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Five challenges facing Tesla after SolarCity merger

David Robinson

For Elon Musk, the hard work is just beginning now that Tesla Motors has gobbled up SolarCity.

Musk succeeded in getting shareholders to buy into his vision that the $2.1 billion merger was a linchpin in his vision of turning Tesla into a renewable energy powerhouse, offering solar panels, electric vehicles and the batteries that each uses.

The question now facing Musk is whether he can deliver, especially given the ambitious plans he has for Tesla.

Here are five challenges that Musk faces in the wake of the SolarCity deal.

*Did Musk bite off too much? There's a lot of work that needs to be done at SolarCity. The company isn't close to turning a profit. It guzzles more than $1 billion a year in cash. And its overall costs have actually gone up over the past year, despite a big decline in solar panel prices.

That's a lot that needs fixing, by itself. But Tesla has two other huge projects in the works. It's building a $5 billion battery gigafactory in Nevada. It's also getting ready to ramp up production of its more affordable Model 3 sedan late next year - a development that will turn Tesla from a niche vehicle producer, churning out about 80,000 cars a year, to one that makes 500,000 annually. Production of the Model 3, with a base model selling for as low as $35,000, is expected to start late next year.

"With initial production scheduled for 2017, along with the ramp of the gigafactory and the Buffalo solar facility, we believe the company has its hands full," Oppenheimer analyst Colin Rusch said in a report.

*Can Tesla make solar panels? Skeptics already were wondering how SolarCity, with no manufacturing experience of its own, would make the head-first leap into solar panel production by opening the Western Hemisphere's biggest solar panel factory in South Buffalo.

Tesla's never made solar panels, either, but the company is working with Panasonic on solar cell production at the Buffalo factory, which would give an experienced solar panel producer a key role at the factory.

But SolarCity's solar technology, which it acquired when it bought Silevo in 2014, is unproven in large-scale manufacturing. Panasonic has its own high-efficiency technology, and Tesla has said it plans to incorporate elements of both into the panels it makes in Buffalo, without going into detail.

How all that comes together could affect the timetable for starting production at the Buffalo factory, now slated to begin by the end of June.

Rusch said he "would not be surprised by delays, given the magnitude of the company's agenda."

*Can Tesla truly become a one-stop shop for renewable energy? To Musk, the SolarCity acquisition was all about creating a one-stop shop for consumers who want to make renewable energy a focal point in their everyday lives.

Stop by a Tesla store to order an electric vehicle. While you're there, arrange to have solar panels put on your roof, either through a traditional rooftop system or the better-looking solar shingles that Tesla is coming out with next year. Add in a wall-mounted battery to store electricity from the solar panels to power your home at night.

To Musk, it's a "no-brainer," a combination that will lead to bigger vehicle sales and open the door to a whole new pool of customers for  its solar panels and battery storage. And by combining the two companies, they can work closely to develop new products, like the solar shingles Tesla unveiled in October.

Ben Kallo, an analyst at Baird & Co., thinks the combination could help Tesla grow, especially if the solar roof catches on and it comes out with other, more complete, energy systems.

"We see potential long-term benefits," Kallo said.

*Will the solar roof sell, or turn into a pricey lemon? There's no question that Tesla's solar roof looks great. But at what price?

Tesla isn't saying, just yet. And Musk has backtracked on his initial comments that consumers would have to factor in the savings they'd get on their monthly electricity bills over two or three decades to bring its cost in line with a conventional roof. Some analysts did the math and estimated that would put the cost of a solar roof at upwards of $70,000 - a price that would lock out all but a well-heeled fraction of the estimated 5 million Americans who replace their roof each year.

Musk has since said he thinks the roof would cost less. “I don’t want to 100 percent commit to this yet, but it’s looking quite promising that a solar roof will actually cost less than a normal roof before you even take the value of electricity into account,” Musk told Tesla shareholders after the merger was approved.

But that may only apply to more expensive roofing materials, like terra cotta tiles, and not the less expensive asphalt shingles that dominate the market here.

*Will the river of funding keep flowing? SolarCity grew into the nation's leading residential solar installer because it came up with an innovative way for consumers to go solar without any upfront costs. But that strategy turned the company into a debt addict, and pushed it into a merger with Tesla when its appetite for cash pushed perilously close to its borrowing limits.

Musk thinks the merger will make it easier for SolarCity to borrow, and the company's shift away from its original leasing strategy to one that relies more on consumers buying and financing the rooftop solar themselves also should reduce its borrowing needs somewhat.

But Tesla, as it builds the battery gigafactory and rolls out the Model 3, will need lots of cash of its own - Rusch has estimated as much as $12 billion through 2018. Most analysts think Tesla, which raised $1.5 billion by selling stock this year, will need to raise even more money next year.

If the economy stays strong and Tesla stays on track to meet its growth milestones, that may not be a problem, given the strong faith investors have shown in Musk's grand vision.

But if there's a recession, the stock market tumbles or banks tighten their lending standards, raising billions in new capital could become a more iffy proposition. And that could take some of the grandeur out of Musk's grand plan.


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