Published on June 25th, 2016 | by Zachary Shahan47
74% Of Cleantech Enthusiasts Support Tesla’s SolarCity Acquisition Offer
June 25th, 2016 by Zachary Shahan
After first publishing about Tesla’s offer to buy SolarCity, I thought it would be interesting to see what our cleantech-loving readers thought of the acquisition proposal — beyond the dozens of people who carried on the discussions in comments under that article and our next two on the topic.
I’m honestly a bit surprised to show that a solid 74% of respondents thought it was a good idea. That’s the side I’m on, but there has been much criticism of the proposal. Maybe that just comes back to the point that people are more likely to chime in if they have something critical to say.
After days of discussing the matter though, I want to also lay out a more thorough take on the pros and cons of the potential acquisition. Naturally, if you think I miss something big, chime in. There’s a decent chance I’ll update the article if feedback seems to warrant it.
(Note that I own stock in SolarCity and Tesla. I don’t think that significantly colors my vision, even though it does make me more personally concerned regarding the cons and hopeful regarding the pros.)
Cons of Tesla’s Potential SolarCity Acquisition
$$$: SolarCity is in debt, big debt, and its growth model has basically been about accumulating debt and expecting it to be paid off by customers over the course of 20–30 years. With about $3.25 billion in debt, and a lot of it being short-term debt, there’s concern that SolarCity could go bankrupt, and could also take Tesla with it. (Note that Tesla isn’t yet profitable itself due to its fast growth plan.)
Sales tactics: SolarCity has developed a fairly negative relationship for pushy, shady sales tactics (note that this point is just anecdotal, but based on a lot of anecdotes) and fine print. There’s concern that this reputation could tarnish Tesla’s brand, which is known for non-pushy sales tactics and superb customer service. Naturally, there’s also hope that Tesla would change how things are done, but what if it doesn’t? Also, Elon Musk is Chairman of SolarCity’s board, so why haven’t the sales tactics been improved by now anyhow?
Solar panel prices: As I reported previously, SolarCity’s prices are reportedly much higher than the average in California, and presumably elsewhere. Again, anecdotes point to prices even 50% higher than the norm. The Pick My Solar analysis found them to be 34% higher than the California average. If there are reasons for the high prices that can’t (or can’t easily) be resolved, does that actually put SolarCity at a big competitive disadvantage? If so, is Tesla going to get burned if it acquires SolarCity (rather than, say, Sungevity)?
Pros of Tesla’s Potential SolarCity Acquisition
Huge customer base and market share: SolarCity is far and away the rooftop solar installation leader in the United States — it has 34% of the market, compared to 12% for #2 Vivint Solar. This is a large network of “salespeople” who could bring in many more solar buyers and also drive EV sales via low-cost referrals. Of course, that’s also assuming that many of them become Tesla customers.
Vertical integration, and “easy” sales at much-reduced cost: Tesla’s main case for the offer was the synergies between solar–storage–EVs and presumable efficiencies and other improvements that Tesla’s engineers could bring to SolarCity’s solar panels and installation. Presumably, there are also some economies of scale that might come from production of some of the components, and definitely with marketing, paperwork, and financing. Several commenters have argued that this is not as big of a benefit as it is made out to be, but other than Tesla’s argument that this is big, Bloomberg New Energy Finance’s head of energy storage market analysis, Logan Goldie-Scott, noted that Tesla was right to “identify product synergies between the two companies.” Going on: “EV owners are more likely to install rooftop PV and vice versa. Furthermore, residential PV and storage may prove to be a lower-cost gateway product for wannabe customers of Tesla’s Model S and Model X,” he said. “Beyond product offerings, the future of Tesla Energy (SolarCity) may be in virtual aggregation services and management of solar, storage and EV charger fleets. In a Tesla-SolarCity home ecosystem, the company could have control over the largest demand source in the house (the EV), the largest demand response unit (the home storage system) and the only generation source (rooftop PV).” (Nonetheless, he also noted that vertical integration hasn’t gone well in the solar industry so far, and highlighted the debt issues noted above.)
At-cost electricity for factories, stories, Superchargers: Of course, if SolarCity was part of Tesla, Tesla could get at-cost solar power for its factories, gigafactories, some stores, and some Supercharger sites. If someone wants to crunch the numbers on this, I’d love to see some estimates, but I think it’s safe to say that the savings could add up quite a bit over 20–30 years.
Better financing: Presumably, Tesla could work out better financing to deal with SolarCity’s debt, putting it in a better position than SolarCity is in. Importantly, I’d say SolarCity’s debt situation is what “puts it on the market” for Tesla to buy, and sense it does so, Tesla could just see this as a great price on a solar giant just when the industry is getting going. If SolarCity pulls through under Tesla and starts making a profit in a few years, that could again boost Tesla’s ability to get financing for its car and battery factories.
