Boondoggle (noun): work or activity that is wasteful or pointless but gives the appearance of having value.
It's hard to argue Tesla's (NASDAQ:TSLA) acquisition of SolarCity has been anything but a boondoggle of epic proportion. In less than a year, Tesla has shrunk SolarCity's business, laid off thousands of installers, and scrapped most of the company's manufacturing plans. In its latest round of layoffs, Tesla was reportedly targeting more of the SolarCity operations as the wind-down of solar operations continues.
The logic of the buyout never made much sense in the first place, unless you looked at the hundreds of millions of dollars Elon Musk, Peter Rive, and Lyndon Rive would lose in stock and bond value if SolarCity went under. This is looking more and more like a bailout and Tesla may eventually have to take a massive loss on solar operations.
Billions wasted on solar
Tesla's $2.6 billion acquisition of SolarCity was supposed to create a vertically integrated clean energy company. But since the buyout Tesla has been shutting down SolarCity's operations around the country. This month, Tesla will lay off about 200 workers in a Roseville, California operations center that was once a hub for SolarCity. This is on top of thousands of layoffs over the past year.
Elon Musk has argued that the best solar strategy is to sell solar in stores, getting EV buyers to pick up a solar system along the way. But Tesla has barely rolled out solar sales in-store across the country and it's not clear the new retail strategy will result in anywhere near the sales SolarCity made on its own.
Tesla plus SolarCity never made sense
The main thing SolarCity had going for it was a massive sales and installation organization. A vast majority of employees worked in these roles and they're the ones responsible for growing the company into a nationwide organization.
If Tesla's vision was to move solar sales from the SolarCity sales staff to its own stores then why buy SolarCity at all? And if you're selling solar systems in a store, why buy a company with thousands of its own installers? Why not use a contracted installer like Home Depot or Lowe's does to install the kitchen counters they sell in-store?
Tesla's actions since the SolarCity buyout showed that it never needed to buy the company in the first place. Rather than buying SolarCity and its Buffalo, New York manufacturing plant, it could have bought solar panels from another manufacturer and sold them through Tesla stores as a Tesla-branded product if it wanted to. Manufacturing of the solar roof, which was a big part of the deal's logic, still hasn't ramped at Buffalo and neither has the traditional solar module. Taking on another manufacturing challenge in solar isn't exactly what Tesla needs right now.
Tesla has more solar trouble ahead
Speaking of the Buffalo plant, Tesla is getting a $750 million subsidy from the State of New York to build Gigafactory 2 and there are a number of strings attached to that money. According to the original agreement, Tesla has to "employ 1,460 high-tech jobs" in the plant, employ at least 2,000 other personnel in the state, and spend $5 billion in New York, money that was originally intended for solar installations, among other contracted requirements.
If Tesla doesn't meet its obligations to the State of New York it could owe $41.2 million annually and a termination of the subsidized lease. Given the delays that have already taken place in Buffalo and the reduction in solar installations by Tesla, it's possible the company won't meet the obligations it has to the state. And that could lead to more costs ahead.
Solar wasn't a great bet for Tesla
Tesla spent $2.6 billion on SolarCity less than a year ago. Today, the company is shutting down SolarCity's operations and continues to lay off workers. If this trend continues Tesla will have to write off the acquisition and potentially take millions in losses on Gigafactory 2. Those are losses Tesla can't afford right now, and investors should consider whether solar is really a meaningful part of Tesla's future.