How Elon Might Be Screwing This Up...

The image above — Elon Musk and the three prongs of his sustainable energy future (generation, storage and transportation)— is from Tesla’s staged Solar Roof announcement on Friday evening. It’s an image that scares a lot of traditional utilities, the assumption being that retail energy in the form of distributed renewables will be their undoing. This will not be the case, there will be a role for the traditional utility in the future of our energy use, business models just have to dramatically change. The solar roof announcement comes on the heels of Tesla’s Q3 earnings call that suggested, by turning a profit in that quarter, the company is throwing pie on the faces of Wall Street folk who don’t think Elon Musk knows what he is doing.

“The simple reality of it is that we will be in a far better position to convince potential investors to bet on us if the headline is not ‘Tesla Loses Money Again,’ but rather ‘ Tesla Defies All Expectations and Achieves Profitability. That would be amazing!” Elon Musk to his team earlier this year.

Apart from the obvious perversion of the reasons for business building (you don’t cut costs to convince investors to give you more money, you just always manage expenses optimally), one quarter is not enough to declare victory. Granted, Elon/his team have done a great job increasing manufacturing output & revenue. But the image below, also from the announcement is the one that really gave me cause for pause…

I’ll come back to this image…

Designing A New Utility

Just a few days ago, in making the case for the acquisition of Solarcity, Tesla confirmed its long term strategy of ‘expediting the move from a mine-and-burn hydrocarbon economy towards a solar electric company’. It’s a short statement that underlies an audacious goal; to radically transform the business model of ~3200 utilities providing electricity to 140M customers across the US. This will happen through (in Elon’s words)

“the provision of Model S/X/3, Solar panel system and a Powerwall for consumers to deploy and consume energy in an efficient and sustainable way lowering costs and minimizing dependence on fossil fuels and the utility grid ”.

But Elon Musk is now making the exact same mistakes the utilities made, the ones that got them to where they are right now. The old utilities got as big and gangly as they are because, to cater to the electricity and comfort needs of US consumers, they had to own all the inputs of power generation and transmission. It stopped being about the energy consumer, it became all about asset management and catering to stockholders and regulators. Elon/Tesla is walking down that same path and actually just recreating the same model by failing along the same two verticals; technology and consumer.

Tesla’s Two Issues

Issue 1 or “who, truly, is your customer?” I’m a big Elon Musk fan (despite the tone of this post) but I’m not blind to his modus operandi; make audacious promises, right before promise delivery is due make some more audacious promises to deflect from the criticism of failing to deliver on your past promises. In all fairness the audacity yields phenomenal results, when eventually delivered. But at this point, only the die-hard fans (which include Tesla owners and Tesla’s board) truly believe that Elon will deliver on all his promises and this is a big problem when you come to selling your product to the average consumer. The mass market, even though they put money down on 500k Model 3’s and put some solar panels on their homes, is not comfortable with broken promises. I have 3 friends who put deposits on the Tesla 3 knowing that Tesla will not deliver in 2018. Those are fans, not your average consumer. Neither Solarcity nor Tesla have built an abundance ofequity with their current base to justify endlessly broadening product offerings and truly becoming a utility.

We’ve all read ‘Crossing The Chasm’ and know what fate befalls companies that wrongly assume that the same things that applied to their early-adopter consumers will apply to the rest of the market;

1. these companies get stuck selling to early adopters (which might be fine if you are not thinking world domination) and have to keep coming up with new products for said early adopters (Powerwalls, Solar Roofs etc) or
2. These companies die.

Tesla is making assumptions of growth based on the belief that the rest of the market will act like its current customer base. The laggards do not respond well to broken promises and Elon keeps breaking them (either intentionally or just due to over estimation of capability). Tying it back to the image of the audience at the Tesla announcement and the disconnect for me; Elon keeps selling to the same customer. Scan the image again and you’ll see that this is not the average consumer who’s excited about a new product, it’s the same folk who bought Tesla’s at a $100k. What people forget is that Tesla Motors (the original company) is 13 years old!!! Most companies at 13 have started to move their products into the mass market.

A solar roof, while a new and necessary product, only matters to a homeowner. Homeownership in the US is dropping amongst the next generation of consumers (41.1% in 2014) and renting is picking up amongst almost all demographics (71.6% amongst millennials, 40.7% amongst 35–54 yr olds and 27% for 55 and older).

A cursory glance at the balding pates in the Tesla announcement image suggests a certain demographic (I’m bald so I can say this :)) and a disconnect with what is required to get Tesla/Solarcity products across the chasm; those folk in the image are your early adopters and do not know energy poverty. Energy poverty exists in the US and affects the customers Elon is, after 13 years, still unable to build products for; the low income consumers (who happen to be renters) who pay a disproportionately larger share of their incomes in energy costs.  products across the chasm; those folk in the image are your early adopters and do not know energy poverty. Energy poverty exists in the US and affects the customers Elon is, after 13 years, still unable to build products for; the consumers (who happen to be renters) who pay a disproportionately larger share of their incomes in energy costs. This is a problem for Tesla because these are the same consumers that the traditional utility stopped caring about and why they find themselves worrying about their futurewill make Tesla worth it’s current stock price.will make Tesla worth it’s current stock price.

