Why SolarCity Corp Can Become a Dominant Solar Manufacturer

SolarCity Corp's acquisition of solar module manufacturer Silevo earlier this week hit the industry by surprise and it comes with huge risks as well as great opportunity. Yesterday, I highlighted the risks for SolarCity and investors, but today, I want to look at the positive side of the acquisition. There are always two sides of the story, and here's the good one if you're a SolarCity investor.

Can Silevo's modules make SolarCity's installers even more efficient than they are today? Source: SolarCity.

Integration and efficiency will lower costs
SolarCity's acquisitions over the past year have been all about lowering the balance of system costs for solar. Zep Solar makes racking that can standardize installation and integrate with panels, and now modules can be built to integrate with racking and inverters, which Musk alluded to developing in-house. All of this is in an effort to lower the time it takes to install each project.

On the efficiency side, SolarCity is trying to pack more power onto each rooftop, or at least a smaller space on each roof. This will either reduce installation time by requiring fewer panels, or increase power output and increase the number of watts (and potential profit) on each roof.

Source: SolarCity.

The goal is to put more MW of solar up with the same number of installers, and each piece of the supply chain SolarCity brings in-house will lower those costs.

SolarCity doesn't have to be the best
If there's one silver lining in SolarCity's move into module manufacturing, it's that the company doesn't have to be best in breed, it just has to be better than what it could buy for a similar cost on the open market.

The headlines surrounding the Silevo acquisition make it sound like the company will allow SolarCity to suddenly make the best module in the industry for lower costs than the competition. Let's clear that up right now. First, SolarCity will not have the lowest costs in the industry, especially not early on. It's using industry-standard polysilicon and wafers (so those costs are the same as the rest of the industry) and a non-standard manufacturing process that will likely lead to slightly higher costs than commodity competitors, at least initially.

Community solar is a big opportunity for SolarCity, especially with energy storage. Source: SolarCity.

Second, even SolarCity's lofty efficiency targets won't put it at the top of the industry. SunPower has already commercialized a 21.5% efficient panel, and even if Silevo hits the 24% cell efficiency target it has two years from now, it would only match SunPower's current product. By the time SolarCity ramps production, it will likely be 2%-3% behind SunPower.

With those two factors understood, we need to understand that Silevo isn't exactly reinventing the wheel, either. Musk said it can use some standard equipment to manufacture cells and modules and will be buying standard raw materials. So, there's technology risk, but it isn't nearly as high as Solyndra, Evergreen Solar, or any number of companies who have failed trying to make a differentiated product.

If SolarCity can simply ramp up its production capacity with a product that's slightly better than commodity modules and has a similar cost per watt, it will have a huge winner. The cost savings come on the balance of system side and from knowing it has a certain amount of supply at a set cost. That piece of mind alone is enough to make this acquisition a success.

Don't bet against Elon Musk
The one intangible factor in this acquisition is Elon Musk. He has a history of surprising us with revolutionary technology improvements and has the vision to take an idea from the drawing board to reality. So, if anyone can jump into an ultra-competitive business like solar module manufacturing and succeed, it's him.

It will be fascinating to watch what Musk and team do when they begin putting R&D dollars into solar modules and inverters. The 24% cell efficiency target that's been stated is already in sight, but a decade from now, that should be ancient history. I wouldn't be surprised if Musk already has his sights set on cell efficiency of 30% or more, which has been demonstrated in the lab.

If SolarCity can innovate faster than the industry, it will build a huge competitive advantage. That's how SunPower stayed afloat as Chinese competitors cut prices, and it's how they've returned to profitability, and even generated more retained value per watt than SolarCity on each installation. With the right innovation, SolarCity could leapfrog even the industry's best.

If it does, this acquisition will be a home run. Musk is one man who can make that happen.

Foolish bottom line
The upside for SolarCity buying Silevo comes from controlling more of the process, integrating its modules into the rest of the system, and continued innovation. It's not a guaranteed success, but for a $350 million acquisition mostly paid for with stock, it's worth the risk.

At the very least, Musk and team aren't people I would bet against, especially considering the powerhouse they've already built in residential solar.

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The article Why SolarCity Corp Can Become a Dominant Solar Manufacturer originally appeared on Fool.com.

Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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