Tesla, the company which revolutionized the solar power sector by introducing solar roofing tiles has decided to downsize its residential solar business, the division once known as SolarCity, that it purchased two years ago in a controversial $2.6 billion deal. The latest cuts to the SolarCity, which was founded by Tesla CEO Elon Musk’s cousins include-cutting 9% of its workforce, shutting down a dozen installation facilities in nine states, including California and ending a retail partnership with Home Depot Inc.
Is Tesla cutting back its energy business?
Tesla’s plans to close a dozen solar facilities in nine states triggered doubts in people’s mind whether Tesla is planning to cut back its energy business. The answer is ‘no’ because even after the closures, the organization will still have around 60 solar facilities open. Moreover, its long-term vision for Tesla Energy isn’t changing as it aspires the solar and battery business to become the same size as automotive.
Reason for Tesla Energy’s restructuring
Layoffs and restructuring are pretty common in businesses but Tesla’s decision to cull its solar arm so quickly after planning its expansion has given rise to many speculations as to why Tesla took that route. Here are some possible reasons for Tesla’s decisions:
- Tesla’s financial issues: A lot of money is being spent on Model 3. Also, the Company is unable to meet its demand of 5000 units of electric cars per week due to a combination of factors which include-over reliance on automation, mismanagement, and contractors. Rumor has it that Tesla would have to go to Wall Street for a loan, so to avoid that route, the company decided to use its solar business as a sacrificial lamb.
- Dwindling sales in solar business: In the first quarter of 2018, Tesla installed 76 megawatts of solar systems, which is very less compared to the first quarter of 2016, when it installed at least 200 megawatts of solar systems.
- Tesla’s commitments: Tesla has plans to open a new solar factory with Panasonic in Buffalo, New York. It has also entered an agreement with the state, which requires it to spend $5 billion within 10 years, failing to do which will result in harsh financial penalties and severely hamper its relationship with both Panasonic and the State of New York.
Why Tesla Energy’s restructuring makes sense
An organization’s restructuring brings with it massive turmoil within the organization but in Tesla Energy’s case it looks like the right decision. Here’s why:
- Tesla has significantly reduced solar deployments, cutting down the costs related to client acquisition and increasing margins when Powerwall frameworks, a complement to Tesla’s solar installations is unable to keep pace with the rising demand.
- Tesla is selling a plethora of energy products that complement each other and it is always better to first catch up with backlogs before generating new demand.
Consequences
The decision to layoff approximately 9% of the workforce and shut down close 12 solar residential installation facilities in nine states has not come as a big surprise to many as they saw this coming when Musk posted a tweet regarding his decision to reduce the workforce. So what does it mean for Tesla? Let’s take a look.
- Better financials: The latest moves reflect the company’s commitment to becoming profitable in the second half of 2018.
- Energy business’s growth: Tesla closing some of the residential solar installation facilities may help it deliver a similar gross margin profile in its energy business as its automotive business, which is around 25%.
Despite the major restructuring move, Tesla continues to power several projects across the globe through its energy solutions, including 11,000 projects in Puerto Rico, where it is helping communities damaged by Hurricane Maria to stand on their feet again. We just hope the cuts and closures help refocus the organization’s businesses in a way that will get their finances back on track.
