Our starry-eyed and very ambitious Mr. Elon Musk is working very hard on his big mission to colonise Mars. But, that doesn’t mean that he’s neglecting our home planet. He wishes to go high up in the skies while staying grounded to the roots.
Yes, today we talk about his on-the-land business, Tesla. Nope, not those supercars.
We talk about a not-so-successful division of Tesla, which will drag Musk down the halls of a courtroom, as he will testify on July 12, 2021.
Woah. Let’s rewind a bit to understand how things got so murky.
Back in 2016, Tesla revealed a new product under its Energy division to cater to households’ clean energy needs and to lay the foundation for a sustainable planet - the Solar Roof.
This solar roof would replace the traditional roof with something called photovoltaic tiles that could essentially capture more solar energy. And the captured solar energy could, in fact, be stored for later use in a home battery, called Powerwall - another Tesla product (of course).
But, Musk, the mastermind that he is, did not want these tiles to be sitting on the roofs, destroying the beauty of the houses. Instead, he wanted the solar roof to enhance the beauty. He wanted people to be able to boast of their beautiful solar roofs.
To bring this vision to life, Musk was eyeing an acquisition - SolarCity, a solar energy company run by his cousins. Musk was also the chairman and largest shareholder of SolarCity. He was convinced that this would be a step in the right direction because both the companies have the same mission and vision, and seeing them as two separate pieces of a puzzle instead of one whole entity, would just be foolishness.
But, this proposal immediately saw mixed reactions from investors. While Tesla’s stock dropped by more than 12%, SolarCity’s stock rose by more than 15%! The shareholders put on their analytical hats and started listing the pros and cons of this deal:
Before the proposal was made in July 2016, SolarCity’s stock had tumbled down by 60%. This meant that Tesla could buy SolarCity at a discount.
SolarCity was having a hard time finding customers. With Tesla as its parent, SolarCity could expand through retail outlets, and reduce its customer acquisition costs.
Tesla has a great go-to-market strategy. Isn’t Musk the best marketeer (read: influencer) out there? When Tesla started taking orders for Model 3, around 4,00,000 people joined the waiting list - for $1,000 each! Now, Tesla wants to make Solar just as desirable.
Tesla wants to give its customers a clean-energy package. You drive Tesla’s clean-energy cars, use battery packs (Powerwall) to consume clean energy, and trap more solar energy, just by sitting at home!
Tesla is definitely a plus-one for SolarCity. But, does Tesla need SolarCity? It’s battery business is doing well. Does it need solar roofs now? Will this deal bring profits for Tesla?
Though this did not look like a clear win-win and was frowned upon by many, the $2.6 billion deal ultimately went through. And with this, started Musk’s vision of bringing “beautiful, affordable and seamlessly integrated” solar roofs to this world.
Right there. Those three words remained mere words, and have not been brought to life yet. And that’s where the downfall of this business started.
Every business has two parts: production and distribution.
While production hasn’t been a problem, and the solar roofs are as efficient and beautiful as they can get, affordable distribution is a pain for the company.
Customers were impressed by the product, and they got into contracts with Tesla for the installations.
But, when the time for the installation came, the customers were informed that the installation costs would be tens of thousands more than initially quoted!
If you signed a contract in February for a roof costing $35,000 and $30,000 for the battery, you would later receive a mail informing you about the new price - $75,000 plus $35,000 for the battery. That’s a 69% price hike.
In fact, Tesla was hit with a class-action lawsuit led by one of the customers whose solar roof price went from $71,660 to $146,460.
Mistake 1: Disappointing consumer experience.
Tesla was already losing customers. To prevent them from any further bad experiences, the company agreed to refund the deposits if customers didn’t want to pay the higher price.
Now, what did Musk have to say to all this?
Well, in the FY21 Q1 Earnings Call (on 26th April 2021), he admitted that the company made “significant” mistakes in assessing the difficulty of the project, and the complexity of the roofs varies dramatically. Every home’s roof is unique. The installation process also varies depending on location. Crews spread out across the country need to be trained accordingly. Basically, a one-size-fits-all solution will not work here.
Mistake 2: Over-promised, under-delivered.
Despite the hiked prices, Musk said that because of their insufficient capabilities to install the Solar Roofs, they were unable to meet the excess demand.
In the first quarter of 2021, Tesla deployed 92 megawatts of energy storage products, and 445 megawatt-hours of storage, a 163% and 71% YoY increase respectively:
In the first quarter of FY21, Tesla also made $494 million in sales of its energy generation and storage products. But, this division is still not profitable.
Looking at failures piling up, Musk finally took matters into his own hands. In mid-April, he conducted a conference call with the leadership of the Solar Roof program. And as rumour has it, right after the call, the executives were fired, and since then, Tesla’s Energy division has no executive.
To make the company’s balance sheet more promising, Musk has decided that solar products will be sold as a package - no Solar Roofs will be sold without accompanying Powerwalls.
While Solar Roof is only a small slice of Tesla’s huge business, it is a step towards sustainable energy, something much more than automotive.
The cumbersome installation process still remains a challenge. With Musk driving the steering, will Tesla be able to solve the installation process and regain consumers’ trust?
Life comes full circle, and 5 years later, Musk’s decision to acquire SolarCity is being questioned once again. Yes, on 12th July, Musk will have to testify. Did Tesla acquire SolarCity in good faith or was it only to save Elon Musk’s family from the looming threat of bankruptcy? (tweet this)
Was Musk’s decision driven by the intention to improve the world or were his intentions aligned because of personal relationships with SolarCity?
This small fiasco can become a big mole that can disrupt Musk’s reputation forever. What does the future hold for Tesla and Musk?
Only time will tell.
Until then, ReadOn.
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