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Comment by pfarnsworth | Hacker News Reader

> Couple this cash crunch for two of his companies along with the Space X rocket explosion today, I can't imagine the amount of stress Musk is under right now!!

Self-induced stress. There is no reason for Tesla to have purchased Solar City. It was an extremely financially stupid and ego-maniacal deal, and the fact that financial institutions want protection against it just proves it. If there is ever a moment that people turn back and ask why Tesla failed, it will be this. I don't think Tesla as a company will disappear, but I can definitely see Musk losing control because of financials spinning out of control, and this would be the jump-the-shark moment.

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Self-induced, yes, but not stupid, and there is a reason.

Egomaniacal, narcissistic, who cares? There is decent consensus that these qualities benefit (https://hbr.org/2012/07/narcissism-the-difference-betw, http://www.psychologicalscience.org/index.php/news/minds-bus...) entrepreneurs and leaders.

The reason is that as a single unit the combined companies are a much more compelling offering as a next-generation energy company managing, both supply and demand of a sustainable, renewable resource. I'm not aware of anyone doing this strategically, building bridges from both the supply and demand side, and at this scale.

The article is an interesting example of how entrepreneurship, and any startup battles similar issues with growth, debt and financing, regardless of the financial position, or level of influence of the founder. All the more reason not to be disheartened when facing challenges of a similar nature, though likely at a different scale.

Master plans 1 and 2 from Musk have been large in scope, practical, achievable steps towards what I think is the moonshot, which is a renewable energy ecosystem for the future.

It's not at all clear to me that power generation via solar has anything at all to do with supplying electricity to cars.

The power generated can be used for anything. The vast majority will go to things other than cars.

Electric cars can consume electricity from any source and, at least for a while, the vast majority will be coming from sources other than solar.

Vertical integration can make a lot of sense in weird markets where goods aren't fungible or there isn't a high quality market for trading. Electrical power is basically the opposite of this though. There is a very very large and very liquid market for pricing electrical power. I see no reason that SolarCity can't just be a supplier to this market while Tesla Owners would be consumers.

It's pretty clear to me that the merging of the companies is mostly due to cashflow management on the part of Musk and has little to do with any real synergies between their businesses. Stockholders in one or both companies are likely to suffer due to the merger.

Electric cars represent a substantial demand for electricity. Solar represents a cost-effective renewable supply of electricity. The two do go hand-in-hand.

"Vertical integration can make a lot of sense in weird markets where goods aren't fungible or there isn't a high quality market for trading. Electrical power is basically the opposite of this though. There is a very very large and very liquid market for pricing electrical power. I see no reason that SolarCity can't just be a supplier to this market while Tesla Owners would be consumers." Yes, but the point is that there is a reason to combine those two, if the long-term agenda is to create a next-generation energy company, as opposed to simply competing in their respective markets, which was a response to pfarnsworth's comments.

I do agree with the likelihood of certain shareholders being negatively affected. You are also probably right about the motivation being cashflow, but that is due to circumstances/timing rather than a lack of synergy.

Airline companies represent a substantial demand for jet fuel but you don't see them merging with oil companies. Because there is a deep, liquid market for jet fuel. Just like electricity.

If they could convince an oil company to do so they might.

Given that, "there is a deep, liquid market for jet fuel," is having Emirates airline and Emirates National Oil Company under the same umbrella poor strategy?

You're also omitting the fact/point that the energy industry is evolving very quickly and that calls in to question the established markets. Energy over-supply in general creates opportunities for disruption and new business models.

is having Emirates airline and Emirates National Oil Company under the same umbrella poor strategy?

Yes. The only reason it exists this way is because they're both owned by the corrupt government/monarchy of Dubai.

Keep in mind that under the same umbrella you also have everything from banks to a cement company to hotels to a mineral water company. This isn't a coherent business strategy, it's just what happens when a single family rules over an entire economy and basically owns everything.

Why is it poor strategy beyond liquid markets for jet fuel?

