On September 22nd, 2017, the U.S. International Trade Commission (ITC) recommended a 35% tariff on imported Chinese solar panels to the president.  The final decision on this tariff now rests in Mr. Trump’s hands. 
The effects of this tariff would be felt across the economy – more 40 major US corporations including L’Oreal, Starbucks, eBay and IKEA have submitted a letter of complaint to the ITC stating that it will materially impact their ability to source clean energy  – but nowhere more so than at solar developer behemoth, SolarCity.
SolarCity has been a market leader. From 2013 through 2016, more than one out of every three rooftop solar systems was installed by SolarCity.  Acquired by Tesla in November 2016 for $2.6B, SolarCity grew into its number one position by investing in growth at the cost of profitability.
Electricity is a commodity, and SolarCity’s business model relies on their ability to offer power at a lower price than consumers are paying to their utility company.  To meet these prices, SolarCity sources panels from China. A 35% bump in panel prices would increase its cost of goods sold by around 15%,  and their aggressive sales tactics have left them with no room to take a hit on margin. If the tariff goes through, SolarCity will have no choice but to raise prices and suffer the consequences for their top line. The resulting decrease in demand is estimated at up to 48%. 
The first thing SolarCity management should be doing is looking to source from alternative suppliers. Panels from Australia, Singapore, and Canada may be exempt from the tariff. SolarCity needs to source around half a gigawatt of panels.  In 2017, total demand for panels will be 11 GW. Meanwhile, the U.S, Australia, Singapore, and Canada combined can produce only 4.3 GW. 
We are looking at a bottleneck in tariff-free production capacity. The marginal panel price will be set by imported panels, and any domestic prices will be bid up to that level. Waiting to see if the tariff will come through, therefore, is a bad option. SolarCity’s best option in sourcing is to secure a domestic production contract today to hedge against the risk of higher prices in 2018.
A better option for SolarCity would be to have their own panel manufacturing operation in America. Three years ago, SolarCity announced plans to a new 1 GW plant in Buffalo NY by 2016.  Gigafactory 2, as it’s being called, has moved ahead with $750M of support from New York State but is not expected to produce at capacity until 2019.  Had the Gigafactory 2 been online, SolarCity would benefit hugely from the tariff. As it stands, this project will provide them with effective relief in the next two to three years. This will almost certainly be in time to benefit parent company, Tesla, but how will SolarCity fare in the meantime?
SolarCity’s prospects are bleak. The U.S. residential solar market has already seen a downturn this year for the first time in recent history, and most experts expect the tariff to go through given Mr. Trump’s rhetoric on trade. Tesla management has laid off over 1,000 SolarCity employees this year.  This could be either as a to poor performance this year or a forward-looking strategy to hunker down for a long winter.
As an outsider, it looks like SolarCity’s options are limited. They could (1) downsize and wait out the tariff until their Buffalo plant comes online, (2) make a public fuss about the tariff and hope it doesn’t go through, or (3) seek alternative revenue streams by diversifying their business away from residential solar to selling other smart home products, such as Tesla’s powerwalls and cars.
In the event that the tariff is implemented in January 2018, SolarCity’s success or failure will likely hinge around the capacity of the Buffalo plant. Can SolarCity survive the new economic landscape until the Gigafactory 2 is operational? Or will this tariff bury the company that once dominated the residential solar market? And more broadly, do losses to SolarCity and others outweigh the benefits of a tariff in encouraging investment in U.S. cleantech manufacturing?
- Erin Ailworth, “U.S. Trade Panel Backs Solar Tariffs,” Wall Street Journal, October 31, 2017, accessed Nov 2017, https://www.wsj.com/articles/u-s-trade-panel-backs-solar-tariffs-1509476295
- United States International Trade Commission press release, accessed Nov 2017, https://www.usitc.gov/press_room/news_release/201_factsheet_finalasposted.pdf
- Joshua Hill, “Major US Business call on ITC to Reconsider Solar Tariff,” Cleantechnica, October 26, 2017, accessed Nov 2017, https://cleantechnica.com/2017/10/26/major-us-businesses-call-itc-reconsider-solar-tariff/
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- SolarCity Q3 2016 Shareholder Letter, accessed Nov 2017, https://www.last10k.com/sec-filings/scty/0001564590-17-003084.htm#
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- SolarCity Q3 2016 Shareholder Letter
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- Austin Carr, “Can Elon Musk Get SolarCity’s Gigafactory Back On Track?”, FastCompany, June 8, 2017, accessed Nov 2017, https://www.fastcompany.com/40422079/can-elon-musk-get-solarcitys-gigafactory-back-on-track
- Lora Kolodny, “Tesla cites performance reviews as it fires SolarCity employees, though workers say reviews never took place,” CNBC, October 25, 2017, accessed Nov 2017, https://www.cnbc.com/2017/10/25/tesla-firings-spread-across-solarcity-employees-blindsided.html