Issue 2 or are you building the future? Tesla products are well designed but the company is failing on the technology front as it relates to inverters.

The Solarcity acquisition is about vertical integration, Elon wants to own all production inputs, control costs while maximizing the income opportunity (by owning a larger share of our wallets) as he serves as our future utility. A flaw with this approach is that, to truly own all the benefits of vertical integration you have to own all the assets in that integration. This is a bad idea for Tesla because it cannot compete with the asset management model of the traditional utility. Tesla should be building a different type of utility centered around being a platform for optimization of energy data. Knowing how much energy I use, how much is created (regardless of where or how it’s created) and how much it costs is something that will be more valuable than owning solar panels. An open platform framework will allow Tesla to work with any utility, any solar panel developer and any energy storage company. To do this Tesla will need to focus on developing the best asset for this future state. That asset is the Inverter. A quick technology sidebar: there are 3 main components of a solar panel; the panel, the racks to hold the panel (or just the panels on the roof) and the inverter. The inverter is the most critical component as it converts DC to AC, modulates panel output while monitoring individual panels.

The role of an inverter is actually more critical in a world of Tesla Solar roofs (above). Solaredge currently manufactures the inverters in use by Solarcity and, even though Elon announced the Tesla inverter yesterday, it is still behind the Solaredge technology. At a $533M market cap, Solaredge might have been a better Tesla buy than Solarcity itself (or could still be one) but since the company provides products to the traditional utility someone else might scoop this company up.

Batteries: There is also a slight issue with batteries but this one is less critical if the open platform approach is the one Tesla adopts. The issue here is that Tesla is not building a new better battery, just building more of a battery that it actually doesn’t build (The batteries will be built by Panasonic). There are business models that work today with the batteries that are available currently and picking one or two use cases should work out here

How Does Elon/Tesla Avoid Screwing It Up?

Two possible paths for Tesla to ensure that this test, because the Tesla/Solarcity merger is truly a test, succeeds is to look at new markets to capture more early adopters and truly own the technology as a vertically integrated utility.

The first path is simple, to create a true platform, Tesla will have to build or buy a company that provides the backbone, (beyond the design) that knits the data from solar panels/electric cars/batteries and any other energy generation or usage source. Not many companies can pull an Apple, keeping its platform closed successfully, selling products that are tens of thousands of dollars. Tesla will need to buy Solaredge (who might not sell as they already provide products to utilities) or nPhase (who are currently struggling and will need a buyer soon). It’s the critical next step to becoming a truly distributed utility platform. Distributed in the sense that the company can sell to anyone anywhere in the world. Because new markets is the true path for Tesla…

New Markets: When stuck with products that don’t translate to mass market, a strategy to adopt is to find new markets where the product might serve other needs. Tesla energy products are too expensive for the mass market in the US but are priced perfectly for places where current power prices are high. Markets like South Africa and Hawaii provide the opportunity that Tesla is looking to capture with its current suite of products. Hawaii is already on the table with plans for 52 MW of grid scale solar. But Africa is a great place for the future utility experiment. Capacity is low (not enough generation to serve the needs of the consumers), abundant solar, there are serious inefficiencies (utilities have little data or information on who is actually using power) and prices are high (as high as 51c/kWh in some places). Tesla can undercut that significantly, something that is less viable in the US where the highest price is in Hawaii at 37 c/kWh and theaverage is 12.25 c/kWh.

It’s hard to imagine sitting in the comfort of a home with power here in the US but reliability is more important than price in these markets. Price is truly not an issue as consumers are paying more than the cost of a kWh from a Powerwall (as high as 51c/kWh in some places) .

Tesla can sell its energy products price competitively in these markets. This is already playing out, as Powerwalls were sold to Singita safari lodge in South Africa (image below) and to Virunga Gorilla park in Congo just a few months ago. The critical point here is that with its current suite of product Tesla/Solarcity will do well to sell in more conducive markets.

Let that sink in… A US utility company is selling its products to customers in locations with names that most traditional utility executives cannot pronounce while scraping off the prime consumers (those bald pates in the picture above) here at home.

For an employee of a US utility, that should worry you. For an executive in a utility company, that should scare you. The geographic barrier that compelled the government to accept the utility as a natural monopoly no longer applies. In the early 1900’s, due to the clever machinations of Insull who convinced government that many companies could not run wires and transmission lines to homes, utilities were allowed to run as monopolies. For the most part that hasn’t changed. But the retail future of the industry turns that on it’s head.

It’s a play the traditional utility industry is wholly unprepared for. But it’s one that Elon Musk might still screw up and lose if he doesn’t solve the problems of creating products that serve the mass market in the US or pay more attention to where the current products are best suited. Because right now it’s definitely not to the vast population of Americans who need sustainable and affordable electricity.

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Seyi Fabode is a Managing Director at VestedWorld, (doing well by doing good) investing in emerging market companies. He writes about energy, resource efficiency, people and technology at Asha Labs.