Is Elon Musk's Attempted Tesla Privatisation A Covert Bail-Out?
August 19, 2018
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I've been a long fourth dimension follower as well as admirer of Elon Musk. I've listened to all his interviews, watched many of his presentations, as well as read the first-class biography written yesteryear Ashlee Vance. The series entrepreneur has achieved feats of growth as well as excogitation over the yesteryear xv years that ex anti most (myself included) would have got considered impossible.
Starting a rocket company, for instance, that has achieved to a greater extent than excogitation inward the yesteryear 10-15 years than NASA has inward the yesteryear 40, with initial start upwards upper-case missive of the alphabet of less than US$200m, is a genuinely remarkable feat. It is also amazing how far he has taken Tesla given the express resources it started with, as well as the formidable odds against success. Either accomplishment lone would live impressive, allow lone running both companies at the same time! Yes, Musk often misses his aggressive self-imposed deadlines, but I've often joked that Musk promises to do inward 2 years what would accept most people 10, as well as and so when it ends upwards taking 3, people claim he can't execute!
Musk's idealism as well as not-for-profit motives, every bit good every bit his sheer boldness, are also slow to admire. Musk is taking on hard rather than slow problems, as well as is genuinely trying to brand the the world a amend seat as well as advance the campaign of humankind. He envisages a the world of clean, sustainable liberate energy (electric cars powered yesteryear solar energy), every bit good every bit human beings every bit a space-faring civilization. He is pushing for new, innovative modes of shipping (the hyperloop), as well as cares passionately nigh the risks AI poses to humanity. This idealism, coupled with his unassuming presentation/conversational trend - something that makes him both likable as well as believable - has endeared him to his fans as well as made him a cult figure that is slow to root for.
As anyone inward the world spotlight attempting to do bold as well as controversial things does, he has attracted his fair part of critics as well as sceptics - specially with the fiscal community. I stance some of these criticisms every bit unreasonably harsh. Musk is trying to modify the world. Portfolio managers are precisely trying to brand a buck. What have got the latter done for the the world lately (or ever)? Even if you're sceptical of whether Musk volition succeed, yous have got to applaud the guy for trying. The the world needs people similar Musk. As George Bernard Shaw in i trial said, "[t]he reasonable human adapts himself to the world; the unreasonable i persists inward trying to adapt the the world to himself. Therefore all progress depends on the unreasonable man". Musk is every bit unreasonable every bit they come.
Nevertheless, high-minded goals as well as a tireless piece of work ethic lone do non guarantee success, as well as marketplace forces tin live punishingly cruel. More often, the unreasonable human is forced to curvature to the volition of the world. From the real beginning, Musk has candidly admitted that the odds of both Tesla's as well as SpaceX's success was remote. Success existence "one of the potential outcomes" was considered plenty to give it a go. Tesla's mission was also never to brand profits, but rather "to accelerate the adoption of electrical vehicles". Musk has also stated inward recent years - quite reasonably as well as level-headedly - that Tesla's part toll "is much higher than nosotros have got whatever correct to deserve". Curious it is, then, that he is forthwith attempting to accept it out at a fabric premium - yesteryear agency of Twitter annunciation no less (and inward a fashion that quite probable breached SEC regulations).
As I hash out below, I intend a reasonable inference tin live made from recent events, coupled with the sense of SolarCity which I hash out at length, that Tesla's troubles may run much deeper than they foremost appear (particularly to the bulls), as well as that the mooted privatisation is really a quasi-bailout as well as a ploy to purchase the companionship much to a greater extent than fourth dimension to dig itself out of its fiscal mess - every bit good every bit much needed upper-case missive of the alphabet as well as privacy. Musk is an innovator as well as an inspiring figure, but it is of import to yell upwards that Elon Musk has never built as well as run a profitable enterprise. As much every bit I admire Musk, he does non walk on water, as well as is dependent plain to the same laws of fiscal gravity every bit the repose of us.
I hope I'm incorrect however, as well as it is also possible Musk has simply tired of existence 'kept on a leash' yesteryear fiscal markets. In this respect, the movement mightiness live purely opportunistic. I hope so. I'm rooting for Musk to succeed. But I can't assist but conclude that something mightiness live amiss.
The Solar City precedent
The foremost cracks inward the Musk facade began to appear for me when I looked into rooftop solar companionship SolarCity - some other Musk-backed, change-the-world inspired company, as well as so run yesteryear his blood brother Kimbal. While the companionship was reporting considerable losses as well as FCF burn, I was intrigued non only yesteryear the company's rapid growth as well as potentially large addressable market, but yesteryear the 'net introduce value of existing installations' the companionship reported. On this latter metric, the stock looked cheap, with the part toll trading roughly inward line with the discounted cash flows from existing installations (net of debt) - a metric that was growing rapidly each twelvemonth with novel installed volume - as well as offered no premium for value creation from novel installations (which at human face upwards value, appeared robust). On an NPV-added accounting basis, the stock really looked remarkably cheap. Installation prices also continued to tendency down, aided yesteryear the well-publicised 'Moore's-law' similar refuse curvature inward wafer prices that was occurring.
A weekend of research, however, rapidly revealed the flaw inward the work organisation model/investment case, as well as made me query how as well as why Musk - someone of considerable intellect - had non picked upwards on this. For the foremost time, I began to wonder whether Musk's sentence was existence clouded yesteryear sci-fi fantasies nigh a future, idealistic the world - inward Solar City's case, a the world where all of our liberate energy is produced cleanly as well as sustainably from rooftop solar installations - to the signal where he was overlooking obvious economical realities.
