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Tesla and SolarCity: Straddling the modular/integrated divide

A merger is the result of two entities in the same business joining forces. It is usually justified through “synergy”, a euphemism for removing redundancies from their unity. Arithmetically, the desired outcome is that the resulting organization should be smaller than the individual parts (which is desired if the available market is shrinking.)

An Integration is the answer to the question of “Why two companies in different businesses are better off together.” Arithmetically, it suggests that the proposed sum is greater than the individual parts.

The spin-off is the response to a situation where one company houses two unrelated businesses.

For completeness, we can define an acquisition as the purchase of an unequal entity in order to improve the value of the acquirer.

The logic of any of these is that there is a disequilibrium which offers an opportunity to those who can exploit it. What the analysis fundamentally assumes is that the status quo of firm boundaries is not optimal.

Much of the measurement of the balance in the equations assumes that the overall industry is stable and that the problems (technical or market) are largely understood and that there is no learning that needs to happen. Boundaries need to be re-drawn because they are imperfect. Boundaries may have grown imperfect for many reasons: founders/owners were separate, markets and technologies evolve at different rates, resources are inflexible, processes are entrenched and values are outdated.

However, all this arithmetic can be safely thrown out of the window if there is a new industry in the making. If there is no balance to begin with because there is an entirely new problem being posited. That is, not only do we not know the answers to technical or market questions, we don’t even know what the right questions are.

When looking at the history of industry creation, the breakthroughs were always about the discovery of the right questions to ask. The early automobile industry was a scramble for solutions to a huge number of technical and market questions: technology, business model, infrastructure, usability, customer segmentation. From 1886 until 1915 there were many grand experiments with thousands of automobile firms springing up.[1]

Early computing, internet, mobile and consumer durables industries went through similar periods of grand experimentation. But the breakthroughs occurred when someone was able to ask (and subsequently answer) a question that nobody had asked before.

Henry Ford asked, “What would enable everyone to have a car”. The result was  not a better car but a better production system.

Steve Jobs asked, “What would enable everyone to have a computer”. The result was not a faster computer, but a more approachable computer.

Akio Morita asked, “What would enable young people to have their own music”. The result was not a better audio quality but a smaller audio player.

Kiichiro Toyoda asked, “How can a car be built without faults”. The result was not a bigger factory but many smaller ones.

Jeff Bezos asked, “What would cause people to do their shopping online”. The result was not a lot of unique sites but one infinite one coupled to a logistics and computing service.

Having great taste in questions turns out to be the principal quality of the successful industrialist: The creation of economic value and power well beyond the boundary of the firm itself.

When the correct question is asked, resources can be efficiently marshaled to answer it. The wrong or incomplete question leads to inefficient resource allocation. And so the architecture of the solution can be built. If the new problem statement is a technical one then an integrated implementation is required. If the new question identifies non-consumption then a modular implementation is required. Each of these approaches suggests different customer sequencing strategies and different application of resources and processes.

There is no right architecture for industry creation. What matters is asking the right question.

So is Elon Musk, today, asking the right question?

The presumptive question seems to be “What would enable everyone to have an electric car?” This is not a great question if it is seen as a continuation of other such questions: “What would enable everyone to have a safe car” or “an efficient car” or “a reliable car” or “a fast car” or “a second car” or “a fashionable car” or “a bigger car”, etc.

These previous questions were answered by introducing sustaining improvements or modules to the existing production systems. The following graph shows the speed of adoption of various automobile technologies. Hundreds more were introduced and all could be shown to have roughly parallel adoption curves. None of these introductions changed the structure of the industry.[2].

Screen Shot 2016-06-23 at 2.01.43 PM

To make electric cars therefore all one has to do is to reduce the cost of electric components for carmakers. They certainly make lots of cars and can make lots more. So why not give them the economic incentives in the form of components to build electric ones?[3]

Tesla seems to be an attempt to incentivize carmakers to build electric cars by setting an example. Maybe it will succeed but this is not a reliable or even viable way to build a defensible business. Envy generates the wrong competitive response, usually. If that business cannot be defended then it will perish and so perhaps will the acceleration.

And so we come to the question of whether the defensibility of Tesla relies more on integration. By adding ancillary businesses, can it sustain itself and perhaps eventually pivot away from a commoditizing business (car making)?

