
Everyone Despises SolarCity Deal, Except Tesla Shareholders - hvo
http://www.nytimes.com/2016/08/05/business/everyone-despises-solarcity-deal-except-tesla-shareholders.html?ref=business&_r=0
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jobu
Most articles paint this deal as solar + battery + car, but the car part
really doesn't matter here. The key part is solar + battery.

Over the last year states have started increasing fees to hook solar into the
grid and at the same time are reducing net metering rates (payouts for power
generation). This has hurt Solar City over the last year and likely would've
killed it long-term.

I see Tesla using the Power Wall to make an in-home grid that uses solar +
battery as the primary power source, and the grid is the backup power (for
charging the battery with off-peak rates) . That way people can avoid paying
fees for net generation, and the net metering rates don't matter.

~~~
guelo
That still doesn't explain why they can't use cheap panels from China.

~~~
illumin8
Have they ever said they wouldn't use cheap panels from China? Why would you
assume Tesla would procure more expensive panels if it didn't make sense to do
so?

~~~
guelo
OK, I was thinking of SolarCity as a panel manufacturer. Are they just an
installer? If so then what makes them worth $2.6 billion?

~~~
erikpukinskis
They were just an installer but they acquired Silevo in 2014. They built a 1GW
plant in Buffalo, NY, cut the ribbon last year and are supposedly ramping
production right now:

[http://www.pv-tech.org/editors-blog/solarcitys-1gw-
buffalo-f...](http://www.pv-tech.org/editors-blog/solarcitys-1gw-buffalo-fab-
using-technology-from-japan-germany-and-taiwan)

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Canutesun
Given Elon Musk's track record of spelling out exactly what he wants to do,
receiving a bunch of naysaying, and then doing exactly what he said, I think
betting against him is a bad bet.

~~~
bjelkeman-again
The shorters, and there is a lot of them, don't think so, but I agree with
you. We need a sustainable future and this is a really good effort to get
parts of our society there. Waiting for the auto companies to get their act
together, then we'll burn.

~~~
semi-extrinsic
> We need a sustainable future and this is a really good effort to get parts
> of our society there.

Even if we accept this as truth (I'm not saying it is or isn't), the fact
remains that Tesla is very overvalued compared to any other carmaker,
especially when we know they are losing money on each car and will keep doing
so for at least three more years. Tesla has almost as high market cap as Ford,
despite selling less than 1℅ as many cars per year. Tesla had a P/E of -60
last year, projected to have -100 this year. The financial fundamentals
compared to current valuation doesn't look good. Will Tesla go up or down?
There is more potential downside than upside, that's for sure.

Also, it's not like none of the other car companies have EVs coming out. In
fact, most of them do.

~~~
vibrato
"There is more potential downside than upside, that's for sure."

This may be true over very short time horizons. But if Tesla survives 50-100
years, is it not realistic to think it could be valued at 5x - 10x current?
That would be a 400% upside, versus 100% downside. I say this as a habitual
short seller.(haven't traded TSLA)

~~~
semi-extrinsic
Tesla is currently valued higher than Subaru, Fiat Chrysler and Mazda; all
successful car companies selling much more cars. With the exception of Volvo
and Toyota, whose value includes much more than just the car companies (like
heavy industry manufacturing, commercial vehicles, Toyote even owns 0.27% of
Tesla), only a ~2x increase in valuation is realistic. If they become one of
the biggest car companies in the world.

~~~
erikpukinskis
They're not just a car company, they're a battery company who happens to make
cars.

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chollida1
I'm not so sure shareholders like the deal, I think its more of a case where
they like Telsa despite the deal.

Or more to the point, they consider the deal more of a distraction than
something that will sink Telsa. When you think Tesla, you probably think
electric car, or autonomous driving car, or Elon Musk.

I mean if you hate the deal what are you going todo. The deal is almost
certainly going to go through so holding shares just to vote against the deal
won't do any good. You could short Tesla but over the past 5 years the street
seems to love Tesla so much that bad news doesn't seem to affect the company
that much.

This is a stock that has had a high short interest number for a long time. And
quarter after quarter they miss numbers but the stock goes up as the shorts
are forced to cover their positions when the stock fails to drop.

People aren't investing in Telsa due to any fundamental, int he financial
sense, numbers, they are doing it on belief that Elon will come through. Which
is good news for Tesla as they really need the short term investors on their
side in the next year as they'll almost certainly have to raise cash to fund
the production of the Model 3.

~~~
wklauss
> When you think Tesla, you probably think electric car, or autonomous driving
> car, or Elon Musk.

If you are an investor thinking in those terms, Tesla will probably seem like
a terrible company. Overvalued and unlikely to succeed once traditional car
companies start taking EV seriously. Like you say, there are no fundamentals
to support current valuation and there will never be.

