Elon Musk has unleashed his vision for the future of Tesla Motors (NASDAQ:TSLA), and SolarCity (NASDAQ:SCTY.DL), in what he's calling "Master Plan, Part Deux." It's a document with big ideas and plans for growth that may define the future of both companies.
On the energy side, folding SolarCity into Tesla Motors is clearly a key to Musk's plans. But there are two major flaws to the plan I think investors need to be aware of.
What Musk wants to do next in energy
First, I think it's key to look at exactly what Elon Musk wants to do in energy. The master plan document says:
Integrate Energy Generation and Storage
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.
We can't do this well if Tesla and SolarCity are different companies, which is why we need to combine and break down the barriers inherent to being separate companies. That they are separate at all, despite similar origins and pursuit of the same overarching goal of sustainable energy, is largely an accident of history. Now that Tesla is ready to scale Powerwall and SolarCity is ready to provide highly differentiated solar, the time has come to bring them together.
It seems simple enough that Musk wants to build a fully integrated energy company. But there are some reasons he won't be able to do so easily.
Residential energy storage isn't ready for prime time
Investors need to understand that the only state where energy storage makes any economic sense is Hawaii. It's the only place where net metering rules have been changed enough so that it's economical to take energy from the sun generated during the day and use it at night. And there are few countries in the world where this makes sense.
That doesn't mean energy storage in the home won't eventually be a big business, but it's not today, and that's a problem. Economics drove SolarCity's sales pitch to customers, who could save money by going solar for $0 down, but there's no equivalent solution in energy storage.
On top of the problems Tesla will have launching solar plus storage for the home, Musk is explicitly stating that he wants to upend the established utility business. Utilities are the biggest buyers of energy storage today -- and will be for years to come. I think Tesla will lose a lot of potential energy storage business to competitors if it takes this adversarial stance with utilities.
SolarCity needs an entirely new business model
As you can see in the statement from Musk above, he wants to take solar plus storage global. But SolarCity's business model of hiring the sales team, the installation staff, eventually building modules, and financing solar systems itself isn't highly scalable.
Former NRG Energy CEO David Crane argued that the real reason Musk wants to buy SolarCity is because the company needs to reboot, and doing that under Tesla's banner instead of as a public company will be easier. The reboot would likely require SolarCity to move away from the installation business to contracting installation out to local installers (just like homebuilders do). It will also have to work to automate more of the sales process instead of going door to door selling solar or telemarketing, as it does today.
That's a big business model change, but it would be required to build the global, vertically integrated energy company Musk wants to build. That may be easier said than done.
Maybe Elon Musk is buying the wrong company?
What I find somewhat strange about what Elon Musk wants to do in energy is that are were companies who fit the strategy better than SolarCity. SunPower makes the most efficient solar panels in the industry, has an elegant look, integrates energy storage, works with local installers rather than hiring installers, and has an automated sales system online. Better yet, it's a technology company that focuses on staying ahead of competitors through research, whereas SolarCity has always been an assembler of other companies' technology.
I don't know that Tesla Motors could have bought the company, but SunPower sounds more like what Tesla Motors needs, not the tens of thousands of employees that come with SolarCity.
Maybe Elon Musk can pull off the acquisition of SolarCity, integrating energy storage into solar offerings and taking the business global. But it's an uphill battle, which investors need to understand when they look at Tesla Motors' shares.