Through the addition of a business building batteries and then a business selling home power storage and now adding a business selling home solar power provisioning, the car business becomes a module in a larger system.

So is Musk effectively asking “How to accelerate a global transition away from hydrocarbon energy?”

This gets more interesting as a question. The production, storage and use of energy have been modularized over a century and a half from the wood era through the hydrocarbon era. Perhaps the renewable era will be characterized by integration and de-networking or edge-enabled production. If so the energy problem needs to be solved through a re-integration and a new set of business models. Production and consumption can be coupled and thus production can be decentralized.

But is the answer Tesla+SolarCity? An integrated approach is appropriate if the technical problems are very difficult and cannot be solved through collaboration across firm boundaries and if buyers are eager for great leaps in performance. Join forces if introducing a new measure of performance, solving an unmet job to be done.

A modular approach is appropriate if the problem is one of scale and reach. That is, remain separate if the problems are with finding and building new markets (competing against non-consumption) and if customers are eager for convenience or conformance while being largely satisfied with performance.

This is the crucial dichotomy: The business architecture needs to match the point of time in the evolution of the prevailing measure of performance. Consider this proposed integration an experiment to determine what performance we should measure and thus where we really are.

Notes:
  1. Estimated 3000 world-wide []
  2. The industry changed through revolutions in production systems []
  3. Incidentally, hybrid cars are slow to be adopted because the modules are not available as such. Each manufacturer is struggling to match Toyota’s solution through internal development—a decade-long process. []
  • Luis Alejandro Masanti

    I do not know for sure, but I read that ‘car batteries’ lost its ‘charge/weight’ ratio after, more or less, two years, making they inefficient for cars.
    So, last year Tesla offered the house battery pack.

    If I buy a Tesla now, what would I do in two years with the batteries?
    Will I have to buy a new pack? What would I do with the old one?

    This is were I see this marriage worthwhile.
    Maybe they will offer me a Car+Home pack or a Car+(2-years-from-now-Home) pack.

    As Apple began last year to ‘sell subscription phones’ (you change it every year) it is posible that at the battery level Tesla will offer something like that.

    As usual, thanks for your clarifying article!

    • Ian Ollmann

      Interesting idea, this recycling of old car batteries into solar storage. Is there an engineering reason to think this is a good idea? Does home use align better with old batteries?

      • Luis Alejandro Masanti

        As far as I know (not too much) the problem is with the relation weight/charge capacity. In the car, this is important because you are ‘carrying’ the batteries; at home, it does not bother.
        I think Testa is offering this kind of service.

    • FlyOffTheWall

      The battery pack in a Tesla should last at least 8 years, and may actually go longer than that. My Tesla Model S is nearly 2 years old, and has lost very little charge capacity.

  • http://www.perspective.pt/ Filipe Araújo Ribeiro

    What if it’s not an acquisition, but a merger instead?

    What if some of the jobs of their customers overlap, and they understood that by providing a integrated approach on the customer experience they could sell better?

    With the SolarCity they are clearly targeting customers who are more aware and conscious about their life on earth. Aren’t they targeting the same customers who have the same emotion jobs when addressing the low-end market of the car industry? If I am going to buy a car, and I want (and can afford) an electric one, why not buying (or rent) a electric power storage too?

    If Elon Musk mission is to accelerate a global transition away from hydrocarbon energy, couldn’t he provide a modular infrastructure on the SolarCity business, and still be integrated from the customer experience point of view? Didn’t he made already some projects open?

    • http://www.asymco.com Horace Dediu

      You can test these questions easily. Just observe the customers and then count the ones which match your criteria.

    • Walt French

      “If Elon Musk mission is to accelerate a global transition away from hydrocarbon energy, …”

      Perhaps his mission might be better stated as to serve (profit from) the transition that is oh-so-much bigger than Tesla (and moonshots).

      His challenge is not unlike what Archos, Creative, Diamond & others faced when Apple jumped into the MP3 player scene—those pioneers quickly disappeared. Except that Toyota, Nissan, BMW and others are ALREADY highly incentivized & even poised to bring their well-known production techniques (and economies of scale). BMW already has announced use of its batteries in a home setting.

      An accelerated transition away from hydrocarbons would involve some new battery, solar or other technology. Not a merged brand.

  • normm

    I thought that Jeff Bezos asked, What would cause people to do all their *book* shopping online? The rest was an outgrowth of this, and a large part of it was the very common Internet Boom idea of giving away a product, and making money in the stock market. They just did it better.

