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David Robinson: Closing Tesla stores won't help sagging solar business

Tesla CEO Elon Musk is turning the sales strategy for its shrinking solar energy business on its head. And it could hurt its already struggling Buffalo solar panel factory.

The electric vehicle maker said late Thursday that it plans to close most of its 130 stores and galleries that sell or display Tesla's electric vehicles as a way to slash costs as the company rolls out a $35,000 version of its all-important Model 3 electric vehicle.

That's a big deal to Tesla's solar energy business – and a concerning development for the company's Buffalo solar panel factory, which already has been slow to hit its stride and become the catalyst for the Buffalo Niagara economy that state officials hoped when they paid $750 million in taxpayer money to build and equip the plant.

Here's why: Rooftop solar energy systems are notoriously hard to sell – and those sales expenses are a big burden to companies such as Tesla. Ever since Tesla acquired the solar energy business from SolarCity in late 2016, it has slashed those selling costs. It stopped selling rooftop solar system door-to-door. It launched – and quickly scrapped – a program to sell rooftop solar through Home Depot stores.

Instead, Musk's vision for selling rooftop solar – including Tesla's long-delayed solar roof – was to tie it in with its electric vehicles. The thinking was that the same environmentally conscious customers who want to scrap their gas-powered and environmentally damaging cars and SUVs for a much greener electric vehicle also would be interested in putting solar panels on their roof.

The idea was to put displays in Tesla's stores showing off the solar energy systems in hopes of selling rooftop solar to the customers who walked in to look into buying an electric car. It also relied heavily on word-of-mouth recommendations.

But now Tesla plans to close all but a small number of its stores in high-traffic locations as it shifts its vehicle sales online. That move has consequences for its solar energy business, too, since it will shift those sales online, too.

In other words, if you want to buy a rooftop solar system from Tesla, the vast majority of homeowners will have to do it online, many without ever having seen a Tesla solar panel or solar shingle in person - unless a friend or neighbor has one installed. That might be asking a lot.

"The move to direct sales is bold," said Bernstein analyst Toni Sacconaghi, in a note to investors. "Salespeople have been important in upselling Tesla customers, as well as selling Tesla solar products."

A Tesla spokeswoman didn't respond directly to questions about the shift in solar energy sales, instead referring to the company's blog post announcing the change.

A scaled-back sales channel, however, won't help reverse the decline in Tesla's solar energy business.

Tesla's conventional solar installations fell by 17 percent to a five-year low during the fourth quarter. Its solar deployments last year were down 62 percent from just two years ago, when it was the unquestioned leader in the residential rooftop market with a market share of around 33 percent. It's now No. 2, and its market share is around 9 percent, according to analysts at Wood Mackenzie Power & Renewables.

Tesla doesn't expect the decline to stop, either. The company said last month that solar deployments would drop even further during the first quarter to another post-2012 low.

None of that is good news for the Buffalo solar panel factory. Tesla's solar roof still isn't ready for mass production and likely won't be until sometime late this year. Employment at the Buffalo plant, including the workers at Tesla's partner, Panasonic, now totals around 700 people, down from 800 late last year, according to state officials.

To meet its target of employing 1,460 people by April 2020, the workforce at the Buffalo factory will have to more than double over the next 13 months or else the company could owe a $41.2 million penalty.

Even Howard Zemsky, the state's top economic development official, is casting doubt on whether Tesla's solar business will be able to meet that goal. Zemsky told state Legislators last month that the company is considering moving other work related to its battery business to the Buffalo factory – a move that current and former workers at the Buffalo factory confirm is under discussion.

That type of move would make sense. Tesla's solar business is struggling. But demand for Tesla's batteries is growing, and the company is struggling to meet it.

A survey last month of solar energy installers found that 55 percent say their customers specifically ask for systems that include Tesla batteries to store the excess electricity produced by their solar panels. But only 12 percent of those installers actually carry Tesla batteries, according to the survey by solar energy information provider EnergySage.

Of course, Tesla's solar energy business is mostly an afterthought to the company these days as it scrambles to ramp up sales of its less-costly Model 3 sedan. Tesla on Thursday said a version of the Model 3 that sells for as little as $35,000 is now available, moving the electric vehicle closer in price to other mainstream cars.

To do that, though, Tesla had to cut costs even more than it did earlier this year when is slashed its work force by 7 percent. Closing the stores will likely result in "potentially thousands" of additional job cuts, according to JP Morgan analyst Adam Jonas. Those cutbacks could save Tesla about $500 million annually, Sacconaghi estimated.

The lower-priced Model 3 could turn more Tesla lookers into buyers, but some analysts also wonder just how profitable the lower-end sedan will be. While Sacconaghi said more than 70 percent of Tesla's car buyers last year made their purchase without a test drive, the company said online buyers will be allowed to return their cars for a full refund within seven days as long as the vehicles have not been driven more than 1,000 miles.

The shift to online sales also will help solve a prickly problem that Tesla has struggled to overcome in its auto business: How to get around restrictive state franchise laws that prevented or restricted Tesla from opening stores in more than half of the states, including New York, where it is limited to only have a handful of stores downstate.

"Eliminating retail is one of the smartest moves they could have done," tweeted Gerber Kawasaki analyst Ross Gerber. "Tesla store were mostly in malls too. Which continue to see declining traffic."

But what's good for Tesla's car business may not be good for its solar energy business and Buffalo.

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