SolarCity Buys Zep: Behold The Power of Vertical Integration
To win the U.S. solar installation game, SolarCity (SCTY) continues to go vertical and thin its margin stack... so what'll be next?James Montgomery
SolarCity (SCTY) is acquiring Zep Solar and its rackless mounting design in a $158 million stock deal, illustrating the growing importance of improving costs and complexity in residential solar.
Much of the cost-cutting in solar PV has been shouldered by the upstream manufacturing side, but half the costs or more in a residential solar PV system come from the softer side, and they'll have to keep coming down dramatically to support widespread deployment of distributed solar PV. For its part, Zep Solar has planted its flag in the installation innovation field with interlocking frames and specialized components that simplify solar array installations, and its licensees include more than a dozen prominent PV module manufacturers and component/inverter makers.
Last November SolarCity signed up too, and since then the company's crews have doubled their daily pace of residential installations, averaging 4-5 hours instead of a day or two, according to Tanguy Serra, SolarCity's executive VP of operations. That means lower costs, and better service because of less tromping around on customer's roofs. Today "the overwhelming majority of our systems use Zep," he said. And so, as the old story goes, they liked it so much they decided to buy the company.
It's likely no accident that the two largest U.S. solar installers, SolarCity and Vivint, have vertically integrated business models. To get scale and costs down in the U.S. market "you need to be vertically integrated," explained Serra. That means "we want to avoid margin stacking; we take it out everywhere we can." To that end, barely a month ago the company acquired sales channel partner Paramount Solar, underscoring the importance of solar customer acquisition. Snapping up Zep similarly will take a slice out of SolarCity's cost structure for components.
Owning Zep also gives SolarCity access to future technology in the pipeline. Serra was particularly enthusiastic about Zep's development in two areas: non-penetrating commercial roofs, which he emphasized "is a big, big deal for us" as they go after large-scale commercial retail clients like Wal-Mart and BJ's; and carports, which for retailers provide a guaranteed cost of power and shade for customers. Current carport products on the market are too expensive and complicated, he said, and cracking this market is "a phenomenal opportunity."
SolarCity will honor all existing Zep customer contracts to their end, and then will manage partnership requests on a case-by-case basis, Serra explained. (Vivint's also a Zep customer, at least for now.) Ultimately "the vast majority of resources" will be directed to international growth, he said, from Germany to Australia to Japan to the U.K. Residential solar is picking up in Japan, where there's a strong emphasis on aesthetics for any product, and that's Zep's forte -- Zep's sleek black skirt "looks great on Japanese slate," the most common roofing material there, Serra noted. The idea is that Zep also can help pull SolarCity into these markets, but SolarCity won't sell power in international markets "just yet," he said, so it won't compete directly with those regional installers.
So where else in this vertically-integrated solar installation cost stack is ripe for trimming? " If you've got to pay margins to a marketing company, an installation company, a financing company -- that's three or four layers of margin, that ultimately gets borne by the end consumer," not to mention a complex coordination of partners, Serra said. He wouldn't say, of course, citing corporate quiet-period rules, whether that means SolarCity's next M&A target is a financing company, only hinting that "as opportunities come up we will consider them."Jim Montgomery is Associate Editor for RenewableEnergyWorld.com, covering the solar and wind beats. He previously was news editor for Solid State Technology and Photovoltaics World, and has covered semiconductor manufacturing and related industries, renewable energy and industrial lasers since 2003. His work has earned both internal awards and an Azbee Award from the American Society of Business Press Editors. Jim has 15 years of experience in producing websites and e-Newsletters in various technology.
This article was first published on RenewableEnergyWorld.com, and is reprinted with permission.