Solar City's client value suggestion was (seemingly) unproblematic - nosotros volition pay for the installation of a rooftop solar scheme on your house, as well as nosotros volition proceed to ain the solar scheme as well as sell yous the powerfulness generated yesteryear the scheme nether a 20yr PPA (power purchase agreement) at a toll starting at 20% below electrical flow retail electricity prices, with a contracted 2% annual toll escalator. The marketing pitch was, with no money down, nosotros tin cut down your electricity mouth yesteryear 20%, field inward the procedure yous tin assist salve the planet (and demo off your environmentally-friendly credentials to your neighbours to boot). What was non to like? Not surprisingly, the company's installation volume grew rapidly. The companionship booked upfront losses/negative FCF, every bit they had to bear the cost of scheme installation upfront, but the annuity revenue flow they as well as so received from customers over the next 20yrs (plus hoped-for extensions) promised company returns on investment over time.
However, the cardinal flaw inward the work organisation model was this: the powerfulness of the solar scheme to profitably generate as well as sell electricity to customers at a 20% discount to on-grid prices was critically dependent non precisely on hefty upfront regime installation subsidies (which were at constant adventure of removal), but also crucially, on the traditional bundled model of retail electricity pricing.
In the past, per-kWh retail powerfulness prices have got been bundled into a unmarried toll that includes (1) the wholesale cost of liberate energy purchased from electricity generators; as well as (2) the cost of electricity shipping provided yesteryear powerfulness transmission as well as distribution companies (we volition ignore relatively nestling administrative as well as client billing functions). The wholesale toll of powerfulness is typically significantly below the retail price, due to the meaning costs of powerfulness transportation/distribution.
The work with Solar City's client value suggestion was that the sub-20% cost of its electricity was a wholesale price, non a retail price. Wholesale electricity prices were 5-8c per kWh, whereas SolarCity was signing customers upwards to pay 13-17c for twenty years (13c inward twelvemonth 1, rising towards 17c yesteryear twelvemonth 20). Retail prices billed yesteryear electricity companies were higher, at closer to 15-17c, but only because these prices included the cost of electricity transmission as well as distribution (as good every bit billing as well as client service functions).
But isn't rooftop solar liberate energy 'distributed' - i.e. produced as well as consumed at the same location - removing the demand for transmission/distribution? One of solar's cardinal problems is its intermittency. The Sun doesn't smooth at night, as well as the grade of insolation varies with both the seasons as well as the weather. Consequently, roof solar really relies more heavily on the grid than the average customer, every bit it feeds electricity dorsum onto the grid when the Sun is shining, as well as and so draws liberate energy dorsum off the grid at nighttime as well as other times of depression solar efficiency. The grid also provides essential back-up services at all times.
The promised 20% electricity cost savings thence relied on rooftop solar customers underpaying for grid services - indeed non paying anything for the cost/upkeep of transmission as well as distribution lines at all, despite using that infrastructure much to a greater extent than actively than conventional electricity customers. This is specially the representative because the increased volatility inward scheme demand as well as provide caused yesteryear solar is real costly from the perspective of maintaining grid stability.
In other words, rooftop solar customers increased the cost of administering the powerfulness distribution system, but paid real piddling for the privilege (only on the internet powerfulness drawn inward excess of full solar production). The costs didn't disappear, but instead were passed on to other (non-rooftop solar) scheme users, inward the class of higher powerfulness shipping tariffs. This, inward turn, as well as so made rooftop solar fifty-fifty to a greater extent than cost competitive every bit bundled on-grid prices rose, accelerating adoption further, as well as so forth.
This flywheel was clearly unsustainable. Somebody had to pay for the cost of grid upkeep, as well as Solar City was saving its customers money simply yesteryear offloading those costs on to other network users, as well as essentially arbitraging outdated legacy bundled billing arrangements. It seemed to me that what ultimately had to hap was that retail electricity tariffs would demand to live unbundled, with the mouth separated betwixt grid access costs as well as wholesale electricity prices.
Warren Buffett's Nevada NV Energy was i of the foremost to sympathise as well as bargain with the problem, announced a modify inward billing practices inward 2016 (as usual, Buffett was good ahead of the pack inward identifying emergent problems as well as taking steps to address them). Solar City as well as other rooftop installers tried to fence that this movement represented vested interests resisting disruption of their work organisation models, but this was disingenuous - inward exercise Buffett was simply insisting on applying what was economically logical, rational, sustainable, as well as fair. Someone has to pay for the grid, as well as at that topographic point is no audio economical rational why specially heavy grid-users, such every bit roof-top solar owners - ought to live exempt from paying.
An unbundling of billing would devastate the value suggestion SolarCity had promised its customers (and locked them into for twenty years). Instead of saving them money, they would destination upwards having to pay considerably to a greater extent than for their electricity, and for a long menstruum of time. They would have got to pay grid access charges equivalent to an average of say 8c per kWh, as well as and so pay 13-17c per kWh for their wholesale electricity, instead of 5-8c on-grid. Their electricity bills would in all probability destination upwards rising some 50%.
Furthermore, whatever removal of internet metering would live fifty-fifty to a greater extent than disastrous, every bit solar customers would have got to pay 13-17c per kWh to SolarCity on solar generated yesteryear the panels, but would only have wholesale prices of 5-8c per kWh if they did non contemporaneously usage the liberate energy as well as sold dorsum onto the grid. This would multiply bills farther still, as well as would require customers pay for a meaning as well as costly installation of in-home batteries - an additional cost non previously budgeted for. And that cost would have got to live borne simply to cap excess electricity mouth costs at 50% for twenty years.
