Published on July 20th, 2020 |
by Paul Fosse
July 20th, 2020 by Paul Fosse
Tesla has been getting a lot a positive attention in the last few weeks as its stock has skyrocketed above a $300 billion market capitalization. (Full disclosure: I’m a Tesla investor, but this article isn’t financial advice or even really about the stock at all.) Many people think Tesla [TSLA] is ridiculously priced as an auto manufacturer, and if that is all it is, I think the stock is way ahead of itself. As we discussed in this recent article, though, Tesla is recognized for its leadership in the battery supply chain, its Supercharger network, its over-the-air software updates, the appeal of its brand, and its pioneering lead in artificial intelligence (AI). Tesla’s innovations in solar are not recognized by either Wall Street or even most Tesla followers as a success.
The story peddled by many who don’t want Tesla to succeed (the short sellers and those about to be disrupted, but I repeat myself) is that Tesla only bought SolarCity to bail out Elon Musk’s cousin’s Peter and Lyndon Rive, who had cofounded the company. The many setbacks in both the Tesla Solar Roof and the traditional solar panel business don’t do a great job of refuting this negative narrative. Is that where the story ends? Or does Tesla have a “secret master plan” that tells us more?
Of course, Tesla has a master plan, but it isn’t so secret. Part 2 was released 4 years ago, and we recently covered some speculation that part 3 will be all about batteries. Part one (released almost 14 years ago) was mostly about cars, but it did include a section about allowing Tesla customers to become energy positive by installing solar panels from SolarCity (which was merged into Tesla a few years ago). Tesla has completed that goal from the original master plan, but it doesn’t seem like the company has the large advantages over its competition that it appears to have in its auto and battery businesses. Tesla seems to be doing approximately the same thing as everyone else in the industry. Well, part 2 of the master plan said this about solar:
“Create a smoothly integrated and beautiful solar-roof-with-battery product that just works, empowering the individual as their own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.”
With that quote in mind, let’s look at what they are doing right now with solar.
Tesla’s Recent Solar Changes
- Solar is now featured prominently on both Tesla’s homepage and on the link you see when you click on anyone’s referral link.
- On its homepage, Tesla addresses the 3 biggest problems with ordering solar by offering clear solutions:
- Process is simple and takes less than 5 minutes to order.
- Best price is guaranteed by one of the most valuable companies in the world.
- Money back guarantee if not satisfied and promise not to spam you in any way.
- Tesla radically simplified its pricing structure to have the same cost per watt for all system sizes. I’ll discuss that later in the article.
- Tesla dramatically increased the referral award to encourage Tesla owners to talk to their friends and family about solar.
How Everyone Else Sells Solar
About a year ago I decided to get solar on my house and I decided to get some quotes from the companies my friends recommended. Most companies use a lot of ads and even door-to-door sales to talk people into buying solar. It reminds me all the people trying to get me to buy a water treatment system when I moved into a new home recently.
I called Sunrun and had them come out to my house, and they used some software to design a system to replace my electricity use*. So, this is the system they (and others) used:
- Advertise to get leads
- Design a system to meet your needs
- Pay a commissioned sales rep to sell you on solar benefits
I didn’t find the sales tactics of the non-Tesla companies bad or dishonest, but they definitely add a lot to the costs of solar. In the Solar Energy Industries Association (SEIA) report last updated June 11, 2020, the “supply chain, overhead and margin” are listed as over half of the average industry costs of $2.83 per installed watt. That is the elephant in the room. As the bank robber Willie Sutton famously said when asked why he robbed banks, “That’s where the money is.”
Even though we are used following all the high-tech reasons that solar costs are declining, if the biggest costs aren’t for the panel, installation, or permitting, but instead are in the sales and marketing, then that is where the innovation has to be to lower them. It seems obvious, but once again it seems to have taken Elon Musk’s famous “first principles” thinking to focus on this opportunity. It also could be that others have thought of this but just don’t have Tesla’s resources to make it happen, and no one with those resources has bought a major solar firm.
