The Industry Grows Up
Note: This transcript has been lightly edited for clarity.
Tom: Hey Boaz, thanks for joining me. We've been talking a lot lately about this idea of Growing up. Growing up as an industry. We need to grow up as solar companies. So frame this out for me—why do you think the term growing up is an apt metaphor at this moment?
Boaz: I think the industry is transitioning from developing to be getting to be mature. And there are a few factors that point to us being at that inflection point.
One is—even without the pending trade case—the growth rate in more mature states like California has slowed down.
The second factor is that we’ve seen prices decline by about 70% over the last five to six years. We had a big price slide in 2012, and another one in 2016, that have really helped to make solar more mainstream, but they also put a lot of pressure on businesses.
And the third factor is that we are seeing less revolutionary change in business models and technology and more incremental change.
Ten years ago, and five years ago—when third-party ownership was becoming a really huge part of the residential market—that was a revolutionary change. When we saw microinverters and optimizers become a huge part of the market for residential, that was a revolutionary change. We’re not seeing those new business models and those new technologies to the degree that we were five years ago. So I think all three of those factors point to a maturing industry.
And what that looks like is: For every business in the value chain—manufactures, distributors, specialty providers—all of those businesses will generate less revenue per watt, less gross profit per watt, less gross profit per overhead dollar than they did five years ago. So there’s pressure on all of these businesses to achieve profitability, and sustainability, in an industry with price pressure, margin pressure, and a declining growth rate.
Tom: So how will that play out?
Boaz: More and more, I think what we’ll be seeing is individual companies figuring out what they can be best at and just doing that well. As opposed to inventing a new way of being the best at something entirely new. Which is something we saw five years ago when Solar City, and Vivent, and companies like that, were really on the rise. They had really different business models than the industry had seen before.
I think there is this compression happening, even sales-only companies, and specialty players, they’re all saying, "I need to be more competitive and more profitable. How do I do that?" And that’s what we are calling growing up.
Tom: Do you think we’re entering into the adolescent period right now?
Boaz: I think adolescence is probably appropriate. A mature industry is growing at two or three percent a year. It doesn’t have much change. It’s all about optimization—operationally, I mean. So I think adolescence is fair. We’ve got our pants on now! [Laughs]
Tom: Thank God! Can you give me some other examples of pressures that contractors are feeling?
Boaz: The weather in Q1 this year in California—that cost 80% of construction days to be rained out for three months—that was a growing up moment, too. There were plenty of contractors for whom that presented a huge amount of pressure. And we’ve seen the California market pretty much flat this year, even without the weather factor. I think the ITC is just another brick in the wall, but this really has been building for the last several years.
Tom: To put you on the spot: What should contractors be focusing on right now?
Boaz: I think a contractor has to understand their own unique strengths and weaknesses and address them. Meaning—play to your strengths and don’t ignore them. And don’t ignore your weaknesses either.
For example, I met a contractor who is incredibly fast at installing really high-quality systems. They don’t really have sales and marketing capabilities and have struggled for a long time keeping their pipeline full, because they weren’t really selling a lot of jobs. But what they could do is install really high-quality systems. And in the last year they shifted their focus to installing for other companies who are good at things that they are not. So that’s an example...
Tom: But you’ve talked before about the need for efficiency improvements across the board. Don’t you think that’s a key component?
Boaz: Yes. A successful contractor has to be driving efficiency in their business, absolutely.
Let me give you another example: While we are not a contractor, this is an example of that 'aha' moment when we understood what we're really great at.
About two years ago we added financing to our linecard, we started offering system design through a partnership, and we started offering permitting through a partnership. And those are all great services. But we didn’t have a huge uptick. We had some interest—and it helped some of our customers to be able to get those services through us—but at the end of the day, we realized we were starting to market ourselves as, "Look, we have all these services for you." And we were losing sight of how—at our core—we are the hub of a supply chain between a manufacturer and a contractor. And if we can’t market ourselves based on being great at that, then we have really missed the boat.
And that really shifted our focus. And while we still offer some of those ancillary services, we’re no longer positioning based on them. Now we're positioning based on: Over the next few years, we’re going to deliver on the most efficient supply chain—not just in solar—but the most efficient supply chain that we can possibly manifest. And we’re going to work with our contractors and our vendors to do that. That’s a much better statement than, "We offer a wide array of services."
We decided what we’re going to be great at, and we’re investing a huge amount of energy and resources in manifesting that.
Tom: OK. Well, other than figuring out what you’re great at, is there another aspect of growing up that you’d like to talk about?
Boaz: I think the other important aspect is: In all of our businesses there are things that we haven’t been doing in an ideal way, the whole time we’ve been in business. And as the business has grown, we’ve put up with these “ankle biter” issues. They can be personnel issues—where you’ve kept a certain person along the whole time. Or they could be process issues. And that’s what we are really seeing in our business.
There are some processes that, when they come up, it’s like doing a science project every time. And some of these processes are even cross-functional, and we have to have meetings about who owns which part of the process, and who is accountable for that. These are things that come up every month or every quarter—having to roll out a price change, or a product transition, or something like that.
And it’s time it’s we just start doing those things right every time! And I think—all of us in our businesses—when we look at growing up, we need to look at: What’s the thing we’ve been doing, without our full attention, that’s wasting resources, and let’s do it right. Let's flatten it out, do it right, and do it the same way every time. For crying out loud. [Laughs] Growing up means fixing those.
Tom: Let’s talk a little bit about books. You and I were talking about Good to Great, the Jim Collins book. Are you reading anything else right now that you feel like is appropriate to this idea of growing up?
Boaz: That’s a great question. Let me look at my bookshelf... I just read a new book by Michael Lewis, who wrote Moneyball. And I’m forgetting the title of the book...
Tom: Yeah, The Undoing Project.
Boaz: Yeah. It’s about how people make decisions. And the big takeaway for me was that people often like saying, "I trust my gut. I have a gut feeling about this." But at the end of the day, there’s no correlation between us having a gut feeling about something and making the right decision based on that. It’s so important to be data-driven.
So there’s definitely a growing up factor in there for us. We’ve always been data-driven, but holding ourselves accountable to that more and more... More people in the company looking for the right information more frequently. That is absolutely driving better decision-making.
I’ve been going back through some of the classics that I read in high school, or in college, and I’m finding my perspective on them is so different than when I read them [back then]. The big example for the last couple of years for me is Zen and the Art of Motorcycle Maintenance. I read that in college, and when I read it again last year it was like a completely different book for me. It was like a philosophical treatise. And back then I was trying to read it like a novel. [Laughs]
Tom: Oh yeah, I remember really struggling with the idea of quality. What is quality? Quality being this thing that you know is there, but you can never quite define it. Did you figure out what quality is?
Boaz: Did I figure it out? [Laughs] I read what Robert Pirsig came up with, and that certainly informed how I think about quality in our business—and gumption. He writes a lot about gumption, which is just an awesome thing to try to define.
There is an interesting comment about quality that ties into the rest of our discussion about what makes contractors great. Several years ago, I had one of our employees define quality for me as: Clear expectations that are fulfilled. If we think about quality that way—if we tell a customer exactly what we’re going to do, and then do it to a “T", then we have fulfilled quality. If we do it in the right amount of time, with the right materials, etc.
I’m not recommending that anyone go out and write a twenty-page scope of work for a residential solar project. But being precise about what quality means—and then fulfilling—it is a great recipe for fifty happy customers and referrals.