A client revolt was quite likely, if non massive lawsuits from customers who felt they had been mislead into signing long term contracts with fake as well as misleading advertising, with a pathetic understanding of the risks. To avoid this liability, as well as non to cite a meaning PR fallout that could harm the Musk halo, huge subsidies would have got to live provided yesteryear SolarCity, including renegotiating lease rates, and/or paying for the installation of battery packs. However, this burden would live far greater than SolarCity could afford, as well as would plough their installed base of operations from an property into a major liability. Bankruptcy inward this scenario would seem inevitable.
Furthermore, if those problems weren't meaning enough, the cost of installations had started to grade off, as well as fifty-fifty tick upwards slightly. What had happened to the 'Moore's Law' refuse curvature inward solar prices the solar bulls had enthusiastically preached of? The number was 'balance of scheme costs'. Wafer prices have got declined a lot, but the cost of glass, concrete, as well as installation labour, it turns out, have got not, as well as these had move the largest costs involved inward installing a system. All-in scheme costs looked to have got bottomed out, as well as at levels no where close depression plenty for solar to live competitive with on-grid wholesale pricing. Worse, clear evidence was emerging that utility-scale solar was much cheaper as well as to a greater extent than efficient than rooftop solar, every bit at that topographic point were much greater economies of scale with installation costs; greater locational flexibility; as well as the powerfulness to install panels inward a fashion able to dynamically adjust their angle to the Sun throughout the day, increasing insolation. All of these factors, viewed together, suggested that the rooftop solar work organisation representative was good as well as genuinely busted.
I was surprised Musk was seemingly unaware of these structural flaws inward the work organisation model, as well as for the foremost time, I began to uncertainty Musk's judgement. He seemed to have got been so blinded yesteryear his sci-fi vision for what the the world could be, that he had overlooked economical realities.
Musk does, however, appear to have got lastly woken upwards to these problems, as well as his solution was to have got Tesla launch a takeover of SolarCity in belatedly 2016. This coincided also - in all probability non coincidentally - with Trump's election - someone who had promised to withdraw the U.S. from the Paris Accords, as well as hence was unlikely to perpetuate of import solar subsidies as well as internet metering policies. Musk's epiphany was never publicly acknowledged, with the motivation for the takeout instead obfuscated with mouth of 'no brainer' synergies betwixt the 2 companies (despite those synergies existence far from self-explanatory). However, tellingly, his blood brother Kimbal who had been previously running Solar City for many years, as well as which Musk had previously lathered praise on as well as said "executed brilliantly", was asked to measurement down.
The truthful motivation for the takeout, I believe, is that Musk realised that Solar City was on the verge of fiscal catastrophe. Changing regulations (particularly given Trump's hostility to climate modify policies) as well as unbundling billing practices was probable to hateful that the companionship was going to demand to provide massive subsidies/compensation to its customers (or allow them walk away from existing contracts) to avoid both lawsuits as well as a a PR disaster, as well as this was a fiscal burden the companionship could ill-afford. Furthermore, such a world blow-up of i of Musk's companies could live highly damaging to his reputation as well as credibility, potentially impacting Tesla's powerfulness to enhance much-needed funding every bit well. It was preferable to absorb SolarCity's problems into the larger Tesla entity, where the losses/evidence as well as PR-fallout could live quietly buried, as well as world scrutiny avoided.
Was this unethical? Musk's actions are sure solely understandable. He had started out with the best of intentions, but had realised at that topographic point were serious unanticipated problems brewing. He was already inward over his caput as well as the stakes were high, both for Musk personally, as well as for other stakeholders such every bit customers as well as employees. It would no uncertainty live a real hard province of affairs to detect oneself inward - every bit a shareholder, yous tin simply sell as well as movement on, but it's non so unproblematic when yous are already committed as well as 'all in'. It is thence solely understandable Musk behaved the agency he did. It seemed similar the best solution for all (except - that is - Tesla shareholders). But understandable does non hateful excusable.
Tesla
It is with this context inward heed that I flora Musk's recent annunciation of an intention to accept Tesla private intriguing. It is real possible Musk's want to privatise Tesla stems from a similar motivation to his want to absorb SolarCity into Telsa - namely a belated recognition that he has overlooked a structural flaw inward the work organisation model that has laid the companionship on an inevitable collision class with reality, as well as a want to retreat from the scrutiny of world markets. This is specially the representative given growing signs fiscal markets could live rolling over as well as monetary policy is starting to tighten.
Realising he is potentially inward over his head, as well as the incredibly high stakes involved, he may live looking for solutions that minimises the adventure of a serious blow up. The extent of Tesla's internal problems are silent unclear, as well as are unlikely to live every bit severe every bit SolarCity's (although, allow it live remembered, SolarCity's problems are forthwith Tesla's problems), but it is at to the lowest degree possible Musk has had a similar 'a-ha' 2nd inward honor of Tesla every bit he did for SolarCity.
Much has been made of the fast measurement of executive departures at Tesla. I don't consider that a smoking gun (although it could seek out to be). Seldom mentioned is that Amazon also suffered a stunning charge per unit of measurement of executive departures during 2000-02 every bit good (albeit that was also a dicey fourth dimension for Amazon). Like Bezos, Musk is no uncertainty an intolerably hard mortal to piece of work for - non everyone has a want to piece of work 120 hours weeks as well as strive for almost impossible-to-deliver outcomes, twelvemonth afterwards twelvemonth afterwards year. Burnout is quite likely. However, it does advise at to the lowest degree the possibility of deeper problems.
