Second Thoughts -- The Solar Company Tesla Motors Should Have Acquired

If Elon Musk really wanted an elegant solar solution for Tesla Motors, maybe he should have bought a company other than SolarCity. Image source: SunPower.

Elon Musk wants to create a global energy company that can offer solar energy, storage, and electric vehicles that appeal to customers on both an economic and an emotional level. In his "Master Plan, Part Deux", Musk said he wanted to:

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.

Part of the plan to achieve that goal is for Tesla Motors (TSLA 14.10%) to acquire SolarCity (SCTY.DL); Elon Musk is the largest shareholder of both. But if the goal is to create a more complete energy offering with beautifully designed, highly efficient solar panels, I think Tesla Motors is buying the wrong company. There's another company that already produces a more efficient solar panel than SolarCity, has an elegant rooftop design, and has a business model that fits Musk's global plans. Tesla Motors should be buying SunPower (SPWR 3.57%).

SunPower beats SolarCity on efficiency

If you look at Elon Musk's statements about his master plan as well as his justification for buying SolarCity, the efficiency of solar panels is a key component. SolarCity acquired a company called Silevo in 2014, and is building a solar panel manufacturing plant in New York that will make solar panels with the company's technology. Here's a quote from Musk after announcing the offer to buy SolarCity (via Seeking Alpha's transcript):

An important advantage of the Silevo technology is that it has significant higher efficiency than the very low cost Chinese panels. So, on the same surface area of roof, you can get as much as a third more power.

To that end, SolarCity announced that a small quantity of its panels had reached 22.04% efficiency late last year. SunPower soon announced that it was already shipping panels with 22.8% efficiency, and it recently said that panels have reached 24.1% efficiency. If Musk wanted the most efficient product, he has the wrong company.

But that's not all. SolarCity isn't even producing solar panels on a mass scale, so its claims on cost effectiveness and efficiency haven't been proven at scale. And after delays it may not make panels at scale until 2018. SunPower is making its high efficiency solar panels today.

Beautiful solar roofs are SunPower's specialty

Musk has also made a big case for a more beautiful solar installation. In the SolarCity offer call he said:

And then aesthetically speaking, the Silevo panels look better, they look a lot better. And if it's done right, we can make your roof look better with solar panels than without. This is a night and day difference. And if you've got a -- if somebody's got a $400,000 house, if you make [the] roof look ugly, then arguably you have made that house worth 5% less or some non-zero percent less valuable. On the other hand, if you make the roof look beautiful, you have made the house more valuable, and maybe that's plus 5% or some non-zero percent plus percent in the value of a house.

Clearly, he is putting a huge value on the aesthetic of the roof. And that's part of his logic for buying SolarCity. But let's look at the products Silevo/SolarCity and SunPower are making. The first image is of SunPower's Equinox system, which has all-black panels and InvisiMount hardware.

Image source: SunPower.

The image on the left is the best image I could find of Silevo's solar panel up close. The company also has a "SleekBlack" panel, but it's less efficient than the panel below, so that negates the efficiency I discussed above.

Image source: Silevo/SolarCity.

SolarCity and Silevo may have a different panel design and look in the works, but right now I don't see how its product is better looking than SunPower's.

Going global will be tough for SolarCity, but SunPower is already there

Maybe the most important piece of Elon Musk's master plan is that he wants to take solar, energy storage, and EVs global. But that will be very hard to do given SolarCity's business model.

Today, SolarCity hires the sales staff and installation crews that put solar on roofs. The result is a company that had 15,273 employees at the end of 2015 and a presence in just 17 states in the U.S. and only a small presence in Mexico.

SunPower uses a dealer model that doesn't require it to directly hire installation or most sales staff. So the company can have a global presence with just 8,309 employees worldwide.

Despite the much lower level of staffing, SunPower deployed 1,154 MW of solar in 2015 compared to 870 MW for SolarCity. And SunPower will grow to 1.6-1.9 GW this year compared to 1.0-1.1 GW at SolarCity.

SolarCity has a very labor-intensive business model, which would be very difficult to scale globally without major changes. SunPower, on the other hand, has a dealer sales model that allows it to scale into new markets quickly. If Elon Musk really wants to go global with his solar product, he should be using SunPower's model, not SolarCity's.

SunPower fits Elon Musk's vision of the future

If Tesla Motors were really looking for the best solar company to acquire to build a vertically integrated energy business, it should have bought SunPower, not SolarCity. Of course, Elon Musk isn't a major shareholder in SunPower, and the company may not have been for sale anyway. But on the merits, it's a much better fit for his vision of Tesla Motors' future than SolarCity is.