Tesla can improve its margins, it will not only reduce the rate of cash burn, but will also allow the company to pass on the benefit to Model 3 customers.

  2. If Tesla manages to become profitable, then the success of Model 3 is all but guaranteed.

A nine percent workforce cut is huge. A difficult but a necessary decision.

“To those who are departing, thank you for everything you’ve done for Tesla and we wish you well in your future opportunities. To those remaining, I would like to thank you in advance for the difficult job that remains ahead. We are a small company in one of the toughest and most competitive industries on earth, where just staying alive, let alone growing is a form of factory” – Elon Musk