One number could live that Musk has realised that it is simply non going to live possible to make the putatively mass-market Model three profitably as well as inward volume at the promised US$35k toll tag - at to the lowest degree non inward the foreseeable future. The companionship overlooked its access to battery raw materials every bit a potential issue, as well as the toll of key battery inputs such every bit cobalt has lately skyrocketed. Supply is short, as well as Tesla's has non locked inward whatever long term provide contracts. Executing on the manufacturing ramp-up has also proven far to a greater extent than complicated than previously expected.
Perhaps fifty-fifty to a greater extent than ominously, a potentially major work is that Musk's electrical vehicle (EV) PR offensive has been arguably besides successful, such that governments all roughly the the world are forthwith making EV sales penetration targets mandatory for automakers (notably inward Europe as well as China). This is a potentially large work for Tesla, because if regulatory mandates are besides aggressive relative to underlying organic client demand (at economical prices), traditional automakers - almost all of whom are investing heavily inward EV roll-outs - volition have got to sell them at a loss to comply with regulatory mandates, as well as subsidise the losses with much to a greater extent than profitable ICE vehicles. Telsa lacks internal-combustion models, as well as hence volition have got to compete with efficient, battle-hardened global automotive companies with considerable fiscal resources, who are existence forced into selling EVs at a loss. It would live an unenviable seat to live inward to say the to the lowest degree - specially if the companionship continues to human face upwards serious internal operational issues and/or less forgiving fiscal markets.
Tesla has also taken on a number of fiscal commitments, including gratuitous recharging for life at its supercharger network, as well as client buyback warranties on sure cars, as well as it also remains responsible for Solar City's considerable fiscal obligations. It is unclear how burdensome these volition live for the company. And at that topographic point may also live other issues that nosotros are non yet aware of.
Some of Musk's actions this twelvemonth betray increasingly frayed nerves - something that is understandable given how much is at stake for Musk. His Apr Fool's tweat that Tesla had declared bankruptcy was specially bizarre. In my interpretation, Musk may good have got been - consciously or unconsciously - attempting to 'reverse psychology' the market: he wanted people to conclude if Musk were really genuinely concerned nigh bankruptcy, at that topographic point is no agency he would joke nigh it similar that. That was my immediate reaction - I worried that Musk mightiness really live harbouring deep anxieties nigh the deteriorating dry soil of Tesla's fiscal health. His exasperated responses to analyst questions on the company's earnings conference telephone phone a few months back, which were widely condemned, were some other sign of a strung-out private nether an intense amount of stress.
So what benefits would a privatised Tesla have got for Musk? It would serve to purchase the companionship to a greater extent than time, capital, as well as privacy to endeavor to solve its problems, field allowing major shareholders to proceed to command the valuation. As I've discussed inward yesteryear spider web log articles, the existent argue at that topographic point have got been so few IPOs of loss-making tech unicorns is that it democratises the toll uncovering process, as well as a lot of these private-market unicorn valuations volition non withstand the scrutiny of world markets, and promoters know it. Privatising the companionship volition allow Tesla to 'bury the losses' inward much the agency SolarCity's losses have got been buried inside Tesla, as well as avoid upper-case missive of the alphabet marketplace as well as media scrutiny.
If Tesla remains listed as well as its fiscal problems deepen as well as investors start to lose confidence - specially if this occurred during a major marketplace sell-off - Tesla's part toll could collapse, as well as if it did, the companionship could rapidly detect itself unable to enhance plenty upper-case missive of the alphabet to live on and/or come across its aspirations. Musk's credibility would also accept a huge hit, which mightiness imperil SpaceX's fundraising potential every bit well. That classify of blow-up scenario is less probable to hap if the companionship is private - existing shareholders are able to prop upwards the valuation as well as proceed to fund it - provided they have got the money - sustaining newspaper profits as well as the illusion that at that topographic point has been no degradation inward value.
It is also possible, however, that I am reading besides much into this, as well as that the movement is instead purely opportunistic. It is possible Musk has simply tired of existence 'kept on a fiscal leash' yesteryear world markets as well as the constant media harassment, field at the same time, at that topographic point remains a huge amount of dumb money out at that topographic point at the 2nd intent on chasing yesteryear heady newspaper profits inward the VC-funded tech space, that is ripe for the plucking. The Saudi's inward particular, which Musk have got been talking to, have got repeatedly demonstrated a tremendous ineptitude when it comes to investing their majestic fortunes, as well as have got been duped fourth dimension as well as in i trial to a greater extent than into buying the incorrect matter at the incorrect time. Musk mightiness simply live taking payoff of this opportunity.
But the timing as well as fashion of this mooted takeout (announcing it over Twitter) advise to me it is also precisely every bit probable an impetuous deed of growing desperation. Time volition tell.
Conclusion
I really want Musk to succeed. I admire the guy as well as his high-minded as well as bold ambitions. I'm rooting for him. Someone that hard working, with an powerfulness to inspire both customers as well as employees, who has such a long history of defying the odds, should never live underestimated. Tesla has had a hard fourth dimension ascending the manufacturing learning curve, but whatever organisation that is every bit innovative every bit Tesla volition - provided it tin live on long plenty - in all probability eventually succeed (provided the work organisation model is non structurally flawed). I volition proceed to root for Musk, as well as wishing him the best of luck (which I'm sure he volition need), but I most sure volition non live investing inward whatever of his companies.
