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David Robinson: Tesla's solar business is shrinking. Here's what it means for Buffalo.

Tesla's already slowing solar energy business is shrinking – and that's a concerning sign for the company's sprawling solar panel factory in South Buffalo.

The electric vehicle and battery maker is in the midst of a plan to reduce its workforce across the country by 9 percent, or more than 3,500 people, and those cutbacks will include reductions at its slowing solar energy business. Reuters reported last week that those cutbacks include closing 13 or 14 of its solar installation facilities – roughly a 20 percent reduction. That still will leave Tesla with about 60 installation facilities across the country.

The closings are a further sign that the solar energy business is playing second fiddle to Tesla's electric vehicle business as it pulls out all the stops to meet its production targets for the Model 3 sedan that the company and its investors are counting on to become the high-volume product that will finally make Tesla profitable.

The Model 3 is important to the Buffalo plant because a profitable Tesla would put the solar plant's owner on more solid financial footing, and put it in a better position to focus on expanding its solar energy business and reach CEO Elon Musk's goal of creating a renewable energy juggernaut.

Tesla must grow its solar energy business if it's going to live up to its promises for the Buffalo plant – creating 1,460 direct jobs in Buffalo and bringing in another 1,440 jobs from the facility's suppliers and service providers.

Tesla has never disclosed how many of its own employees are working in Buffalo, but both company and state officials say it is ahead of its hiring and investment commitments for the RiverBend factory. If it doesn't meet those commitments, the company could face a $41 million penalty for each year it falls short of its promises.

For more than a year, Tesla, which moved into the solar energy business after acquiring SolarCity in November 2016, has been keeping a lid on its solar business to preserve cash it needs for the Model 3.

Tesla's first-quarter solar energy deployments were just half as much as they were a year ago, and the company no longer is the nation's biggest residential rooftop installer. The 76-megawatts of solar generating capacity that Tesla installed during the first quarter was the lowest for any quarter since late 2013 and less than a third of its deployments during the first quarter just two years ago.

Last year, Tesla deployed just 522 megawatts of solar energy generating capacity – a little more than half of the stated 1,000-megawatt capacity of the Buffalo factory. The idea, when state officials agreed to spend $750 million in taxpayer money to build and equip the Buffalo factory, was that the solar energy business, then run by Musk's cousins, would keep growing and easily absorb every solar panel that the Buffalo factory could produce.

Now, the slump in the first quarter puts Tesla on a pace for solar business to be less than half the stated capacity of the Buffalo factory in 2018.

For now, Tesla says there are more than 600 people working at the Buffalo factory. More than half are employed by Tesla's partner, Panasonic, which is making solar cells and solar panels there. Panasonic held a career fair two weeks ago and is looking to hire 80 additional workers to join its staff of 300.

Tesla, for its part, is focusing on its new solar roofing product, which it started to install on customer roofs on an extremely limited basis this spring. For Tesla to meet its promises for the Buffalo plant, the solar roof will have to be a big hit with consumers.

But Tesla's cutbacks also are reining in its sales channels. The company already has stopped selling door-to-door, and now it also is scrapping a deal to sell rooftop solar through kiosks in Home Depot stores – a more expensive sales channel where it can cost as much as $7,000 to secure an order, according to analysts at GTM Research.

In its place, Tesla is emphasizing sales through its network of electric vehicle stores, where it can showcase its cars, battery storage and solar energy offerings in a single stop for consumers who, the company says, already are showing an interest in sustainable energy.

“Tesla stores have some of the highest foot traffic of any retail space in the country, so this presents a unique benefit that is demonstrated by the growing number of Tesla vehicle customers who are also purchasing energy products through our stores,” the company said in a statement.

Tesla predicted last month that its solar energy business would begin to rebound later this year, but that was before it further pared back its sales channels.

In the meantime, Tesla continues to burn through cash as it tries to reach its goal of producing 5,000 Model 3 sedans each week – a goal that has been elusive because of production delays. The company has never been profitable, but Musk continues to say the company won't have to raise additional cash this year. Not everyone agrees. Some analysts, like Morgan Stanley's Adam Jonas, think Tesla could need to raise $3 billion before the end of the year.

The staff cuts and the shutdown of the solar installation facilities will help Tesla reduce costs at a time when much of its attention is focused on getting its Model 3 production to the 5,000-a-week level. That's more than double its weekly production at the end of March. In the scramble to meet the production target, Tesla this month started making the Model 3 in an assembly line under a giant tent at its California auto factory.

Much is riding on the Model 3. If the Model 3 can make Tesla profitable, it will be better able to absorb the costs and investment required to put its solar energy business back on a growth track. A successful – and popular – Model 3 also will drive more consumers to Tesla's stores, where they also can see its solar energy offerings.

State officials still think Tesla can deliver.

"I do believe their commitment to solar and renewables and to the Buffalo plant is part of their core philosophy, their corporate mission and DNA," said Howard Zemsky, the Buffalo developer who serves as the president of Empire State Development. "I think that’s a good place to be for the long haul."

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