You could equally argue that is exists that way because they need to deploy extremely large amounts of capital. So, an infrastructure company in a region that is going through phenomenal, albeit temporary growth, makes a lot of sense. Once that growth levels off they could transition to higher-tech endeavors.

One counter example is that Delta bought an oil refinery for this reason. https://en.wikipedia.org/wiki/Trainer_Refinery

> Airline companies represent a substantial demand for jet fuel but you don't see them merging with oil companies

They are creeping in that direction though. Delta purchased their own refinery in 2012:

http://www.reuters.com/article/us-delta-jetfuel-exclusive-id...

If you read your link it explains why this sort of vertical integration is almost certainly a bad idea. Delta can't capture all the gains that the refinery creates by operating in ways that reduce its effectiveness. It's money losing overall.

> It's not at all clear to me that power generation via solar has anything at all to do with supplying electricity to cars.

Tesla is a battery company that just so happens to also make a couple of cars. When you look at it that way, it makes a lot more sense.

This actually makes sense. And perhaps SolarCity will also become a battery company that just so happens to also make solar panels because solar power turns out to be more of a storage problem than generation problem.

You are making me rethink my position a little bit. Thanks!

>Tesla is a battery company

What advantage do they have in battery tech that say, Panasonic (who provides their batteries), doesn't?

Government backed/funded manufacturing facilities based in the US

Tesla will be the owner of the gigafactory, a factory in which Panasonic will own a small portion of the manufacturing space inside. I suppose an advantage here is the willingness for the two companies to work together.

Demand. No one is clamoring to buy Panosonic batteries. They are clamoring to buy Tesla vehicles (which so happen to require quite a few cells).

Total Tesla sold battery capacity is about 10 GWh. For comparison, Nissan has sold 6 GWh, and Chevrolet has sold 2 GWh. But all are beaten by Toyota, who have sold more than 17 GWh in their hybrid vehicles.

For further comparison, the total capacity of existing pumped hydroelectric storage plants is 740 000 GWh. (This puts plans of battery-based electricity storage in a rather harsh perspective.)

Do you have a reference for the hydroelectric storage number? Does this include hydroelectric dams without reverse-pumping capability, which still do have the capacity to perform fast grid leveling?

https://en.m.wikipedia.org/wiki/Pumped-storage_hydroelectric...

I believe this number only includes dams with reverse pumping. The global production capacity for all hydroelectric power is much larger, but it's not a widely used number, since you typically don't empty a reservoir due to the lower water having less potential energy.

So this capacity number is a bit theoretical, since you wouldn't use it that way in practice. But then again, so is the capacity number for batteries, since you really want to avoid doing a full discharge.

Annual global hydroelectric production is a more useful number, and is a little more than 4 000 TWh.

Cool, thanks. I wasn't aware that pumped hydroelectric had this great installed capacity. Those are very big numbers. Of course, it isn't an either/or proposition, since pumped hydroelectric is limited by geography. Battery-supported grid levelling can also be installed locally at each residential solar project, which makes adoption less of a political case.

These things all have different growth rates. You might want to mention those, too.

>Demand. No one is clamoring to buy Panosonic batteries

Tesla is.

Tesla is an energy company that just happens to make cars, batteries, and solar panels. Or so they would like to be.

If you look a the energy industry now, there's an iron triangle, if you will, between fossil fuel extraction, electric utilities, and the automobile industry. Tesla is aiming to replace all three sides with solar, batteries, and electric cars. A person could use Tesla products and, in theory, not interact with the current energy sector of the market at all. Which, if it works, would be some kind of disruption!

"Tesla is a battery company "

That is common misconception. Tesla repackages batteries bought from Panasonic.

The difference is that solar power works best with battery storage because it's not continuous, so Tesla's vehicles can benefit from that source more easily than most other consumers.

the Powerwall product uses the same battery for home storage.

also, a sweet deal like: "charge your electric car for a discounted rate m when your home already has SolarCity brand electricity" is a much easier sale than "Oh, you've got a Tesla... don't you want to charge it with your standard meter rate from Vivent?"

> There is a very very large and very liquid market for pricing electrical power. I see no reason that SolarCity can't just be a supplier to this market while Tesla Owners would be consumers.

