Tesla and SolarCity: The bet on the bet

Last week, Tesla announced its intention to acquire SolarCity for around US$2.7 billion. It was exciting to see how very different assessments were circulated from different quarters. The whole gamut, from “the certain end” to “completely brilliant”, was played. An attempt at a differentiated assessment of this latest coup by one of the most ground-breaking companies of our time, in the most literal sense of the word.

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Musk about everything – including corporate governance

There was a loud outcry from traditional analysts due to the financial ties between Elon Musk, Tesla and SolarCity. It is easy to explain why: Musk is the majority shareholder of both companies and has also granted SolarCity various loans. SolarCity is now constantly losing money and its share price has fallen by over 60% in the last year, which has a very direct financial impact on Musk.

By adding the 2.6 billion cash drain from SolarCity to Tesla’s 1.5 billion cash drain through the planned purchase, Musk is making the deal more difficult for himself. On the other hand, SolarCity is secure for the time being.

What also didn’t go down particularly well is the fact that almost everyone on SolarCity’s Board of Directors is somehow connected to Elon Musk. The Rive brothers, Musk’s cousins, JB Straubel, co-founder of Tesla, Antonio Garcia, who sits on Tesla’s Supervisory Board, and Musk himself all recused themselves from the decision. So in the end, 3 out of 8 Supervisory Board members decide. Good corporate governance looks different.

Musk’s share in the Tesla brand

Tesla spends virtually no money on advertising and marketing. The “Musk” part of the Tesla brand is also very large. There has probably never been an entrepreneur who has built up such a huge star cult.

There is this aura of the “Iron Man”, who can do anything, who makes everything work. And Musk plays with it quite deliberately. This became clear, among other things, at the Tesla General Assembly, when he and JB Straubel spent two hours talking about the beginnings of Tesla and gave a kind of analogy in a tough presentation as an answer to the pressing questions of Tesla’s future. Message: “Look at the problems and challenges we went through. Building 500,000 Model 3s is comparatively easy”.

VW would have had to spend EUR 15 million to place this message with investors in this liability. Musk does this, visibly unprepared, practically on the side.

This aura is currently one of the most important assets of the Musk ecosystem. It is hard to imagine what would happen if this aura were to be tarnished by the downfall of SolarCity. Critics who say that Musk is desperate to avert any damage to his image with the deal are probably not so wrong. In fact, it must not happen.

Vertical integration

However, the points mentioned above are only one side of the coin. The other is that this integration makes perfect sense. Musk once said that when a trend becomes obvious, it is too late for business. Well, the trend in the energy sector is not yet that obvious.

I have written before that the really revolutionary thing about Musk’s plan is the change in energy supply. It is logical and comparatively simple to produce and store energy in a decentralized way. This plan is feasible. We can finance it, we can also manufacture the devices for it. But there is no awareness of it yet.

The key to this transformation is energy storage, e.g. using batteries. That’s why the introduction of the Powerwall, the battery for the home, was the logical step for Tesla. What is missing in the chain are the photovoltaic panels.

In addition, the improvement of battery technology has just picked up speed again. I think we will also see very rapid progress in this technology. At the moment, only cost reduction is relevant for commercialization. That is already enough to have an economical mass model.

Tesla is very reticent when it comes to communicating battery costs. However, it can be assumed that they have already achieved significant improvements.

Musk must therefore believe that he has basically reached his goal with cars. He has initiated the movement towards electric cars on a broad front. And it will be unstoppable, because at the end of the day it’s all about physics and economy of scale. If all the components of an electric car are produced in the same quantities as those of combustion engines, an electric car can be produced much more cheaply.

What’s more, the software-based concept gives Tesla considerable cost advantages. It is pretty obvious that Musk will win in the market. Now it’s “only” about delivery – the core competence of the proven players in the market.

What’s the next not-yet-obvious thing?

At the beginning of the year, I wanted to buy a solar system with home storage. The plan was, and still is, to install a large solar system, battery storage for 2 days of home autonomy and charging facilities for two cars. The goal: complete independence from the power grid.

So I started to do some research. And realized that it wasn’t that easy. There are many good photovoltaic service providers. But when it comes to integrated systems and batteries, the know-how usually stops there. Almost all of them focus their concepts on feeding electricity into the grid, which of course makes economic sense at the moment. From an ecological point of view, however, this is pretty rubbish.

The more I looked into the subject, the more I realized that I was moving into quite experimental territory.

In my naivety, I assumed that I could configure such a setup somewhere online, that there would be cheap and good standard components, that the individual components would talk to each other or learn together to anticipate consumption and production needs.

But none of this exists. There are many hundreds of suppliers who provide individual modules and systems. But if you want to launch a complete system, sooner or later you will have to get to grips with electrical engineering and more or less organize a EUR +150k project yourself. My project is on hold for now. It’s too time-consuming and risky for me.

There is a lot to suggest that we will have this autonomous, distributed power supply. First and foremost, the fact that solar cells will become radically cheaper in the future. In combination with radically cheaper batteries, equipping homes with such technology will become the solution of choice. Ecologically and economically, of course.

That is the strategic aim of this deal. The fact that the “experts” at UBS see things differently is a perfect example of the different ways of thinking:

We believe that batteries today are not a real synergy, nor will be under the current US regime for Net Metering in the US through the next 3-4 year period. The core market for SCTY is California with 100% net metering and hence we see limited value to a battery cross-sale. Which market is relevant? Hawaii. We note this remains a limited (single digit figure) for installs for SCTY and will likely remain quite modest. While a test bed for battery penetration, we doubt this remains a real opportunity to ramp. We don’t expect a significant pullback in Net Metering any other relevant market for SCTY, or at least enough to make batteries ‘work’ in the near-term.

If you were ever looking for a good example of managerial vs. entrepreneurial thinking, here it is.

The bet on the bet

Of course, I’m not asking UBS analysts to go into raptures here. Their job is to assess short-term opportunities and risks for their investors. And where, if not here, should they issue a warning?

Anyone who thinks these plans are insane has not understood that Musk is obviously playing by a completely different set of rules. There is no other explanation for the fact that someone who has just made a lot of money is putting this money at risk with a company for rocket transportation to Mars. He says of this decision that it made sense to him and that losing all the money “wouldn’t be the end of the world”.

And, as many people don’t know, it almost went really wrong. After three unsuccessful rocket launches, Musk used practically the last of his money to make a fourth attempt and make SpaceX possible in the first place. He knows all too well that it could just as easily have failed.

I have written time and again that outstanding entrepreneurs are betting their companies on future developments. In other words, they put all their eggs in one basket. The term of such a bet is not 3 or 4 years. We will probably not know for another 15 years whether Musk was really right. Until then, there can still be so many imponderables that could cost his companies their heads. Musk knows this very well. But he values the attempt more highly than the potential damage of a total loss.

This bet on the bet proves how much courage, or indifference to failure, is involved. Because the first bet that electromobility will become widespread has not yet been won. It is foreseeable that it will be won, but it has not yet been won.

With the deal, Musk has therefore pulled the one lever that will certainly lead to his downfall if he loses the bet. Or, in the other case, will actually make Tesla the most valuable company in history. There is nothing for Musk to lose. There is only 0 or 1.