Why Tesla's SolarCity Bid Will Fail

Smith Brain Trust — Electric car maker Tesla Motors describes its bid to acquire full-service solar power systems provider SolarCity as a move destined to create the “world’s only vertically integrated energy company offering end-to-end clean energy products to our customers.”  But management professor Brent Goldfarb at the University of Maryland’s Robert H. Smith School of Business says such a move is destined to fall flat.

The merger would create a firm with about 30,000 employees and all its products renamed “Tesla,” including electric cars, batteries and solar panels. “Culturally, this is a great fit,” Tesla writes in a blog post announcing the bid. “Both companies are driven by a mission of sustainability, innovation, and overcoming any challenges that stand in the way of progress.”

Goldfarb, academic director of Smith's Dingman Center for Entrepreneurship, suggests a different strategy and end game pursued by Elon Musk, chairman and largest shareholder of both companies. The merger could "be a way to transfer cash between the companies or shut SolarCity down without calling it a ‘failed company,'” Goldfarb says. Both growing companies are bleeding. Losses in 2015 totaled $899 million for Tesla and $769 million for SolarCity. 

The Tesla blog suggests a scenario where customers buy solar panels and/or electric cars in Tesla stores. But solar panels and cars in the same showroom is like displaying "apples and rakes together because shoppers like apples and rakes are useful,” Goldfarb says. “They don’t seem very connected.”

Tesla further projects itself becoming a clean energy powerhouse bolstered by the core competencies of each formerly separate entity. Tesla’s experience in design, engineering, and manufacturing that advances solar panel technology, and SolarCity’s wide network of sales and distribution channels and expertise in customer-friendly financing products.

Ultimately, “the same demographic might be interested in both products, but I don't see this making sense from a pure business sense,” Goldfarb says. “A SolarCity failure might spook Tesla investors.” Tesla’s stock, reports the Los Angeles Times, “plunged” on June 22, 2016, “effectively devaluing the company’s currency and casting doubts on its plan to buy SolarCity.”

Gigafactory, Model 3 Implications

Tesla’s blog notes its Gigafactory-produced Powerwall home battery system dovetails with SolarCity-produced solar panels. But Goldfarb objects to “the hypothetical connection in that solar can charge a home battery during the day, and this then can be used by the electric vehicle at night — or both batteries could be used to sell back to the grid.” But solar generally doesn't produce enough to power a home, he says. "And you can't store power in your car battery during the day because the car is usually not there.” 

Goldfarb also says the $4 billion Gigafactory in Nevada has been “a huge bet” and has experienced delays. “It is hard to see how its battery model will be profitable,” he says.

Musk says, according to Vox, that a SolarCity deal will not affect Tesla’s plan to sell its $35,000 Model 3 starting in 2017. But Goldfarb says the margins in this part of the market will be very tight. “General Motors has been promising a late-2016 launch of a 200-mile range Chevrolet Bolt EV, electric car,” he says. “Moreover, the electric car market is crowded in the midprice range. Nissan, Ford, BMW, VW, Fiat, Mercedes, Kia, Mitsubishi and Smart all produce cars in the segment.”

Not Mass-Market Suited

Given the above-noted factors, Goldfarb says Tesla’s mass-market and SolarCity-takeover ambitions appear out of line with Musk’s track record as a master and visionary. For example he’s been out in front of the self-driving revolution (though the self-driving car "is really just a toy right now, and this market is very crowded, too," Goldfarb says). Tesla can and should focus on what it does best: high-end electric cars, Goldfarb says. “Tesla owners love their cars," he says. "They should. These are wonderful automobiles.”