But How Can Tesla Sell Small Solar So Cheaply?
The big question in my mind was about how Tesla can sell the small systems for the same price as the large systems. Microeconomics (I taught a college Microeconomics course 30 years ago as a side gig for Rochester Community College) has taught me to think of costs as fixed or variable. I would think that many of the sales, design, and permitting costs of installing solar panels are the same for a small 4 kWh system as an extra large 16 kWh system. So, how can Tesla cover that fixed cost on the small system?
To answer that question, let’s go back to the 1980s and the US auto industry. During that time, Detroit automakers ordered large quantities of parts to optimize cost. All the MBAs (I have an MBA) learned in business school that you plug 3 variables (order costs, holding costs, and demand) into a formula and that gives you the optimal quantity to order. What MBA school forget to teach the managers is that you don’t have to stop there.
Japanese manufacturers, who were the first to use Just In Time techniques to try to minimize inventory, didn’t stop there. This didn’t just save money, but also improved quality, because with tighter feedback loops, you find a quality problem with a part much faster than if you order a batch of a million of them and then find out the whole batch is bad for some reason. If the manufactures just tried to reduce inventory without lowering order costs, it would be a failure, but they found many innovative ways to reduce setup and order costs, and that allowed the Japanese (and later American) companies to greatly reduce inventory, reducing costs and improving quality. This was a major success story in the manufacturing industries at that time. I worked at IBM during this time in its Rochester Manufacturing Plant and was a small part of the team that helped the company win the Malcolm Baldrige National Quality Award in 1990.
So, how does this relate to Tesla? Tesla can lower order costs like the automakers did in the ’80s if it can pull off these steps:
- Use the power of Tesla’s brand, Elon Musk’s Twitter following, and the legions of satisfied Tesla car owners to draw people to the website for less than $500 a system instead of more than $5,000 (my estimate after reading a variety of articles including the SEIA report) it costs for most of the industry to get past that first step.
- Use a very easy-to-use website to convert that interest into an order with a $100 order fee — the perfect balance of ensuring the customer is serious but keeping the cost low enough to make it an impulse buy.
- Deliver a quality installation. Tesla will have some growing pains as it ramps up solar sales, but with proper focus, it will get through those.
- Provide quality support as issues arise. Once again, Tesla will have some growing pains as it learns to deal with many small issues efficiently.
Tesla’s money back guarantee is a classic marketing ploy to close the sale, but if you aren’t committed to quality execution, you are left with 2 bad choices:
- You end up with the high cost of returns and lost sales
- You try to not refund the money and damage your reputation as customers report that you don’t live up to your promises.
All of us Tesla watchers saw how Elon Musk was committed to the Model 3’s success, even as ramping up production and deliveries posed many unexpected challenges. Let’s hope the company is equally committed to ramping up solar panel installations over the next few years. If it is, I’m confident this will be hailed as a major milestone in the solar industry. If not, it will be another misstep. Tesla has shown many times it can change direction quickly, so if this doesn’t work for the crew, they will quickly change tactics to adjust to what they learned during this latest solar push.
If you decide to order Tesla Solar panels or roof, use a friend’s referral code for $100 off either solar panels or a solar roof! If you don’t have any friends with a Tesla, use mine: https://ts.la/paul92237
*The thing that kept me from buying a system was my roof was 17 years old and it adds costs to take off and reattach the panels when you add a new roof (the Tesla Solar roof wasn’t available at that time). It was a good thing I didn’t get the panels because I ended up getting a new roof 6 months later and selling the house soon after that. It is unfortunate, but today, appraisals don’t properly evaluate solar in many areas of the country, so many people don’t get the fair value when they sell their homes with valuable panels working to dramatically lower costs. If you plan to sell your home in the next few years, talk to appraisers in your area to see if this is a problem where you live. Over time, it will be solved, but it may take some time.
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