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Why Tesla wants to team up with Panasonic in Buffalo

Bringing in Panasonic as a partner with SolarCity at its solar panel factory in Buffalo will give the ambitious venture manufacturing expertise and much-needed financial support.

The tentative deal between the Japanese electronics giant and Tesla Motors also is aimed squarely at skeptical shareholders who will decide the fate of the electric vehicle maker's $2.2 billion bid to buy SolarCity.

If shareholders from both companies don't vote to approve the merger in a pair of critical votes on Nov. 17, the deal between Tesla and Panasonic won't go through. So the stakes are high, not only for the companies, but the fate of the Buffalo factory as well.

State officials praised the Panasonic deal, and U.S. Sen. Charles E. Schumer, D-N.Y., did the same on Tuesday, calling the proposed agreement "a godsend" for the Buffalo plant, which is being built with $750 million in state funding and is scheduled to open next year.

"This Panasonic thing is a godsend because, first, it will make the Tesla shareholders more likely to vote for the merger, because they see where SolarCity is going," Schumer said. "One of the major solar cell manufacturers in the world is going to focus on Buffalo."

Both Tesla and SolarCity are laden with billions in debt and consistently posting losses, so the potential deal with Panasonic could ease some of the financial pressures on a post-merger Tesla.

Panasonic's non-binding letter of intent – if it turns into an actual agreement – also would provide Tesla with some relief from the billions of dollars in capital it must raise to support its ambitious ventures, from building a $5 billion battery gigafactory in Nevada to ramping up production of its Model 3 electric vehicle.

Here's a look at three main reasons why Tesla is trying to forge a partnership with Panasonic at the Buffalo factory.

1. New capital

One of the reasons Tesla's merger with SolarCity has raised concerns among the electric vehicle maker's shareholders is because of the massive amounts of capital the combined company would need to raise, not only at SolarCity's sprawling plant in Buffalo, but also at the battery gigafactory and to support the launch of Tesla's newest and most affordable sedan.

Colin Rusch, an Oppenheimer analyst, has estimated that Tesla will need more than $12 billion in new capital through the end of 2018, with SolarCity accounting for about half of that funding requirement.

The financial terms of the deal with Panasonic haven't been disclosed, but any investment that Panasonic makes in the Buffalo plant will help reduce the $440 million in capital that the Buffalo plant is expected to require through the end of 2018. After that, SolarCity expects the Buffalo plant to generate more cash than it uses, according to Securities and Exchange Commission documents.

"Panasonic’s support could mitigate, in our view, some of the [capital spending] required to launch the Buffalo facility,” Brian Johnson, a Barclay's analyst, said in research note.

Elon Musk, who doubles as Tesla's CEO and SolarCity's chairman, tweeted last week that Tesla wouldn't need to raise new capital this year and "probably not" during the first quarter of 2017.

With Panasonic collaborating on the production of solar cells and modules at the Buffalo factory, SolarCity's funding needs could be reduced.

2. Manufacturing experience

Even though SolarCity is gearing up to open the biggest solar panel factory in the Western Hemisphere, the company is a novice when it comes to manufacturing. The rooftop solar installer has never made its own solar panels and its only experience making them is from a pilot factory it runs in Fremont, Calif.

When Tesla proposed buying SolarCity this summer, SolarCity executives said Tesla's manufacturing experience would provide valuable expertise that could be applied to the solar panel factory.

But Tesla has never made solar panels, either. And the grand scale of the Buffalo factory, spanning 1.2 million square feet and with a capacity to produce up to 10,000 solar panels each day, had raised concerns among some analysts and investors.

The proposed deal with Panasonic, which has been making solar panels for more than 30 years, would ease those concerns. It would put an experienced manufacturer in charge of making the solar cells that are the key component of each solar panel. A typical solar panel has dozens of solar cells, grouped into individual modules.

3. Higher efficiency

SolarCity got into the panel manufacturing business two years ago when it bought Silevo, a small California company that was developing a technology to make solar panels more efficient. The Silevo technology even set a world record last year for the most efficient solar modules.

The record stood for about a week – until Panasonic said its own modules were even more efficient.

The technology that both companies use is similar and both have been working on production processes that use the same type of equipment, said Kady Cooper, a SolarCity spokeswoman.

"We will combine the best cell components from both and integrate them into the new solar module that will be produced in Buffalo," she said.

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