I suspect SolarCity's microgrid program and system service contract (which allows for customers to participate in yet-to-be-developed markets) is intended to disrupt the whole shit. IIRC, SolarCity already purchased a utility company. I expect they're looking to buy more utility poles & make their own market, cash squeeze realities notwithstanding.

> Egomaniacal, narcissistic, who cares? There is decent consensus that these qualities benefit entrepreneurs and leaders.

It's possible that they benefit leaders on average but can also cause black-swan cases of terrible decision-making, which I think is the argument against the SolarCity purchase here. Tragic flaws and all that.

> I'm not aware of anyone doing this strategically, building bridges from both the supply and demand side, and at this scale.

I mentioned this in a previous comment about the SolarCity merger: most people agree it makes sense strategically. We're wondering whether it's a good move tactically, for a company in a stable-but-iffy cash flow situation to buy another company that was hemorrhaging cash and wasn't expected to continue as a going concern for much longer.

What are the alternatives? I think we can make an objective judgment on this tactic vs. any other?

The safe alternative (from Tesla's perspective) would have been to let SolarCity die. That's why people are questioning Musk's actions on this deal: they look like he's putting his own interests ahead of Tesla's.

First, my point is that there is a larger objective where synergy between the companies exist and serve a strategic purpose. Namely, each is a component in building a next-gen energy company.

So, the tactics Analemma_ 50 and I are discussing are what other sustainable, renewable supply options exist. Because that is what SolarCity represents. Does it make sense to buy troubled SolarCity before they go under, or does it make more sense to buy another solar (or insert renewable here), or does it make more sense to start over on that component. Those are the alternative tactics I am interested in, which I am not aware of.

>>building a next-gen energy company Agreed. They're aiming for GE, not GM. (to repeat myself from the last thread on TSLA)

>>Does it make sense to buy troubled SolarCity before they go under

From an investment standpoint, I think optimally you let Solar City go into bankruptcy, buy it for pennies on the dollar, and then you cherry pick the components you want and sell off any others that you think you can. Can someone do that as a chair of both though, not sure (i guess so?).

Maybe they didn't do that because they see someone else coming in - a new challenger? Or, he sees long term something that others don't. Or maybe he's just ego-maniacal.

All fair options, but sacrificing one group of shareholders for another seems to carry its own risks.

>there is no reason for Tesla to have purchased Solar City. It was an extremely financially stupid and ego-maniacal deal...

I think you're speculating. There are lots of plausible reasons. For example, see S+C's Alex Danco's series on this: https://medium.com/@alexdanco/in-a-world-of-energy-mainframe...

Could it all go horribly wrong? Well sure, of course. But that doesn't mean that the Tesla board is composed of idiots.

edit: See also this thread, related: https://news.ycombinator.com/item?id=12402366

>I think you're speculating.

There are many solar companies. Perhaps there are synergies with Tesla. But why SolarCity, specifically? What was outstanding about them as a target?

It's silly to expect someone to prove the point for you. Either argue why SolarCity wasn't a good choice or go ahead and assume that Elon Musk isn't a total idiot and had good reasons to buy it.

Errrr, it's haemorrhaging cash? There are plenty of other solar companies that don't have those overheads and would be cheaper.

>It was an extremely financially stupid and ego-maniacal deal

Care to provide any evidence of this? Some analysis of the solar industry in general and what made Solar City especially bad? What's the insight you have into Musk's overall strategy and why do you feel like this merger is contrary to that strategy?

>There is no reason for Tesla to have purchased Solar City

They are releasing giant battery packs for homes. This seems like a pretty good reason to also have a solar solution to work with them, considering that just storing energy from the grid is sort of dumb. There are places with variable pricing but I can't imagine a Power Wall would ever offset those price differences.

> It was an extremely financially stupid and ego-maniacal deal

Maybe. But also maybe, it's breaking the conventional wisdom that has gotten him where he is today.

> I can definitely see Musk losing control...

I am sure investors would be super careful of doing that. Specially now, when we remember what happened to Apple when Steve was expelled.

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