Mobility without combustion. Electricity without emissions. These are the respective promises of the electric car and renewable energy. If you can figure out how to move vehicles without burning fossil fuels, and then figure out how to create the energy that can power those vehicles without burning fossil fuels, you can go a long way toward reducing emissions without substantially altering the way we live and move.
Elon Musk’s industrial empire has been attacking this challenge from two directions. Tesla Motors has led the way for battery-only vehicles, first with a pricey sports car with a 250-mile range, and, now just a few years later, the promise of a $35,000 car with a 215-mile range, for which it already has about 400,000 reservations. And SolarCity, which Musk helped found and is run by his cousins, brothers Lyndon and Peter Rive, has used innovative business and financing techniques to plant solar panels on rooftops of homes and commercial enterprises.
On Tuesday, Musk proposed to merge the two entities by having Tesla acquire SolarCity in an all-stock transaction. Depending on how you view Musk, it’s either his latest act of financial engineering to keep his companies afloat, or it’s his next logical move in an ambitious effort to reinvent some of our most entrenched systems.
The two companies have some similarities. Both have built up impressive scale from scratch in the past decade by upending traditional business and financial models. Unlike other carmakers, Tesla, founded in 2003, takes deposits years in advance, which helps fund its capital needs, and doesn’t rely on dealers to sell vehicles. Rather than try to sell expensive solar panel systems upfront, as industry competitors had done, SolarCity, founded in 2006, uses instruments like leases that effectively allow people to get solar on their roofs for no money down.
But the comparison only goes so far. Neither company had reliably made money. Yet Tesla, which makes a premium, sexy product and has essentially had its niche market to itself, has an impressive stock market capitalization of $32 billion. It’s a story stock, and investors believe the story. By contrast, SolarCity has heavy capital needs—it spends a lot of money upfront on sales, marketing, and installation but has to wait to collect lease payments—and sells what is essentially a commodity product, indistinguishable from its competitors’. SolarCity’s stock has fallen by about three-quarters from its February 2014 peak, and it’s only worth about $2 billion. (The company’s stock has suffered along with the broader solar sector, as investors have grown impatient with recurring losses and a seemingly insatiable need for capital. Sun Edison, one of the largest solar developers, filed for bankruptcy in April.)
So what does Musk get by offering to use the buoyant stock of Tesla to buy the deflated stock of SolarCity? Lashing together two companies that struggle to make a profit does not magically turn them into a single profit-making venture, even if you can cut some overlapping costs. Essentially, he is trying to pioneer a 21st-century version of what American industry did to such great effect in the late-19th and early-20th century: vertical integration. Vertical integration is the now-out-of-fashion modus operandi under which companies seek to increase profits by owning different stages of production, sources, and components. A century ago, Henry Ford owned rubber plants in Brazil (the key source for tires), timberland (the source for wood packaging crates), and the power plant that fueled Ford’s giant River Rouge, Michigan, plant. In the case of Tesla and SolarCity, vertical integration could benefit both businesses in an obvious way—and also in a more convoluted one.
The thing about solar is that it is intermittent. The sun only shines during the day. And that is hindering the industry’s development. In places like Hawaii or Nevada, rooftop solar panels produce more power than a house can use during the middle of the day, and there are limits on how much of that excess power the local utility will buy. The fact that a chunk of the output is effectively wasted reduces the financial appeal of solar.
SolarCity has tried to stand out from its competitors in an increasingly commoditized business by pairing solar generation with storage. It is doing so on a wholesale level: SolarCity is building a huge solar field in Kauai, Hawaii, that will charge up giant battery arrays during the day and then discharge the electricity into the grid in the evening. And it is doing so on a retail level. Last year, SolarCity introduced a home energy-storage offering, in which a battery pack collects electricity from a customer’s rooftop solar panel system and then discharges it at night. The key components of these storage systems are Powerwall battery packs produced by Tesla. So a marriage of the two companies is Vertical Integration 101: boost margins and gain efficiencies by building more of your own parts.
There’s a second attempt at vertical integration here, which is more out of the box. The way the auto industry now works is that automakers sell the cars but then let others sell the services and the fuel that make them run. General Motors doesn’t own gas stations. By not being in the fuel business, automakers are forgoing a big revenue opportunity. If gas is $3 per gallon, a car owner who drives a 25-mile-per-gallon vehicle for 100,000 miles will spend $12,000 on gas. If you could sell the power that runs the car, it would be like manufacturing and selling both the flashlight and the batteries that power them.
That’s the type of vertical integration Musk is after here. “Tesla is not just an automotive company,” the company notes on its website. “It’s an energy innovation company.” In effect, Musk is saying that he wants to turn Tesla from a carmaker into an energy company. In theory, owning SolarCity will afford Tesla the ability to sell you the electric car, and then sell you the solar panels that generate the electricity that can power the car’s battery (which it also makes), and then sell you a wall-based battery pack that can store the electricity so you can charge the car at night. That’s the plan.
The eccentric early-20th-century industrial tinkerer from whom Musk is taking his cues isn’t Nikola Tesla. It’s Henry Ford.