LT3000
Starting a rocket company, for instance, that has achieved to a greater extent than excogitation inward the yesteryear 10-15 years than NASA has inward the yesteryear 40, with initial start upwards upper-case missive of the alphabet of less than US$200m, is a genuinely remarkable feat. It is also amazing how far he has taken Tesla given the express resources it started with, as well as the formidable odds against success. Either accomplishment lone would live impressive, allow lone running both companies at the same time! Yes, Musk often misses his aggressive self-imposed deadlines, but I've often joked that Musk promises to do inward 2 years what would accept most people 10, as well as and so when it ends upwards taking 3, people claim he can't execute!
Musk's idealism as well as not-for-profit motives, every bit good every bit his sheer boldness, are also slow to admire. Musk is taking on hard rather than slow problems, as well as is genuinely trying to brand the the world a amend seat as well as advance the campaign of humankind. He envisages a the world of clean, sustainable liberate energy (electric cars powered yesteryear solar energy), every bit good every bit human beings every bit a space-faring civilization. He is pushing for new, innovative modes of shipping (the hyperloop), as well as cares passionately nigh the risks AI poses to humanity. This idealism, coupled with his unassuming presentation/conversational trend - something that makes him both likable as well as believable - has endeared him to his fans as well as made him a cult figure that is slow to root for.
As anyone inward the world spotlight attempting to do bold as well as controversial things does, he has attracted his fair part of critics as well as sceptics - specially with the fiscal community. I stance some of these criticisms every bit unreasonably harsh. Musk is trying to modify the world. Portfolio managers are precisely trying to brand a buck. What have got the latter done for the the world lately (or ever)? Even if you're sceptical of whether Musk volition succeed, yous have got to applaud the guy for trying. The the world needs people similar Musk. As George Bernard Shaw in i trial said, "[t]he reasonable human adapts himself to the world; the unreasonable i persists inward trying to adapt the the world to himself. Therefore all progress depends on the unreasonable man". Musk is every bit unreasonable every bit they come.
Nevertheless, high-minded goals as well as a tireless piece of work ethic lone do non guarantee success, as well as marketplace forces tin live punishingly cruel. More often, the unreasonable human is forced to curvature to the volition of the world. From the real beginning, Musk has candidly admitted that the odds of both Tesla's as well as SpaceX's success was remote. Success existence "one of the potential outcomes" was considered plenty to give it a go. Tesla's mission was also never to brand profits, but rather "to accelerate the adoption of electrical vehicles". Musk has also stated inward recent years - quite reasonably as well as level-headedly - that Tesla's part toll "is much higher than nosotros have got whatever correct to deserve". Curious it is, then, that he is forthwith attempting to accept it out at a fabric premium - yesteryear agency of Twitter annunciation no less (and inward a fashion that quite probable breached SEC regulations).
As I hash out below, I intend a reasonable inference tin live made from recent events, coupled with the sense of SolarCity which I hash out at length, that Tesla's troubles may run much deeper than they foremost appear (particularly to the bulls), as well as that the mooted privatisation is really a quasi-bailout as well as a ploy to purchase the companionship much to a greater extent than fourth dimension to dig itself out of its fiscal mess - every bit good every bit much needed upper-case missive of the alphabet as well as privacy. Musk is an innovator as well as an inspiring figure, but it is of import to yell upwards that Elon Musk has never built as well as run a profitable enterprise. As much every bit I admire Musk, he does non walk on water, as well as is dependent plain to the same laws of fiscal gravity every bit the repose of us.
I hope I'm incorrect however, as well as it is also possible Musk has simply tired of existence 'kept on a leash' yesteryear fiscal markets. In this respect, the movement mightiness live purely opportunistic. I hope so. I'm rooting for Musk to succeed. But I can't assist but conclude that something mightiness live amiss.
The Solar City precedent
The foremost cracks inward the Musk facade began to appear for me when I looked into rooftop solar companionship SolarCity - some other Musk-backed, change-the-world inspired company, as well as so run yesteryear his blood brother Kimbal. While the companionship was reporting considerable losses as well as FCF burn, I was intrigued non only yesteryear the company's rapid growth as well as potentially large addressable market, but yesteryear the 'net introduce value of existing installations' the companionship reported. On this latter metric, the stock looked cheap, with the part toll trading roughly inward line with the discounted cash flows from existing installations (net of debt) - a metric that was growing rapidly each twelvemonth with novel installed volume - as well as offered no premium for value creation from novel installations (which at human face upwards value, appeared robust). On an NPV-added accounting basis, the stock really looked remarkably cheap. Installation prices also continued to tendency down, aided yesteryear the well-publicised 'Moore's-law' similar refuse curvature inward wafer prices that was occurring.
A weekend of research, however, rapidly revealed the flaw inward the work organisation model/investment case, as well as made me query how as well as why Musk - someone of considerable intellect - had non picked upwards on this. For the foremost time, I began to wonder whether Musk's sentence was existence clouded yesteryear sci-fi fantasies nigh a future, idealistic the world - inward Solar City's case, a the world where all of our liberate energy is produced cleanly as well as sustainably from rooftop solar installations - to the signal where he was overlooking obvious economical realities.
