Tesla's Bold Vision to Vertically Integrate Clean Energy

A crowd recently gathered on the set of the long-running television show "Desperate Housewives" to hear about Tesla's new solar roof tiles. Tesla CEO Elon Musk is working to create a roofing product that is more durable and insulative than a traditional roof, yet with a lower installed cost and the added value of solar electricity.

The textured glass roof tiles conceal the solar cells and come in a variety of styles and colors, potentially making them more attractive than asphalt shingles. Musk then announced on Friday that Tesla will likely offer solar roofs on future cars as an option for running the defroster and generating energy.

Some Tesla critics scoffed at the roof tile announcement, asking why a car company wants to manufacture roofing products. Musk is the chairman and the largest investor in both Tesla and SolarCity. Given Tesla's $2.6 billion proposed merger with SolarCity, the announcement seems timely. Tesla and SolarCity shareholders will vote on the merger on Nov. 17, and some are having trouble understanding the advantages of a solar company and an automaker joining forces.

To proponents, Musk is a visionary who has a unique way of conducting business. The 80 percent vertical integration of Tesla highlights this point. While most other auto companies use lean manufacturing techniques, Tesla strives to manufacture most of its own components. But the company is struggling to ramp up production of its electric vehicles and is often criticized for missing production targets. Tesla is in the unique position of having products with a much higher demand than it anticipated.

SolarCity is also becoming more vertically integrated by manufacturing high-efficiency solar panels. With the five-year extension of the investment tax credit for residential and commercial solar systems, demand will certainly be strong for solar panels in the upcoming years. And Tesla's 'gigafactory' uses the most advanced solar manufacturing equipment and relies heavily on robotics, helping to keep manufacturing costs down.

“One of the reasons we can do this in North America as opposed to Asia is that we can be cost-competitive because of our equipment knowledge and we can design the plant in such a way that it can be very, very efficient,” says Steve James, Tesla senior vice president of operations.

Tesla is dedicated to producing products for the clean-energy ecosystem. Within this context, the merger with SolarCity makes sense. The company will then offer products in solar electricity generation, energy storage, and electric vehicles and is consistent with the vision of vertical integration.

If Tesla can produce a solar roof tile that is cost-effective, attractive and able to keep up with demand, it has the potential to take solar energy production to the next level. The opportunity to cross-sell solar to electric vehicle owners seems like a natural fit. Selling an attractive residential solar product fits with the Tesla brand of sophistication, innovation and performance.

Elon Musk is certainly a risk taker, a dreamer and an innovator. It will be fascinating to see the results he produces in the upcoming years.

Image courtesy of Tesla Motors (press use only)