Tesla’s Car Business Is Booming. Unfortunately, It’s Not Just a Car Company.

A view of Tesla’s Gigafactory 2 solar panel plant in Buffalo, New York, on Wednesday, December 26, 2018. Photo: Andrew Harrer/Bloomberg via Getty Images

If you looked at Tesla’s earnings report for the fourth quarter of 2018 and focused exclusively on its auto business, you’d have reasons to be very optimistic about the company’s fortunes. In 2018, Tesla sold almost as many cars as it did in all its previous years combined. Tesla’s Model 3, the first of its cars that is even remotely affordable for the average car buyer, is now the best-selling premium vehicle in the U.S. Tesla dominates the electric vehicle (EV) market in the U.S., moving 80 percent of all EVs sold last year.

Looking to 2019, Tesla expects to manufacture at least 50 percent more vehicles than it did in 2018. Tesla has overestimated its manufacturing capabilities in the past, but if Tesla can hit a 50 percent increase, it would manufacture nearly 368,000 cars in 2019. Tesla also expects to finally start selling the Model 3 at its originally announced price of $35,000 (right now, the cheapest Model 3 you can get is $45,000 with an extended-range battery), and has just delivered the first Model 3s to Europe. Tesla won’t be giving Toyota or Volkswagen a run for their money on vehicles sold anytime soon, but thanks to the Model 3 you could describe Tesla as a small but growing mass-market auto manufacturer, rather than a niche luxury auto company.

The problem for Tesla is that it doesn’t just sell electric vehicles. In 2016, Tesla bought solar energy company SolarCity for $2.6 billion, also taking on $3 billion in SolarCity debt. The deal raised a few eyebrows; SolarCity was founded in 2006 by one of Elon Musk’s cousins and Musk owned a 22 percent stake in the company and was chairman of the board.

SolarCity did fit broadly into Tesla’s vision of transportation powered by clean electric power. But SolarCity was struggling: it was falling far behind its own growth targets, taking on more debt at increasing interest rates, and watching as sales and marketing costs ballooned. SolarCity, which in 2013 had been the market leader in residential solar installations, was quickly losing market share as other start-ups began to undercut its prices.

Which meant that from the moment the deal was announced, it looked to many like a bailout, and not a strategic acquisition of a company that Musk just happened to have close personal and financial ties to. On the day the deal was finalized, shares of SolarCity soared, while shares of Tesla tanked. Shareholders, led by pension funds that had invested in Tesla, sued the company over the SolarCity acquisition, claiming that Musk had influenced the board (which was already largely stacked with Musk’s friends and family) into buying SolarCity. And in the years since Tesla has acquired the company, there have been further suggestions that all is not well at SolarCity. Three whistleblowers are suing the company and Tesla, claiming they were fired after reporting that SolarCity was falsifying sales numbers in order to drive up its valuation before its sale.

Then there’s the Gigafactory 2 in Buffalo, New York. The factory, founded by SolarCity well before Tesla acquired the company, was the centerpiece of the “Buffalo Billion” state project led by Governor Andrew Cuomo (a project that has already led to nine indictments and four people being found guilty of bid rigging). Gigafactory 2 was given $750 million in state subsidies for construction, purchasing equipment, and to cover additional costs. The plan was that the plant would produce photovoltaic cells, as well as the shingles for Tesla’s “Solar Roof” project, but it has been plagued by production problems. Panasonic, which had planned to provide components for the factory, found that Tesla simply wasn’t prepared to start producing, and had to seek other buyers.

A report by Buffalo station WIVB News on Monday painted an even grimmer picture of a factory that was largely non-operational over long intervals. “Some weeks we produced enough solar modules for zero homes and probably the best I saw was maybe four homes in a week,” said one former employee.

In November, Tesla allowed the media inside its Buffalo factory for the first time. Employees told WIVB that Tesla turned the factory into a Potemkin village, building walls to hide unused production equipment and not allowing the media to bring its own cameras inside, instead providing footage to news outlets.

“It was all fabricated for show,” said a former employee. “There was no actual production that day, so some of the teams in their specific area were instructed to make sure they looked busy and they actually were working on the same module over and over again.”

All of this is reflected in Tesla’s earnings reports. Its residential solar installations have declined nearly every quarter since the SolarCity acquisition in 2016. Tesla has attempted to staunch the bleeding by cutting the head count at the factory: 9 percent of its workforce was cut in June 2018 and another 8 percent in December 2018. After the midsummer layoffs, some analysts thought Tesla was attempting to shut down its solar energy business on the sly — which may be the right move for the company.

But Tesla continues to stand by its solar business, saying the slowdown in residential installations has all been part of a larger strategy. “We plan to ramp up the production of Solar Roof with significantly improved manufacturing capabilities during 2019, based on the design iterations and testing underway,” it wrote in its earnings report for Q4. “In the meantime, we are continuing to install Solar Roofs at a slow pace to gather further learnings from our design changes, as well as about the viability of our installation processes by implementing them in areas around the U.S. that are experiencing inclement weather.”

There are other reasons for Tesla investors to worry, as well. On Tuesday, Tesla acquired Maxwell Technologies, a battery company researching high-density ultracapacitors, a personal fascination of Elon Musk’s (and a tech another company in the space has called “R&D hell”). It still has $920 million in convertible bond debt due in March, and in order to not be forced to immediately pay investors nearly $1 billion in cash and significantly deplete its cash on hand, Tesla would need its stock to be trading at $359.90 per share or higher. In 2018, Tesla’s stock traded above $359.90 for only very, very brief periods. In 2019, it has yet to trade for higher than $314. And Tesla’s newest CFO, Deepak Ahuja, announced plans to leave the company just one day after its Q4 earnings were reported, after a little under two years on job, as Tesla continues to burn through CFOs and other execs at a rapid pace.

The Model 3 is a tremendously fun car to drive. Consumer are eager to buy it; one of biggest struggles Tesla faced in 2018 was building enough cars to keep up with demand, which in the grand scheme of things is a very good problem to have. But under Elon Musk’s leadership, Tesla has taken on burdens the company never should have been saddled with. Worse, in every earnings report, Tesla has made its solar energy production part of its growth narrative. Investors have put a tremendous (some would say irrational) amount of faith in the company, based mainly on promise of the growth of Tesla’s auto business. But investors can’t ignore the danger signs around Tesla’s solar energy production business forever. Tesla has yet to release its 10-K financial statement for 2018, which will provide investors with a much more thorough look at how its solar business is doing. It’s highly probable that when that report drops, Tesla’s solar business will look even uglier than it already does.

Musk seems entirely sincere in his desire to combat climate change through electric vehicles. And yet his SolarCity acquisition — unless things turn around very, very quickly in 2019 — dims Tesla’s prospects considerably. Tesla has proven that the future of the automobile is electric. But with other auto manufacturers quickly picking up speed on their own EV efforts, it may not be Tesla that brings the electric vehicle to the masses.

Update, 2/12/19: This article has been updated to reflect the length of time CFO Deepak Ahuja was CFO at Tesla. We previously stated his tenure was five months. Ahuja was CFO from March 2017 until announcing his plan to leave Tesla in January 2019.

Tesla’s Solar Power Business May Stall Out Its Car Ambitions