Elon Musk in Hong Kong on Jan. 26.
Tesla Motors is churning through the news cycle again—this week, it reported its quarterly results and plans to massively ramp up production to meet the huge requirement for the next-generation Model 3. Even as the company loses money, it continues to invest in order to build production capacity and gain scale. And its stock, despite some volatility, remains buoyant.
Part of that has actually to do along with the faith investors have actually in the financial engineering skills of founder Elon Musk, that owns 27 percent of the company. As the Wall Street Journal reported last week, Musk has actually used his personal funds, borrowing capacity, and regulate of companies to bolster the finances of Tesla and SolarCity, the solar-power company run by his cousins in which he owns a 22 percent stake.
Skeptics of Musk’s various enterprises—the Muskonomy, I call it—frequently disregard the degree to which Musk is a financial host unto himself. What’s more, it’s becoming clear that the companies he effectively controls—Tesla, SolarCity, and SpaceX—function in some methods love a Japanese keiretsu, a group of allied companies along with interlocking business relationships. Such arrangements are rarely seen in the U.S. While Musk is the connective tissue, these firms support one an additional at the corporate degree in essential ways.
For manufacturing businesses such as SolarCity and Tesla, scale is vital. Ramping up the volume of production gives you much better bargaining power on supplies and labor, lowers unit costs, and enables the spread of technology. Scale allows you to make the most of your expensive investments in capital. If you’ve built a big factory, you need to run three shifts about the clock, not merely eight hours a day.
Musk’s companies function in some methods love a Japanese keiretsu, a group of allied companies along with interlocking business relationships.
In order to Grab scale, SolarCity calls for numerous your hard earned cash upfront. The company spends a lot to build, market, and install the solar-panel units it leases to homeowners and businesses, and it has actually to wait to collect the lease payments over time. Over the years, it has actually raised funds from banks, institutional investors, and various other entities that have actually your hard earned cash sitting about that can easily be tied up for a year or so—including … SpaceX.
SpaceX has actually a terrific business model. It gets its customers—including the U.S. government—to make upfront payments to finance and reserve space on upcoming satellite launches. As a result, SpaceX frequently has actually cash—tens or even hundreds of millions of dollars—sitting on its balance sheet that it may not reason for a year or two. Most companies put this your hard earned cash to job in ultrasafe short-term investments, such as government bonds and cash. Yet last year, SpaceX used $165 million to buy bonds issued by SolarCity that are backed by solar leases. The move is an unorthodox one for a company: The bonds aren’t actually traded, and SpaceX bought instruments that don’t pay off for a year. On the various other hand, SolarCity bonds pay way, way much more compared to government bonds—4.4 percent interest for a one-year investment. This spring, SpaceX bought an additional $90 million in SolarCity bonds, which allowed SolarCity to pay off the $90 million in bonds SpaceX had purchased in 2015. Both parties benefit: SolarCity gets capital on relatively favorable terms, and the space company gets comparatively, um, astronomical returns.
Next, think of the symbiosis between SolarCity and Tesla. As solar grows and matures, it enhances an issue for users and utility systems: Solar panels develop a lot of electricity throughout the day, once requirement frequently isn’t that higher for residential use, then develop little or nothing in the late afternoon or evening, once residential requirement rises. This mismatch is a barrier to expansion. Increasingly, solar companies are finding that pairing solar generation along with electricity storage is a terrific solution: You charge up the batteries throughout the day along with excess power generated by the sun and discharge them at night.
SolarCity is embracing the solar-plus-storage model at both the wholesale and retail level. It struck a potentially revolutionary deal along with the Kauai Island Utility Cooperative in Hawaii, under which it will certainly build a huge solar field on 50 acres. Yet rather than feeding the power in to the grid instantly, it will certainly use the panels to charge up a giant battery array along with 52 megawatt-hours of capacity. And every day, between 5 and 10 p.m., those batteries will certainly function as a power plant, injecting clean energy in to the grid—all of for much less compared to the utility would certainly pay for electricity generated by burning fossil fuels. On the retail level, SolarCity has actually rolled out a similar product for residence users in Hawaii and elsewhere: Pair the company’s solar panels along with a battery pack, which can easily be charged throughout the day and tapped at night.
Now, SolarCity could buy the battery packs from a range of suppliers. Yet it has actually selected to buy them from … Tesla.
SolarCity is most likely getting a fairly good rate on the batteries, and it’ll be simple for SolarCity’s executives to hold their counterparts at Tesla accountable for delivering quality products. Yet this arrangement is additionally a boon to Tesla.
Tesla craves scale in the same method that SolarCity does. Remember, Tesla makes the battery packs that power its vehicles and is constructing a giant factory in Nevada, the Gigafactory, to build much more of them. It is pursuing a road of vertical integration. As its auto production ramps up by a factor of five, Tesla must guarantee it has actually an adequate supply and wishes to capture the profits that may have actually accrued to a supplier. What’s more, anything that boosts the volume of orders of batteries—whether those orders are from Tesla itself or SolarCity—helps bring down the unit cost. So SolarCity, which enhances funds from SpaceX, is providing a essential stream of revenues outside the auto industry for Tesla and is aiding to raise volume.
In theory, that need to tips lower the cost of developing Teslas, thus boosting sales. And, ultimately, greater sales of Teslas can easily lead to much more potential requirement for … SolarCity. Tesla—and electric cars generally—offer drivers the ability to break the link between mobility and combustion. Yet Tesla owners that additionally have actually rooftop solar panels and battery storage can easily break the link between electricity production and emissions. Several of the hundreds of thousands of individuals that believe it is cool to buy Tesla vehicles might additionally believe it will certainly be cool to “fuel” their cars along with solar-plus-storage units sold by SolarCity.
So what’s not to like? Clearly, these arrangements between related companies can easily be symbiotic and synergistic. Yet they additionally pose potential conflicts. In the U.S. system, shareholders are supposed to be the master. And it’s not constantly clear which shareholders are getting the much better deal in these intra-Muskonomy transactions. Just what if there’s higher requirement for battery packs, and various other solar companies are willing to pay much more compared to SolarCity for the output of the Gigafactory? It would certainly make much more sense financially for Tesla to serve those various other customers first. Yet doing so would certainly love trigger issues for SolarCity.
In addition, these types of interconnections can easily tips spread issues at one company in to another. If Tesla were to have actually a serious problem along with battery production, that could lead to dire consequences for SolarCity, which would certainly in turn have actually difficultly making the payments on the bonds that SpaceX holds. So far these arrangements are working actually well. They constantly do—until they don’t.