    • Nevermark

      Clearly Bezos’ has been answering a different questions ever since Amazon went beyond selling books to our ancestors. Catch up on some history.

      “They just did it better.” Really? The “just” in that phrase undervalues “better” in qualitative and quantitative terms and overgeneralizes “it”.

      Amazon has done numerous things that other sellers never dreamed of doing, including back end capabilities that have become their own businesses.

    • synthmeister

      From what I have read, Bezos, had the “everything store” in mind from the very beginning. Books simply offered an lucrative entry into that space because:
      1. The publishing industry was used to huge profit margins
      2. The brick and mortar stores had huge inefficiencies in inventory management, rent, wages, etc.

      Bezos saw that once the massive logistics, inventory management and distribution system was set up for books, then he could parlay those systems into selling everything else.

  • Richard Jennings

    Here’s a quote from Musk on disruption:
    “I don’t think we should disrupt things unless it’s…fundamentally better
    for society,” he said. “I’m not really a fan of disruption; I’m just a
    fan of things being better.

    http://www.greentechmedia.com/articles/read/elon-musk-tells-utilities-hes-not-really-a-fan-of-disruption

    For a broader look at the disruption taking place in the energy and transportation sector check out this video from Stanford lecturer Tony Seba:

    • http://www.asymco.com Horace Dediu

      Diffusion, disruption, discontinuity and displacement are different things. It’s important not to use the wrong word because the wrong word suggests you don’t understand what is happening.
      Disruption as defined by Christensen does not apply to either Tesla or the automobile in the period 1900 to 1913.

      • Richard Jennings

        Thanks Horace. Please help me to understand what is happening.

        Christensen describes disruptive innovation as “a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.” I agree that Telsa is not disrupting the automotive market from below. But as we’ve seen with the iPhone, disruptions can happen from above. Or am I missing the boat completely?

        I look at the Tesla strategy from the perspective of Geoffrey Moore’s beach head, or bowling pin model. Become the best in the world and dominate one niche market, and from there attack all the follow-on markets. Tesla has created the best car in the world and is using the battery modules in energy storage products to accelerate the adoption of renewable energy and self-generation by homes and businesses.

        You posed the question “So is Musk effectively asking ‘How to accelerate a global transition away from hydrocarbon energy?'” I think the answer is yes. Solar and storage are key ingredients in the change (disruption?) of the energy space as we transition away from central generation using fossil fuels and move to distributed generation using renewables.

      • Ian Ollmann

        If the EV became cheaper than the ICE version, then it would become disruptive vs. traditional cars, especially if it competed asymmetrically (e.g uber), at least as Christiansen defines disruption.

        However, I personally think Christiansen got only half the story at first, and prefer the Dediu classification with different types of disruption. Webster for example doesn’t recognize Christiansen’s definition, and instead presents the one that has been with us for hundreds of years as most people understand it:

        Disruption – to cause (something) to be unable to continue in the normal way : to interrupt the normal progress or activity of (something)

        The classical meaning for the word would allow for both over and under service disruptions, and I chafe at the notion that we should have to shed some part of the word when the core idea is that the commonly prized part of the product has changed (features price) making it no longer possible for business as usual to continue based on the old value system. Encumbents continue to emphasize the thing that was profitable for them before and cannot embrace the new culture and fail. These things are two sides of the same coin.

      • http://www.asymco.com Horace Dediu

        Disruptions cannot happen from above. What you are describing is diffusion. The processes and competitive dynamics for diffusions are completely opposite to those of disruption. The main difference between the two phenomena is how competition responds. Disruption is largely unperceived and ignored while diffusion is a matter that draws great attention and response in kind.

  • Richard Jennings

    Bloomberg describes the convergence of cheap solar and the falling cost of battery storage as complimentary technologies that reinforce each other.
    http://www.bloomberg.com/view/articles/2015-04-08/clean-energy-revolution-is-way-ahead-of-schedule
    “So instead of thinking of solar and batteries as two independent things, we should think of them as one single unified technology package. Solar-plus-batteries is set to begin a dramatic transformation of human civilization. The transformation has already begun, but will really pick up steam during the next decade. That is great news, because cheap energy powers our economy, and because clean energy will help stop climate change.”