The only way to look at Tesla is to think about it on more broad terms. It is
a car manufacturer, yes, but it also is a company that provides a long range
EV support infrastructure (superchargers), the (soon-to-be) largest Li-ion
battery manufacturer, a domestic energy storage provider, etc...

With that perspective in mind, SolarCity fits right within the catalog of
product and services. Tesla is an engineering company focusing the different
applications of renewable energy and batteries. Cars just happen to be one
that offers an attractive market to address now and a personal interest for
Musk.

And that, I think, it's more than just faith in Elon coming through. It is a
measurable market, albeit uncertain and dependent on a lot of social
transformation and full of regulatory hurdles.

~~~
dragontamer
The largest Li-ion cell manufacturer remains Panasonic, the other owner of the
Gigafactory.

The "Batteries" that Tesla builds are just a bunch of Panasonic cells wired
together plus some smarts to distribute the load. I don't see Panasonic
remaining Tesla-exclusive for an extended period of time.

~~~
erikpukinskis
The Tesla IP is just as important as the Panasonic IP though. It really is a
joint venture. And Tesla, as the customer connection, has more leverage than
Panasonic. They could cut Panasonic out of the next Gigafactory, but Panasonic
can't start selling cars and home energy systems.

~~~
dragontamer
Panasonic owns half the Gigafactory.

Tesla doesn't have any leverage here. Panasonic does what it wants. Tesla can
decide to switch to another supplier, but Panasonic can just start selling to
GM or Ford.

~~~
erikpukinskis
Of course, for Gigafactory 1 Tesla and Panasonic are married.

I was talking about Gigafactory 2.

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forrestthewoods
How much money has SolarCity gotten from the government? Looks like at least
2.5 billion [1].

Tesla and SpaceX haven't been super dependent on government funds. But
SolarCity definitely has.

Musk's real super power might be in getting free money. I suppose the phrase
here is don't hate the player hate the game. But it still rubs me the wrong
way. As unpopular as that opinion may be.

[http://www.latimes.com/business/la-fi-hy-musk-
subsidies-2015...](http://www.latimes.com/business/la-fi-hy-musk-
subsidies-20150531-story.html)

~~~
mulcahey
Specifically in response to that Times article:

[http://electrek.co/2015/05/30/opinion-times-article-on-
musks...](http://electrek.co/2015/05/30/opinion-times-article-on-musks-empire-
being-fueled-by-government-subsidies-is-grossly-one-sided/)

Elon argues that the subsidies only make sense because they offset the much
greater subsidies that the fossil fuel industry gets implicitly from negative
externalities (to the tune of over 5 trillion):
[http://www.imf.org/external/pubs/ft/survey/so/2015/new070215...](http://www.imf.org/external/pubs/ft/survey/so/2015/new070215a.htm)

Some people still like to argue that Tesla is propped up by government help,
but by this slide they put up in their shareholders meeting, that's clearly
not the case:

[https://youtu.be/DvVlNkL8f_o?t=2h9m20s](https://youtu.be/DvVlNkL8f_o?t=2h9m20s)

~~~
forrestthewoods
Tesla and SpaceX are self-sustaining. SolarCity is not. SolarCity is also
Musk's largest subsidy beneficiary.

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abalone
It makes sense. Tesla's raison d'être is sustainability. If at scale their
product is still powered by dirty energy, it will undercut the product. It's
not just a fast car, it's a clean car. If utilities don't keep pace with them
in terms of solar deployments, it's literally a risk to the company.
Empowering customers to directly source clean power at the grassroots level
frees them from dependence on utilities.

~~~
Analemma_
> It makes sense.

It makes sense _strategically_. I think most of the people complaining about
the deal are more concerned with whether it makes sense _tactically_ , since
SolarCity is bleeding cash and wasn't expected to survive much longer, and
will now be hitched to Tesla, which doesn't have a great cash flow situation
either.

~~~
tcoppi
SolarCity's immediate cash flow looks a lot better when you take away sale and
customer acquisition costs, in fact it brings them very close to
profitability. It is widely expected that the merger will close that side and
bring it closer to Tesla's sales model, which is cheaper per customer
acquisition.

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GigabyteCoin
>Even if energy generation, storage and an auto powertrain are a seamless
product, so-called vertical integration, in which one manufacturer makes all
the components, was the old Henry Ford model and later, General Motors’. That
approach has gone down in automotive history as a colossal failure.

What is Tesla meant to do if nobody else is able to deliver what they demand?

Ford Motor Company essentially created a new industry, which is why they had
to make all their parts... Tesla is doing a similar thing here imho.

~~~
latj
There are plenty of PV suppliers out there. I believe FSLR is the largest.

The deal does make sense to me though. In the beginning it worried me that
Tesla only had one product. One major flaw in the product could have ended
them and they we creating a completely new kind of product that is expected to
last decades. Now they have storage which makes sense because they can grow it
along with their auto battery technology. But they also have these stupid
stores where you cant really do much and you can only buy two things- a car or
a battery for your house. It makes perfect sense to be able to buy the panels
from them because otherwise you can buy the batteries from whoever you buy
panels from. People who like Tesla are Apple users. They want complete
packages, everything brushed aluminum with an apple or tesla logo on it.

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cletus
The best way I can describe this deal is that one of Musk's companies (Tesla)
bails out another of Musk's companies (SolarCity) that owes a lot of money to
yet another of Musk's companies (SpaceX).

I'm really not surprised people are concerned about this.

