Rick Marotta remembers how Tesla used to be, driven by word-of-mouth sales and known for intimate service. The company he’s dealt with lately is losing that personal touch.
Marotta, a New York-based musician, became enamored with his friend’s Model S during a speedy zip through Los Angeles. Soon after, he bought a 2015 black S of his own, with the powerful 85 kW battery, a variant with a big range. He loved the speed, the space, the software updates and the service. The company checked in on him frequently to ensure he was enjoying the car.
So he convinced friends in L.A., Miami and New York to buy a Tesla, expanding the affluent network of early adopters.
But now, the company is in the midst of a change. It bought SolarCity, a solar panel manufacturer, and the company is going mass market with the Model 3, a vehicle Marotta pre-ordered alongside 400,000 other Tesla drivers and aspirants.
Marotta is fine to wait another 12 or 18 months for the compact sedan, but he’s noticed Tesla doesn’t check in with him these days. And now, he’s concerned the company’s personal touch and distinctiveness are slipping away.
“The more popular it gets, and the more Elon Musk gets involved in so many things, the more it’s going to get like any other company,” he said.
Tesla now finds itself on the precipice.
The company this month closed a $2 billion purchase of SolarCity, which manufactures, sells and installs solar panels, for more than $2 billion. Its not just customers like Marotta who consider the deal a distraction. Investors are worried too – shares are down more than 9.37 percent since the deal was announced.
The idea is to create a green energy one-stop shop – offering customers solar roof tiles to generate electricity, Powerwall 2 batteries to store the electricity and electric vehicles to charge with that solar power. And since Tesla has found hundreds of thousands of consumers interested in their cars, the company already has a pool of potential customers for other green energy products.
Its merger with SolarCity couldn’t happen at a worse time for the companies. Donald Trump’s upcoming presidency will wound SolarCity and Tesla by ripping away the tax credits that have made them more viable. Both startups are still malnourished, relying too much on investors and government, and unable to churn profits. The acquisition dovetails with CEO Elon Musk’s stated ambition to make Tesla a green energy powerhouse. But it’s a costly distraction that will drain Tesla’s resources as it develops its Model 3 entry-level sedan, a vehicle that could be a breakthrough for the company.
“It wouldn’t have been my choice to bring these two companies together. You have one that’s on the verge of profitability. And one that still loses money. Why not keep them separate?” said Ivan Feinseth, the chief investment officer at Tigress Financial Partners, LLC, which has a neutral outlook on Tesla.
So far, SolarCity has been a loss machine. In the third-quarter alone, the company lost $225 million – more than Tesla put into research and development during the same quarter. That includes development of the all-important Model 3, which is due to enter production in late 2017, barring any further delays.
The main question for Tesla concerns its priorities. The California-based company opted to expand into solar panel manufacturing before becoming a mass-market automaker, rather than fleshing out a profitable car business and using that cash to expand into green energy.
Tesla star-CEO Elon Musk’s vision for his company is to be a green energy behemoth. A company to sweep sustainable cars around the globe; swell the use of solar power; and save the world from the crisis of climate change.
And profit has broached the horizon. Tesla made $22 million in the third quarter. And it could make $3.2 billion in profit from the Model 3, if it can translate pre-orders into sales and its unit margin remains consistent.
But peril awaits.
SolarCity’s business model relies on spending money on solar panels upfront for customers to lease – a complex financial dance that hasn’t yet yielded profits. And Tesla has just subjected itself to the whims of the green energy business at the advent of a presidency hostile to green energy.
Households and companies can deduct 30 percent of the cost of installing solar panels from their federal taxes, with no cap on the value. Trump has promised to invest resources in the fossil fuel industry instead, especially coal and oil.
These policies would curtail SolarCity’s future growth with customers who are not wealthy environmentalists, and need a financial incentive to go ahead with alternative energy.
Then there’s the matter of the financials.
