Do you know what industrial and technological giants such as Intel Corporation (NASDAQ:INTC), General Electric (NYSE:GE), TSMC, Bosch, and Siemens have in common? They have all invested in the solar energy industry and failed after sinking millions if not billions of dollars each. Solar panel manufacturing has seen such a steep and precipitous fall in costs and prices over the last 5 years that solar energy has now become cheaper than coal in 30 countries. Though it has been great for consumers and the growth of the overall industry, the manufacturers have suffered from low margins and losses. The history of the solar industry is littered with hundreds of bankruptcies and billions in losses. Even long standing industry stalwarts such as SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) are finding the going difficult. Recently another strong panel player, AUO, gave up its solar energy endeavor unable to compete with the low cost Chinese companies.
Given this history, it was very strange for Tesla (NASDAQ:TSLA) (its subsidiary SolarCity (NASDAQ:SCTY)) to enter the solar panel manufacturing industry by announcing a 1 GW plant in New York. It wanted to vertically integrate despite knowing the pitfalls.
Even Before Launch, Tesla Has Failed In The Solar Panel Business
In 2014, when Tesla announced a gigawatt scale solar panel factory, the reasoning given by Elon Musk was to create economies of scale in solar panels something similar to what he was doing with lithium batteries.
“Our intent is to combine what we believe is fundamentally the best photovoltaic technology with massive economies of scale to achieve a breakthrough in the cost of solar power… At a targeted capacity greater than 1 GW within the next two years, it will be one of the single largest solar panel production plants in the world. ”
But 1-gigawatt plant in 2016 is really not big given that top tier Chinese companies will be shipping around 5-6 GW of solar panels this year. Economies of scale and low costs seems difficult to achieve given that SolarCity's target cost of producing solar panels at 55 cents/watt seems ludicrously expensive, considering the current international price of 36 cents/watt. Tesla is now trying to save face by signing an MOU with its battery partner Panasonic to invest in its solar factory. But Panasonic is itself a marginal player in the solar panel production industry now and recently closed its Japanese plant because of high costs. Industry experts have also questioned the compatibility of Silveo’s and Panasonic’s technology and the huge delays in the completion of the Buffalo factory.
It seems extremely difficult for either Panasonic or Silveo to become competitive with the top tier Chinese companies in my view. They will remain niche producers at best. But what is the logic of Tesla being a niche panel producer? They are much better off using their capital and management bandwidth elsewhere and buying the solar panels from the Asian manufacturers as they currently do. The lithium battery business is a new area in which the Panasonic and Tesla combination can create new benchmarks in costs but the solar panels race has already been lost. The faster the Tesla management realizes it the better.
Does Tesla Really Need To Be In The Solar Roofing Space And Can It Succeed?
Elon Musk recently announced plans of making a revolutionary “solar roof” that would integrate solar panels with battery power packs.
“Create a smoothly integrated and beautiful solar-roof-with-battery product that just works, empowering the individual as their own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.”
The company wants to replace 5 million housing roofs with its new solar product. However, Tesla has failed to give any pricing or cost data for this “solar roof” and how it would compare to a traditional roof with solar panels. This product does not look like a slam dunk idea, given that others much more experienced in the material industry such as Dow Chemical (NYSE:DOW) have tried and failed. It is simply much cheaper and easier to install normal solar panels on mounting structures rather than integrating solar cells into the roof tiles.
The rooftop solar business model is facing pressure as USA customers move more towards the self-financing route, rather than the third-party financing model which SolarCity champions. The rooftop solar industry is not an easy one to crack and in my opinion, it seems difficult for Tesla to make this solar roof product into a major revenue stream. While Elon Musk might cite the synergy between solar energy and energy storage for entering this segment, it looks a bit far-fetched to me. Should Tesla start manufacturing steel just because it uses it a lot in electric vehicles?
Tesla has never been a cheap stock and is currently priced to perfection with a P/B of 15.3x and a P/S of 5.9x. The stock has jumped up by almost 25% in the last 3 months and is trading near its 52 week high. News of faster than expected production at its “Gigafactory” and Elon Musk’s proximity to Donald Trump have been the key triggers for the stock. However, the company has a lot on its plate as it fights other technological and auto majors in the rapidly changing transportation industry, which is on the cusp of a major paradigm change with autonomous technology.
It will take a huge effort and all the resources that Tesla can muster to keep ahead in this rapidly evolving industry. Its vision to expand into trucking and buses makes sense keeping in mind the synergy with its electric cars. However, I am not convinced that Tesla has much of a future in the cutthroat solar energy (or solar roofing) industry. It is a distraction that Elon Musk could do without and Tesla investors would sleep better at night if the company torpedoed its solar plans and focused fully on getting its energy storage and electric vehicle plays right.