Tesla Deal With Panasonic Underwhelms

| About: Tesla Motors (TSLA)

Summary

Tesla's 1 GW ramp by 2019 is about a 3-year delay compared to original plans and about a 2-year delay compared to the most recent plans.

1 GW in 2019 makes Tesla a marginal solar player at best and the solar fab largely irrelevant in the overall financial picture.

On the upside, Tesla moves capex burden to Panasonic in exchange for what is likely an expensive take-or-pay agreement.

Tesla (NASDAQ:TSLA) announced it has finalized the agreement with Panasonic (OTCPK:PCRFY) to manufacture solar cells and modules at its Buffalo fab.

According to Tesla, the cells and modules will initially be used to satisfy demand for non-solar roof applications. In addition, Tesla will also incorporate Panasonic's cells into the many kinds of solar glass tile roofs that Tesla will be manufacturing in the future.

Presumably, these "many kinds" would include the solar roofs that the Company seems to be targeting for car glass rooftop applications.

In theory, Panasonic should be gearing up for cumulative demand from SolarCity's old residential and commercial solar business, new Solar Rooftops, Supercharger deployments, and likely many hundreds of thousands of automobiles. With SolarCity targeting close to 1GW just for the current business, one would expect the total demand should be well in excess of 1 GW in 2017 and 2018.

However, the agreement states that production of the first PV modules will begin in summer 2017, and will ramp to 1 GW of module production by 2019.

That is an anemic ramp by any stretch of imagination and a three-year delay compared to the original plan to ramp to 1 GW in 2016.

What gives?

The answer to the question lies in another comment from the Tesla PR: "As part of the agreement, Panasonic will cover required capital costs in Buffalo and Tesla is making a long-term purchase commitment from Panasonic."

Outside of the Tesla PR, it is being reported that Panasonic will invest around $260M for these "required capital costs." As we have discussed in the past, there are no signs that the Silevo technology is working and Panasonic needs to invest additional monies to get the production going.

However, does this level of investment make sense for a 1GW fab that gets to full production in 2019?

Consider that other manufacturers have been rapidly increasing the efficiency of solar panels and the touted efficiency advantage of Tesla/Panasonic is vanishing with the passage of time. Whatever little technology advantage the companies could have had with a 2016 production would disappear by 2019 and the companies will be nothing more than yet another set of commodity manufacturers.

The solar fab being based in New York and Tesla's solar business and auto manufacturing being based in California means that there are likely no meaningful advantages in shipping costs when compared to importing from China, Korea, or Southeast Asia.

In addition, consider that the module ASPs in Q4 2016 are already sub-$0.40 and are likely to be around $0.30 by 2019. Given it is highly likely that Tesla signed up some very high ASPs to get Panasonic to make this deal, let's assume that Tesla will pay Panasonic about $0.40 per watt. What this means is that the fab, when fully ramped in 2019, would deliver about $400M in revenues. This level of revenues is peanuts in comparison to solar module competition or to Tesla's auto business. Since the business has no scale at this level, at best this is a 10% net profit business for Panasonic.

All of this assumes that Tesla can absorb the output from the fab at contractual prices. If Tesla cannot absorb the output, then the ASPs will be far lower in the open market and Panasonic will likely make no money in the business.

Given this dynamic, it would make little sense for Panasonic to enter into this agreement unless there is an ironclad guarantee from Tesla on demand.

The reason for the slow ramp, we believe, is that Panasonic likely refused to invest at a rate any faster than what it needs to generate a sufficient ROI. We find it highly unlikely that Panasonic will invest in the factory until it gains significant confidence that Tesla will succeed with its SolarCity business or the Model 3.

In addition to facing the slow ramp, we find it likely that Tesla has retained much, if not all, of the liabilities of the Buffalo fab - especially any penalties or fines due to the State of New York. Note that the PR says "Panasonic will cover required capital costs" and that particular specificity is likely there for a reason.

For the State of New York official behind the original SolarCity deal, this new deal with Panasonic is an essentially two to three-year delay and a major setback. With these delays, it is increasingly likely that the fab will never be a competitive fab and produce any meaningful economic return for the taxpayers. Will the government officials keep Tesla's feet to the fire and impose any penalties or fines? Time will tell.

The odds do not favor the taxpayers though. We already know that what Tesla lacks in manufacturing prowess it makes it up in getting favorable deals from gullible government officials. It would not be surprising if Tesla can find a way to have the penalties waived.

The only real upside we can see for Tesla with this deal is that it is able to reduce the SolarCity burn and pass on the capital expense obligation to Panasonic.

Summary:

It is quite telling that this anemic ramp includes the combined demand of all divisions of Tesla including the old SolarCity business, Solar Roofs, Supercharger deployments, and automobile glass solar roofs.

Neither Tesla nor Panasonic has any sustainable technology edge in solar panel production and it is unlikely that these companies will be competitive in the market.

The low demand also gives an indication of the strength of the SolarCity operation. 1 GW by 2019 will not move the needle for Tesla and shows the futility of the SolarCity acquisition.

Tesla, with this deal, reduces near-term cash burn at the expense of higher procurement costs in the future.

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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.

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