SolarCity has such an unsustainable business model that Tesla would have to sell 9,300 additional vehicles each quarter just to cover SolarCity’s operations losses, for a value of $186 million, by this author’s calculations. That amounts to 36,474 more vehicles a year, or $744 million, more than a third of Tesla’s current annual volume.
For all investing expenses, which includes solar panel leases, SolarCity spent $1.3 billion in the first ninth months of 2016. The company also spent $425 million for operating expenses in the same period. Tesla itself burned through $1.56 billion in operating expenses in the first nine months of 2016.
That’s unsustainable. Combined, the two companies have $3.3 billion in cash at the end of September – and Tesla needs it to expand manufacturing.
Instead of the SolarCity vanity project, Tesla should be expediting development of the Model 3.
“The Model 3 is going to get them the mainstream exposure, because they have had financial issues. If that fails, everything else becomes a pipe dream rather than a reality,” said Jessica Caldwell, executive director of industry analysis for Edmunds, a car research company.
Even Musk agrees that the Model 3 is urgent.
“We’ve just got to build those damn things,” he said on a recent earnings call.
Nonetheless, Musk is betting that the next big thing is a solar roof tile that replaces the shingle of a roof. But there’s little evidence that Tesla’s throng of Model 3 drivers-in-waiting will buy solar panels from the combined company.
The buying demographic for the upcoming Model 3 tilts toward young, urban people, according to Tesla’s president of global sales and service, Jon McNeill.
“Tesla is almost a part of a cultural experience. People want to be a part of that. But you’re dismissing people who have apartments and don’t have their own homes,” Caldwell said.
That means that Tesla’s green energy products borne of the merger will have a smaller pool of wealthier buyers that more closely resembles the buying demographic of the Model S and X.
Minah Worley, a Model X-owner, just installed solar panels on her house in Martha’s Vineyard. But they’re from a competitor, called South Mountain.
“I thought about SolarCity, but for Martha’s Vineyard, the best way is South Mountain,” Worley said.
That’s because the board of the historic district where she lives has approved South Mountain panels, and the company already has a strong presence there.
Before buying Tesla’s new solar tiles, she said she would need to learn more about their efficiency and capacity.
In the meantime, Worley, who only started driving two years ago, enjoys the gadgets on her $150,000 white Model X.
“The autonomous driving is really, really good. I was originally leery of it, but it’s been great. I love not having to drive and knowing the car is much better,” she said.
Worley wouldn’t consider a Model 3 to replace her existing Mercedes because it won’t have the bells and whistles of her X.
But fortunately for Tesla, there are hundreds of thousands of people who disagree.
Focusing on the Model 3 is the fast-track to the profits of the mass-market. The SolarCity acquisition is a double down on niche customer bases.
There exists the possibility that Tesla can pull off both tracks while turning a profit, which has been elusive for both companies.
Executives promise that they’ll cut $150 million of administrative costs within the first year of the combined company. SolarCity currently spends $103 million on sales and marketing, while Tesla doesn’t spend any money on marketing, so that figure is also likely to be streamlined in the process.
SolarCity’s customer acquisition costs are bloated and relatively easy to shrink, according to Jeffrey Osborne, of Cowen Group.
And Tesla can always come back to investors. The company has raised $2.2 billion through share sales in the last two years – though that was before SolarCity was part of the equation.
And Tesla will change SolarCity’s business model, so that it is selling panels to customers rather than assuming the financial risk of leasing panels.
The problem is that the cake is already baked. SolarCity has hundreds of thousands of 20-year leases on the books, for depreciating solar panels that is still has to service.
As a result, SolarCity’s current leases will incur losses that need to be offset for years to come.
Some analysts say that the Model 3 can pave a pathway to prosperity for the company, with its 400,000 preorders.
“SolarCity has not deployed that many cumulative households in its short corporate history,” said Osborne.
Feinseth, from Tigress, said Tesla would succeed despite the SolarCity decision, not because of it.
“It is going to cloud the financial results. Hopefully they give a breakdown of the results to give the overall profitability of the car business, because you can’t lose money forever,” he said.