Update: Kurt Lowder fleshed out the details of the pros a lot better in the comments, so I’m reposting his comment (with slight edits) here:
You covered a great deal, but I have a few points to add along with a few more specifics. Most of these points come from the Tesla conference call. Sorry if I make redundant points. I will put them in bullet form:
- Musk and others have kicked this merger idea around for a long time. He said arguably this should have been done sooner. He said that it certainly is not being done too soon. Well, if they had done this earlier, they would have had to pay much more because SolarCity has dropped to almost a 1/3 of its value. The timing is also great because of the rollout of Model 3 and SolarCity will be producing its own panels soon.
- You mentioned installation — Musk said what was done in 2–3 visits can now be done in one visit.
- You mentioned marketing — to be a little more specific, SolarCity has been doing paid advertising, but Tesla as far as I know has not or rather very little. Tesla gets a lot of free coverage and has a larger following on social media. Therefore, it would make sense that less will be spent on advertising with the merger. To put it in other words, if SolarCity remains its own entity, it will have to spend more on advertising.
- To date, SolarCity has, I believe, 300,000 customers. Currently, there are ~400,000 Model 3 orders. Would it not better to have a Tesla rep to contact them as opposed to a SolarCity rep to add the purchase of solar power plus battery system.
- With all three being installed at the same time, there is less of a chance of problems occurring.
- If something goes wrong with your solar power system or car, you have only one contact person. If and when there is a service call, the entire system and vehicle can be checked.
- Both SolarCity and Tesla have referral programs, with thousands of ambassadors. Now, with the merger, those ambassadors can offer all products and receive referral fees on all products.
- Musk said that the value of SolarCity has been determined by the market and the premium being paid is rather average.
- Musk said, looking back, the price will seem really small, and he envisions Tesla being a trillion-dollar company.
- Tesla will be growing fast and will need more employees. SolarCity employees are already very familiar with Tesla vehicles, Tesla culture, and Tesla work ethic. Accordingly, training costs and employee turnover will be reduced. Also, fewer workers will have to be hired than if the two companies remain separate.
- Tesla is a better brand than SolarCity, so SolarCity by itself has much less goodwill.
- Tesla solar panels and Powerwalls will be visible and in a way will act as billboards. I am sure many customers would love to put up a sign that says something like “Powered by Tesla.”
- Going back to the SolarCity referral program: Ambassadors regularly have parties and events with a SolarCity rep there. Sounds like a great time for a test drive, since it will now be a Tesla rep who has to drive there. Also, more people will show up to party if a Tesla vehicle is going to be there. Tesla is known for throwing great parties.
- Future production facilities can be located on the same grounds. I think Tesla has plenty of land left over in Nevada at the location of the Gigafactory. New roads, power lines, and utilities had to be built. Also, Tesla obviously produces its own power on site. It will be cheaper if Tesla’s solar plant can reach greater scale to power both factories. Furthermore, Tesla already has relationships with many communities and cities that lobbied for Tesla to build facilities there.
- Tesla and SolarCity have to store incredible amounts of data, which can now be stored at the same facility.
- You mentioned this already, I think: Superchargers will be able to showcase Tesla solar power systems. More free advertising!
- The new Silveo solar panels have much better aesthetics than anything else available. Musk has said they look so good, that they will add value to homes. This goes along with Tesla’s great styling.
- Elon Musk’s time is incredibly valuable. Merging the companies will free up more time for him and/or allow him to be more involved in solar aspects.
- Elon has said this is such basic common sense based upon his first principles analysis, which are based upon science and the big picture. This merger will make everything easier, not harder. Critics of the merger are stuck in a corporate quarter-to-quarter frame of reference. They are looking at only the financials of the companies. They are not looking at the physics of it. Nor are they thinking from the perspective of a customer.
- 15 years ago, people were paying $90,000 for solar power + a battery system. Now, you can get a way better system, plus likely the best car ever built, for $70,000.
Well, that’s more than enough. Once again, sorry for the redundancy. This merger has been so exciting and I cannot wait for all the morons in the media to be proven wrong again.
In the end, with financial stories like this, it comes down to your appetite for risk and your faith in the new company being able to better execute the bought company’s vision. This is a controversial story largely because of the debt issues SolarCity faces, but also because a lot of people (including shareholders) have a lot of faith in Tesla and its cars and batteries, but don’t have faith in SolarCity’s overall business model. For those of us in that boat, the question is whether Tesla can turn things around at SolarCity and make it the solar company we’d like it to be … but none of us know if that’s the case.
Of course, there are others who just aren’t bullish on solar or SolarCity’s potential at all. I don’t know what to say for those people. Solar is the future, and if nothing else, SolarCity has a big foot in the door to that future.
But if you look at the results of our survey, it seems the majority are simply in the camp that Tesla and SolarCity both have bright futures, and Tesla’s decision to try to buy SolarCity at a low price is a good move.