Solar City's client value suggestion was (seemingly) unproblematic - nosotros volition pay for the installation of a rooftop solar scheme on your house, as well as nosotros volition proceed to ain the solar scheme as well as sell yous the powerfulness generated yesteryear the scheme nether a 20yr PPA (power purchase agreement) at a toll starting at 20% below electrical flow retail electricity prices, with a contracted 2% annual toll escalator. The marketing pitch was, with no money down, nosotros tin cut down your electricity mouth yesteryear 20%, field inward the procedure yous tin assist salve the planet (and demo off your environmentally-friendly credentials to your neighbours to boot). What was non to like? Not surprisingly, the company's installation volume grew rapidly. The companionship booked upfront losses/negative FCF, every bit they had to bear the cost of scheme installation upfront, but the annuity revenue flow they as well as so received from customers over the next 20yrs (plus hoped-for extensions) promised company returns on investment over time.
However, the cardinal flaw inward the work organisation model was this: the powerfulness of the solar scheme to profitably generate as well as sell electricity to customers at a 20% discount to on-grid prices was critically dependent non precisely on hefty upfront regime installation subsidies (which were at constant adventure of removal), but also crucially, on the traditional bundled model of retail electricity pricing.
In the past, per-kWh retail powerfulness prices have got been bundled into a unmarried toll that includes (1) the wholesale cost of liberate energy purchased from electricity generators; as well as (2) the cost of electricity shipping provided yesteryear powerfulness transmission as well as distribution companies (we volition ignore relatively nestling administrative as well as client billing functions). The wholesale toll of powerfulness is typically significantly below the retail price, due to the meaning costs of powerfulness transportation/distribution.
The work with Solar City's client value suggestion was that the sub-20% cost of its electricity was a wholesale price, non a retail price. Wholesale electricity prices were 5-8c per kWh, whereas SolarCity was signing customers upwards to pay 13-17c for twenty years (13c inward twelvemonth 1, rising towards 17c yesteryear twelvemonth 20). Retail prices billed yesteryear electricity companies were higher, at closer to 15-17c, but only because these prices included the cost of electricity transmission as well as distribution (as good every bit billing as well as client service functions).
But isn't rooftop solar liberate energy 'distributed' - i.e. produced as well as consumed at the same location - removing the demand for transmission/distribution? One of solar's cardinal problems is its intermittency. The Sun doesn't smooth at night, as well as the grade of insolation varies with both the seasons as well as the weather. Consequently, roof solar really relies more heavily on the grid than the average customer, every bit it feeds electricity dorsum onto the grid when the Sun is shining, as well as and so draws liberate energy dorsum off the grid at nighttime as well as other times of depression solar efficiency. The grid also provides essential back-up services at all times.
The promised 20% electricity cost savings thence relied on rooftop solar customers underpaying for grid services - indeed non paying anything for the cost/upkeep of transmission as well as distribution lines at all, despite using that infrastructure much to a greater extent than actively than conventional electricity customers. This is specially the representative because the increased volatility inward scheme demand as well as provide caused yesteryear solar is real costly from the perspective of maintaining grid stability.
In other words, rooftop solar customers increased the cost of administering the powerfulness distribution system, but paid real piddling for the privilege (only on the internet powerfulness drawn inward excess of full solar production). The costs didn't disappear, but instead were passed on to other (non-rooftop solar) scheme users, inward the class of higher powerfulness shipping tariffs. This, inward turn, as well as so made rooftop solar fifty-fifty to a greater extent than cost competitive every bit bundled on-grid prices rose, accelerating adoption further, as well as so forth.
This flywheel was clearly unsustainable. Somebody had to pay for the cost of grid upkeep, as well as Solar City was saving its customers money simply yesteryear offloading those costs on to other network users, as well as essentially arbitraging outdated legacy bundled billing arrangements. It seemed to me that what ultimately had to hap was that retail electricity tariffs would demand to live unbundled, with the mouth separated betwixt grid access costs as well as wholesale electricity prices.
Warren Buffett's Nevada NV Energy was i of the foremost to sympathise as well as bargain with the problem, announced a modify inward billing practices inward 2016 (as usual, Buffett was good ahead of the pack inward identifying emergent problems as well as taking steps to address them). Solar City as well as other rooftop installers tried to fence that this movement represented vested interests resisting disruption of their work organisation models, but this was disingenuous - inward exercise Buffett was simply insisting on applying what was economically logical, rational, sustainable, as well as fair. Someone has to pay for the grid, as well as at that topographic point is no audio economical rational why specially heavy grid-users, such every bit roof-top solar owners - ought to live exempt from paying.
An unbundling of billing would devastate the value suggestion SolarCity had promised its customers (and locked them into for twenty years). Instead of saving them money, they would destination upwards having to pay considerably to a greater extent than for their electricity, and for a long menstruum of time. They would have got to pay grid access charges equivalent to an average of say 8c per kWh, as well as and so pay 13-17c per kWh for their wholesale electricity, instead of 5-8c on-grid. Their electricity bills would in all probability destination upwards rising some 50%.
Furthermore, whatever removal of internet metering would live fifty-fifty to a greater extent than disastrous, every bit solar customers would have got to pay 13-17c per kWh to SolarCity on solar generated yesteryear the panels, but would only have wholesale prices of 5-8c per kWh if they did non contemporaneously usage the liberate energy as well as sold dorsum onto the grid. This would multiply bills farther still, as well as would require customers pay for a meaning as well as costly installation of in-home batteries - an additional cost non previously budgeted for. And that cost would have got to live borne simply to cap excess electricity mouth costs at 50% for twenty years.
