Tesla is cutting seven percent of its full-time employee headcount, Elon Musk announced in a company-wide email. The layoffs are expected to affect around 3,000 employees, based on Tesla’s estimated workforce of 45,000 people.

In addition to the cuts, which come after the company’s headcount increased by 30 percent last year, Musk also announced that the company would be retaining, “only the most critical temps and contractors.” The move comes just a day after Tesla said it would be ending its customer referral program in an effort to cut costs.

In a blog post, Musk describes the “most challenging” year in Tesla’s history in which it launched the Model 3, the company’s first mass-market vehicle. Production of the car was beset by difficulties which limited the amount that Tesla could produce and the economies of scale it could achieve.

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

Tesla’s shares dropped 5.6 percent in premarket trading

Musk noted that Tesla had made a small profit in the last two quarters of 2018, although Q4 profit came in less than Q3. Profitability was helped by focusing on higher-priced versions of the Model 3. Despite having a theoretical base price of $35,000, the cheapest version of the Model 3 currently available costs $44,000.

However, Musk said that this will need to change if the company wants to become cost-competitive with fossil fuels, especially since the loss of tax credits will soon make the cars more expensive. The USA’s federal tax credit for electric cars is due to be halved to $1,875 on July 1st, and removed completely on December 31st 2019. The CEO said he wants to start delivering the mid-range Model 3 to all markets starting in May as the company progresses towards producing lower-priced variants of the car.

Responding to the news, Bloomberg notes that Tesla’s shares fell by 5.6 percent in premarket trading.