    In the developed world we take for electricity granted, but in the third world countries I think we’ll see a dramatic change in living status as cheap off-grid power becomes available. Think of the impact and uptake of cell phones to people who never had landlines, and smartphones to people who never had computers.

    Here’s a video illustrating the impact refrigeration has to milk production in rural India.

  • Joris75

    Great article!

    I suppose a right question is: “How many batteries are needed to allow a solar panel to provide stable power 24/7, 365 days per year?”

    The answer is “too many, so you’ll remain stuck with burning fossil fuels.”

    This is not a question of business models or technological development. It’s a question of math and physics. 🙁

    • http://www.asymco.com Horace Dediu

      These calculations will not enlighten you.

      • Energy

        Residential solar + energy storage is not as straight-forward as one may think. Just follow the logic:

        – Daily solar insolation varies across the year (more in summer, less in winter). A solar + storage system must be sized to produce enough electricity to serve the residential load on the shortest/darkest/cloudiest/coldest day of the year.

        – By definition, this means that for most days of the year, there will be excess solar electricity that needs to be sold back onto the grid.

        – In order to sell the electricity, the residential dwelling must be connected to a local distribution grid.

        – Without that line, the customer can’t sell excess power back into the
        grid and has to oversize their PV & storage solution to the point
        where it would never make economic sense.

        – Somebody has to pay for that
        line, and just because you’re self-generating and storing some energy,
        if u want a line going to your house, the utility will make sure you end up paying for that service one way or another.

        – Whether you consume 1 kWh or 20 kWh per day, it’s generally a fairly fixed cost the utility pays to maintain that line for you. That cost is currently passed onto consumers as a bundled rate; but if you stop buying electricity from the utility, then they’ll simply have to unbundle the rate and charge you for transmission & distribution.

        – Hint: it won’t be cheap. Think of it as paying your local cable TV provider a basic $39.99 per month just for service, before you get any channels. The alternative is you don’t use their lines and you can’t buy or sell power from the grid, you’re totally on your own. In CA, the actual cost to have a power line run to your house is not too far off from ~$40 per month. In most cases, the true cost is hidden through a maze of accepted rates that are negotiated by the utility & public utilities commission.

        – The bottom line is this: to assume that utilities won’t charge self-generating residential customers a distribution and transmission tariff to use the utility’s lines as a “backup” to absorb excess power would be naive.

        – Business models like SolarCity’s are subject to this type of risk and it can crush a business overnight, as SolarCity found out in Nevada. It’s not a conspiracy of fossil fuel powers that be – it’s just the law of economics and how utilities make money.

      • Tatil_S

        I don’t know if $40 a month is really what it costs to build and maintain a “backup” line, but that fee would just be subtracted from the income coming from the electricity sold to the utility. Otherwise, utility needs to bring that energy from a large power station over long distance transmission lines and congestion on these lines are quite severe in some places. (and they are lossy)

        In any case, once a household has some generation and storage capability, that local line has to be cost competitive with simply buying a diesel generator that can turn itself on automatically.

  • berult

    The crux of a ‘momentous’ event lies in the quantum state of ‘being’…the right question. A complex adaptative system, a given set(1….n) of human ‘beings’…’seduced’ into summational abnegation through integral self-calculus, ‘commensurates’ the right question into the present participle of to ‘be’.

    Had one been enabled, in real time, to query The Renaissance over its peculiar locale within the process of evolution, it would’ve endlessly soliloquized upon its own infinitesimal shadow, as an ethereal doorway to…grounded infinity: “I have been, I was, I am, I shall ever be a simple Florentine seed, sown in a papacy-thin layer of philistine eternity”.

    Elon Musk sparks electric…no doubt! Does Elon Musk quark eclectic…? Hmm, not without Jobs/da Vinci-type gluons minding his lore…!
    berult.

  • Sacto_Joe

    I’m a happy Solar City customer (but I may have gotten a better than average deal), and I’m a supporter of renewable clean energy. But I’m not sure about this deal. To my mind, it smacks of Tesla looking for a way to hedge it’s lithium battery bet. The reality is thet, while lithium ion batteries make sense for mobile applications, it doesn’t make sense for stationary energy storage. For example, lifting a weight up a hill and dropping it to regain energy is far cheaper and more efficient. Yeah, most people can’t do that at their homes or workplaces, but that’s why we have the grid….