A client revolt was quite likely, if non massive lawsuits from customers who felt they had been mislead into signing long term contracts with fake as well as misleading advertising, with a pathetic understanding of the risks. To avoid this liability, as well as non to cite a meaning PR fallout that could harm the Musk halo, huge subsidies would have got to live provided yesteryear SolarCity, including renegotiating lease rates, and/or paying for the installation of battery packs. However, this burden would live far greater than SolarCity could afford, as well as would plough their installed base of operations from an property into a major liability. Bankruptcy inward this scenario would seem inevitable.
Furthermore, if those problems weren't meaning enough, the cost of installations had started to grade off, as well as fifty-fifty tick upwards slightly. What had happened to the 'Moore's Law' refuse curvature inward solar prices the solar bulls had enthusiastically preached of? The number was 'balance of scheme costs'. Wafer prices have got declined a lot, but the cost of glass, concrete, as well as installation labour, it turns out, have got not, as well as these had move the largest costs involved inward installing a system. All-in scheme costs looked to have got bottomed out, as well as at levels no where close depression plenty for solar to live competitive with on-grid wholesale pricing. Worse, clear evidence was emerging that utility-scale solar was much cheaper as well as to a greater extent than efficient than rooftop solar, every bit at that topographic point were much greater economies of scale with installation costs; greater locational flexibility; as well as the powerfulness to install panels inward a fashion able to dynamically adjust their angle to the Sun throughout the day, increasing insolation. All of these factors, viewed together, suggested that the rooftop solar work organisation representative was good as well as genuinely busted.
I was surprised Musk was seemingly unaware of these structural flaws inward the work organisation model, as well as for the foremost time, I began to uncertainty Musk's judgement. He seemed to have got been so blinded yesteryear his sci-fi vision for what the the world could be, that he had overlooked economical realities.
Musk does, however, appear to have got lastly woken upwards to these problems, as well as his solution was to have got Tesla launch a takeover of SolarCity in belatedly 2016. This coincided also - in all probability non coincidentally - with Trump's election - someone who had promised to withdraw the U.S. from the Paris Accords, as well as hence was unlikely to perpetuate of import solar subsidies as well as internet metering policies. Musk's epiphany was never publicly acknowledged, with the motivation for the takeout instead obfuscated with mouth of 'no brainer' synergies betwixt the 2 companies (despite those synergies existence far from self-explanatory). However, tellingly, his blood brother Kimbal who had been previously running Solar City for many years, as well as which Musk had previously lathered praise on as well as said "executed brilliantly", was asked to measurement down.
The truthful motivation for the takeout, I believe, is that Musk realised that Solar City was on the verge of fiscal catastrophe. Changing regulations (particularly given Trump's hostility to climate modify policies) as well as unbundling billing practices was probable to hateful that the companionship was going to demand to provide massive subsidies/compensation to its customers (or allow them walk away from existing contracts) to avoid both lawsuits as well as a a PR disaster, as well as this was a fiscal burden the companionship could ill-afford. Furthermore, such a world blow-up of i of Musk's companies could live highly damaging to his reputation as well as credibility, potentially impacting Tesla's powerfulness to enhance much-needed funding every bit well. It was preferable to absorb SolarCity's problems into the larger Tesla entity, where the losses/evidence as well as PR-fallout could live quietly buried, as well as world scrutiny avoided.
Was this unethical? Musk's actions are sure solely understandable. He had started out with the best of intentions, but had realised at that topographic point were serious unanticipated problems brewing. He was already inward over his caput as well as the stakes were high, both for Musk personally, as well as for other stakeholders such every bit customers as well as employees. It would no uncertainty live a real hard province of affairs to detect oneself inward - every bit a shareholder, yous tin simply sell as well as movement on, but it's non so unproblematic when yous are already committed as well as 'all in'. It is thence solely understandable Musk behaved the agency he did. It seemed similar the best solution for all (except - that is - Tesla shareholders). But understandable does non hateful excusable.
Tesla
It is with this context inward heed that I flora Musk's recent annunciation of an intention to accept Tesla private intriguing. It is real possible Musk's want to privatise Tesla stems from a similar motivation to his want to absorb SolarCity into Telsa - namely a belated recognition that he has overlooked a structural flaw inward the work organisation model that has laid the companionship on an inevitable collision class with reality, as well as a want to retreat from the scrutiny of world markets. This is specially the representative given growing signs fiscal markets could live rolling over as well as monetary policy is starting to tighten.
Realising he is potentially inward over his head, as well as the incredibly high stakes involved, he may live looking for solutions that minimises the adventure of a serious blow up. The extent of Tesla's internal problems are silent unclear, as well as are unlikely to live every bit severe every bit SolarCity's (although, allow it live remembered, SolarCity's problems are forthwith Tesla's problems), but it is at to the lowest degree possible Musk has had a similar 'a-ha' 2nd inward honor of Tesla every bit he did for SolarCity.
Much has been made of the fast measurement of executive departures at Tesla. I don't consider that a smoking gun (although it could seek out to be). Seldom mentioned is that Amazon also suffered a stunning charge per unit of measurement of executive departures during 2000-02 every bit good (albeit that was also a dicey fourth dimension for Amazon). Like Bezos, Musk is no uncertainty an intolerably hard mortal to piece of work for - non everyone has a want to piece of work 120 hours weeks as well as strive for almost impossible-to-deliver outcomes, twelvemonth afterwards twelvemonth afterwards year. Burnout is quite likely. However, it does advise at to the lowest degree the possibility of deeper problems.
