Elon Musk thinks combining Tesla Motors (NASDAQ:TSLA) and SolarCity (NASDAQ: SCTY) to streamline solar manufacturing, solar installation, energy storage, and electric vehicles would create a vertically integrated energy company that could bring a differentiated offering to customers. Whether it's an individual walking into a showroom to buy rooftop solar or a large utility making a purchase, he thinks one-stop shopping is the way to go in energy.
In some ways, he's right: The energy industry has become a strange brew of companies trying to figure out how to build out renewable energy, energy storage, and EVs the right way. And by having one strategy for all three, he might create a simplified offering.
But he might also create a walled-off ecosystem that produces more enemies than friends. And SolarCity, which has a dominant position in the residential solar market, needs all the friends it can get right now because it needs to continue churning volume through its business just to stay afloat.
Creating conflicts competitors will take advantage of
If it's true that Tesla and SolarCity could cross-sell to each other's customers, that might seem like a good thing, but it will allow competing solar companies to create similar cross-selling partnerships with an even broader range of EV manufacturers. With SolarCity holding a dominant market share in the residential solar industry, it needs customers who might be interested in buying an electric Chevy, Audi, VW, or any number of vehicles coming to the market in the next few years. But someone like SunPower (NASDAQ:SPWR) could swoop in and partner with all of these manufacturers, making it the first solar power system customers are told about when they buy an EV from one of those brands. Think about it: If EV manufacturers see solar as a cross-selling opportunity, why would any of them do anything to help SolarCity if it's acquired by Tesla Motors?
SunPower has made some inroads in the auto space, having teamed up with Ford and Nissan in the past to generate solar leads from EV sales and vice versa. Could SunPower partner with other automakers to create a unified force against Tesla/SolarCity?
This deal could also be bad for Tesla Energy. We've seen competitors like Sunrun testing Tesla Powerwalls in combination with their solar systems. Tesla Energy would love to have Powerwalls be part of every residential solar installer's portfolio. But why would installers fund a competitor if the Tesla/SolarCity merger goes through?
Commercial customers could be key to the future of Tesla Energy
The commercial market may question this deal more than Elon Musk thinks. When companies like SolarCity and SunPower sell solar energy to corporate customers, they're creating a long-term relationship to sell energy, battery storage, and other services. SolarCity/Tesla might have more services in-house now, but will corporate customers want to be involved with a high-risk auto manufacturer?
When commercial customers are looking at suppliers for renewable energy, the risk a supplier provides is important. They don't want a supplier to abandon a project because they've gone out of business or to be unable to execute a project because they have priorities elsewhere. If Tesla Motors is seen as a risky company, it may not be a great partner for corporations looking to go solar.
What about utilities?
The third leg of a combined Tesla and SolarCity customer base would be utilities. Elon Musk doesn't advertise it often, but utility customers, not homeowners, account for a vast majority of energy storage sales from Tesla Motors. And having SolarCity under the same roof would complicate that relationship.
SolarCity is trying to disrupt the utility business by selling rooftop solar systems, and it fights with utility companies in state after state over keeping net metering in place. If SolarCity is undermining utilities, why would those utilities then turn around and buy battery energy storage systems from Tesla? There are a dozen other companies who will provide batteries.
At the end of the day, this may be the biggest complication for a SolarCity/Tesla deal. The two companies' sales channels just don't align as neatly as it might appear, and utility companies could be discouraged by the prospect of having a fierce competitor also be a major supplier.
Competition is going to love this merger
Overall, SolarCity competitors may actually love Tesla Motors buying SolarCity, given the partnerships and sales channels it could open up for them. Another thing to consider is that a combined company might be distracted from the task at hand -- something we saw when Vivint Solar agreed to be acquired by SunEdison.
A solar company needs to be laser-focused on optimizing and selling solar power systems, and being distracted by energy storage or EVs could make that focus difficult. In some ways, Tesla Motors/SolarCity will now be a competitor to former partners. I think other players in the rest of the solar industry will be able to use that conflict and competition to their advantage.