~~~
vanattab
How much does SolarCity owe SpaceX?

~~~
Hypx
About $165 million: [http://fortune.com/2015/08/07/this-is-why-elon-musks-
spacex-...](http://fortune.com/2015/08/07/this-is-why-elon-musks-spacex-has-
been-buying-up-solarcitys-bonds/)

Which will soon be $165 million Tesla owns to SpaceX.

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kragen
A thing I don't understand about this article: " _vertical integration…was the
old Henry Ford model and later, General Motors '. That approach has gone down
in automotive history as a colossal failure_"

Because clearly when we think about the role of pre-Baby-Boom Ford and GM in
the history of the automotive industry the first term that comes to mind is
"colossal failure"?

Also it seems contradictory to say "Tesla shareholders" don't "despise [the]
deal" and then point out that the stock price dropped 10% when the deal was
announced. What determines the stock price, if not the previous and current
shareholders? Gremlins?

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jshevek
> Even if energy generation, storage and an auto powertrain are a seamless
> product, so-called vertical integration [...] That approach has gone down in
> automotive history as a colossal failure.

This kind of statement always bothers me.

Just because several entities experienced failure using a method in the past
doesn't mean that the method itself is guaranteed to fail always and forever.

~~~
VogonWorkEthic
It's also pretty irrelevant. The vertical integration isn't for producing
cars, it's for producing sustainable energy products. And we all remember why
vertical integration is famous... the unprecedented success of the steel
industry e.g. Carnegie and the other steel barons. The article seems premised
on a false equivalency fallacy.

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erdevs
The SolarCity combo is absolutely brilliant. The chattering class and peanut
gallery bet against Musk on Tesla and Space X as well, and there will always
be naysayers to quote in the press for bold moves like this.

The combo makes perfect sense for exactly the reasons Musk outlines in "Part
Deux" of his strategy for Tesla and in the publicly disclosed rationale for
this deal. If you're a long-term investor, which is rightfully the only sort
of investor that Musk really cares about (at least for now, when he has the
power and support to fend off activists and the like), this makes absolute
sense and is a great bet.

As for governance... let's not forget the NetSuite deal involving Oracle and
Ellison on both sides that just happened. This sort of thing isn't exactly
unheard of, and the key question is not whether conflict exists, but whether
the deal makes real business sense on both sides despite the conflict. Also
recall that this was fully and properly disclosed before the deal was
finalized, and that Musk got sign off from independent shareholders on both
sides, even among those that were initially skeptical of the combination. One
can't really do anything more than Tesla and SolarCity did here.

Also, one shouldn't be surprised that Musk had a conflict of interest here.
Much as VCs sometimes rightfully say "no conflict, no interest"... part of the
reason you invest in a market or begin a company is because you have a thesis
about the space or the market overall. If you're taking multiple bets in that
space, even if they start at different vectors, there's a chance they will
collide or make sense to combine over time. For the same reason, one shouldn't
be overwhelmingly surprised if in 10 years it ends up making sense to combine
Space X with Tesla and Solar City as well. I don't see an explicit rationale
for that today at all, but it's easy to see the possibility of a rationale
existing in the future, depending on how things evolve. No one should be
acting gobsmacked or thinking the SolarCity+Tesla combo is somehow a
nonsensical, self-dealing arrangement.

The one thing I wish Musk would have done in addition here, or that I hope
he'll do shortly following this combo, is introduce even greater provisions
for his ongoing control. My biggest fear with Tesla is that it grows large
enough to attract activist investors that are highly levered so as to have
disproportionate impact and seek to exploit the stock. Musk may, at some point
(at least temporarily) lose the halo effect, and that'll leave him and Tesla
vulnerable to provocative moves form investors that do _not_ align with long-
term shareholder value, but rather seek to optimize shorter-term outcomes. So,
if anything, I'm directly against the calls from people that are questioning
governance here. I would prefer Tesla shareholders agree to cede _more_
control to Musk and that the company limit executive liability. _Most_
companies absolutely should not have these sorts of provisions, because most
CEOs are not worthy of that sort of trust. But in Musk's case, the boldness of
vision, correctness of long-term thinking, and overall trustworthiness in
shareholder value creation and protection have been proven for long enough
that I'd be more than willing to see this happen and actually actively hope
for it.

~~~
makomk
Last I heard, Space X were still spectacularly failing to meet the launch
schedules promised to their customers, to the point that it was costing those
customers money and meaning they couldn't meet contractual obligations to
their own customers.