One number could live that Musk has realised that it is simply non going to live possible to make the putatively mass-market Model three profitably as well as inward volume at the promised US$35k toll tag - at to the lowest degree non inward the foreseeable future. The companionship overlooked its access to battery raw materials every bit a potential issue, as well as the toll of key battery inputs such every bit cobalt has lately skyrocketed. Supply is short, as well as Tesla's has non locked inward whatever long term provide contracts. Executing on the manufacturing ramp-up has also proven far to a greater extent than complicated than previously expected.
Perhaps fifty-fifty to a greater extent than ominously, a potentially major work is that Musk's electrical vehicle (EV) PR offensive has been arguably besides successful, such that governments all roughly the the world are forthwith making EV sales penetration targets mandatory for automakers (notably inward Europe as well as China). This is a potentially large work for Tesla, because if regulatory mandates are besides aggressive relative to underlying organic client demand (at economical prices), traditional automakers - almost all of whom are investing heavily inward EV roll-outs - volition have got to sell them at a loss to comply with regulatory mandates, as well as subsidise the losses with much to a greater extent than profitable ICE vehicles. Telsa lacks internal-combustion models, as well as hence volition have got to compete with efficient, battle-hardened global automotive companies with considerable fiscal resources, who are existence forced into selling EVs at a loss. It would live an unenviable seat to live inward to say the to the lowest degree - specially if the companionship continues to human face upwards serious internal operational issues and/or less forgiving fiscal markets.
Tesla has also taken on a number of fiscal commitments, including gratuitous recharging for life at its supercharger network, as well as client buyback warranties on sure cars, as well as it also remains responsible for Solar City's considerable fiscal obligations. It is unclear how burdensome these volition live for the company. And at that topographic point may also live other issues that nosotros are non yet aware of.
Some of Musk's actions this twelvemonth betray increasingly frayed nerves - something that is understandable given how much is at stake for Musk. His Apr Fool's tweat that Tesla had declared bankruptcy was specially bizarre. In my interpretation, Musk may good have got been - consciously or unconsciously - attempting to 'reverse psychology' the market: he wanted people to conclude if Musk were really genuinely concerned nigh bankruptcy, at that topographic point is no agency he would joke nigh it similar that. That was my immediate reaction - I worried that Musk mightiness really live harbouring deep anxieties nigh the deteriorating dry soil of Tesla's fiscal health. His exasperated responses to analyst questions on the company's earnings conference telephone phone a few months back, which were widely condemned, were some other sign of a strung-out private nether an intense amount of stress.
So what benefits would a privatised Tesla have got for Musk? It would serve to purchase the companionship to a greater extent than time, capital, as well as privacy to endeavor to solve its problems, field allowing major shareholders to proceed to command the valuation. As I've discussed inward yesteryear spider web log articles, the existent argue at that topographic point have got been so few IPOs of loss-making tech unicorns is that it democratises the toll uncovering process, as well as a lot of these private-market unicorn valuations volition non withstand the scrutiny of world markets, and promoters know it. Privatising the companionship volition allow Tesla to 'bury the losses' inward much the agency SolarCity's losses have got been buried inside Tesla, as well as avoid upper-case missive of the alphabet marketplace as well as media scrutiny.
If Tesla remains listed as well as its fiscal problems deepen as well as investors start to lose confidence - specially if this occurred during a major marketplace sell-off - Tesla's part toll could collapse, as well as if it did, the companionship could rapidly detect itself unable to enhance plenty upper-case missive of the alphabet to live on and/or come across its aspirations. Musk's credibility would also accept a huge hit, which mightiness imperil SpaceX's fundraising potential every bit well. That classify of blow-up scenario is less probable to hap if the companionship is private - existing shareholders are able to prop upwards the valuation as well as proceed to fund it - provided they have got the money - sustaining newspaper profits as well as the illusion that at that topographic point has been no degradation inward value.
It is also possible, however, that I am reading besides much into this, as well as that the movement is instead purely opportunistic. It is possible Musk has simply tired of existence 'kept on a fiscal leash' yesteryear world markets as well as the constant media harassment, field at the same time, at that topographic point remains a huge amount of dumb money out at that topographic point at the 2nd intent on chasing yesteryear heady newspaper profits inward the VC-funded tech space, that is ripe for the plucking. The Saudi's inward particular, which Musk have got been talking to, have got repeatedly demonstrated a tremendous ineptitude when it comes to investing their majestic fortunes, as well as have got been duped fourth dimension as well as in i trial to a greater extent than into buying the incorrect matter at the incorrect time. Musk mightiness simply live taking payoff of this opportunity.
But the timing as well as fashion of this mooted takeout (announcing it over Twitter) advise to me it is also precisely every bit probable an impetuous deed of growing desperation. Time volition tell.
Conclusion
I really want Musk to succeed. I admire the guy as well as his high-minded as well as bold ambitions. I'm rooting for him. Someone that hard working, with an powerfulness to inspire both customers as well as employees, who has such a long history of defying the odds, should never live underestimated. Tesla has had a hard fourth dimension ascending the manufacturing learning curve, but whatever organisation that is every bit innovative every bit Tesla volition - provided it tin live on long plenty - in all probability eventually succeed (provided the work organisation model is non structurally flawed). I volition proceed to root for Musk, as well as wishing him the best of luck (which I'm sure he volition need), but I most sure volition non live investing inward whatever of his companies.
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