On Sunday, Tesla (NASDAQ:TSLA) announced an agreement with Panasonic (OTCPK:PCRFY) regarding SolarCity's (SCTY) Buffalo fab. According to Tesla blog entry, this agreement is non-binding and contingent upon Tesla's shareholders' approval of SolarCity acquisition.
According to Tesla: "The parties intend for Panasonic to begin PV cell and module production at the Buffalo facility in 2017. Tesla intends to provide a long-term purchase commitment for those cells from Panasonic."
With this announcement, we believe it is worthwhile for investors to revisit some of the claims made by Tesla CEO Elon Musk in defense of this ill-conceived merger. When announcing the SolarCity merger, Mr. Musk claimed that:
"We are going to be the world's best manufacturer, not by a small margin but by a margin that people don't even think is possible. And I believe in taking a first principles physics based approach to analysis. And my analysis of the situation is that dramatic improvements are possible on the automotive side and on the photovoltaic side."
"I spent time in the SolarCity Silevo power plant in the Bay Area. And so, I am familiar with this. And my observation is there are dramatic improvements, like there's not some physical thing that's preventing it from being super competitive. It's actually relatively straightforward manufacturing process."
We can now see that these claims are patently false unless divestiture of the photovoltaic operation is supposed to demonstrate the strength of SolarCity/Tesla manufacturing capabilities.
This new announcement essentially implies that Tesla plans to offload some or all of the much touted SolarCity fab to Panasonic. While Panasonic certainly has the pedigree for high efficiency solar PV cells, it has been unable to manufacture these products cost effectively and does not rate in the list of top 10 solar PV manufacturers.
If any investors were under the false impression that either of these companies had any manufacturing expertise, that can be firmly put to rest. It also reinforces, once again, that the main purpose, or may be the sole purpose, of Tesla acquisition of SolarCity is to bail out SolarCity.
This assessment is further buttressed by Tesla's statement that: "With the aid of installation, sales and financing capabilities from SolarCity, Tesla will bring an integrated sustainable energy solution to residential, commercial, and grid-scale customers."
It is refreshing that Tesla is disavowing any manufacturing expertise at SolarCity. Unfortunately for Tesla investors, even the installation, sales, and financing capabilities of SolarCity are quite weak.
While there is certainly some reputational damage to Tesla and SolarCity with this announcement, there are some clear benefits:
- Since, neither of these companies have any demonstrated manufacturing expertise in the solar PV arena, this agreement will potentially get rid of a millstone around the Companys' necks.
- This agreement certainly reduces cash burn at SolarCity and by extension, at Tesla, if the merger goes through.
- Tesla could potentially get some cash out of Panasonic for the free plant and equipment that SolarCity got from the State of New York. In effect, Tesla could get to cash out some of the benefits doled out by the state of New York.
On the downside, Tesla will likely be saddled with an uneconomic solar cell/module purchase agreement from Panasonic.
Given the expected change of control of the manufacturing facility, we also expect that there will be considerable slippage in production ramp at the Buffalo fab. We will be surprised if the fab is fully ramped in 2017.
From a historical perspective, SolarCity may have paid Silevo as much as $200M for the cell/module technology in 2014. Since then, the Company has spent considerable additional money to productize the Silevo technology. At this point, all that may be left to show for this investment is a future "solar roof" product with highly questionable uptake. It will be interesting to see how much of the money Tesla will be able to get back from Panasonic in the sale.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.