Fear Not, Tesla Motors Inc. Shareholders: Elon Musk Is As Much a Capitalist As an Environmentalist

Tesla Motors (NASDAQ: TSLA  )  CEO Elon Musk said at the automaker's annual shareholder meeting last week that he's thinking of doing something "fairly controversial" regarding the company's patents.

This statement came in the context of Musk expressing disappointment that other automakers haven't enthusiastically embraced electric-vehicle development. In recent days there has been speculation that Musk is considering releasing some of Tesla's patented technology in order to speed up EV development. I think this conjecture is right on the mark.

Tesla currently has the lock on high-end, long-range, electric vehicles, and will almost surely be the first to market a longer-range, more affordable EV when it launches the "Generation III" sedan in 2017. So why would Musk give any thought to sharing the EV wealth now that Tesla's domination of the nascent, but fast-growing, market looks so promising? Simple. He thinks the potential profit upside could outweigh the downside.

Source: Tesla Motors.

More EVs = more potential paying customers for Tesla's Superchargers
Tesla's sharing of key patents would likely result in more automakers -- major companies and start-ups -- developing electric vehicles. The downside of this scenario is that some of these EVs would probably compete with Tesla's Model S, Model X (set to launch in 2015), or the Gen III sedan. However, one potentially huge upside is more paying customers for Tesla's Supercharger network.

I've believed for a while that Tesla could ultimately be as much an energy infrastructure play as an EV manufacturer. Last July, I wrote about Goldman Sachs' price target for Tesla, which it established by averaging valuations representing three scenarios for Tesla's EV sales three to five years out. The hole in Goldman's logic was that it only considered EV sales. As I wrote:

The optimistic scenario could prove understated because it doesn't include revenue for anything other than producing vehicles. A few what-ifs:

  • What if Tesla's work supplying SolarCity with batteries for solar energy storage proves successful, and results in more solar revenue in the future?
  • What if Tesla permits other automakers' EVs to use its Supercharger network (for an upfront fee)?
  • What if Tesla expands its production of electric drive train components for other automakers?

We'll stay focused on bullet point No. 2. It seems likely that turning the line of car-charging stations into a nonexclusive network in some fashion has been in Musk's game plan for a while. Releasing some patents to rev up EV development and future sales should make Tesla's Supercharger network more valuable. Non-Tesla EV owners will need somewhere to charge up when they're on the road, and Tesla's stations are the speediest chargers in the industry. Tesla has been rolling out its second-generation Superchargers, which provide the 85-kilowatt-hour Model S with a half charge in 20 minutes, and provide juice for about 170 miles in 30 minutes. Most public chargers are pitifully slow, even the so-called "fast-charging" systems. Surely, automakers that get into the EV business will find it a competitive advantage -- or at least not a competitive disadvantage -- to offer buyers of their EVs access to Tesla's network.

In addition to speed, Tesla's Supercharger network offers good coverage, which should soon be great coverage, in the United States, Canada, and Europe. Tesla aims to have 90% of the U.S. population and much of Canada covered by the end of this year, with 98% coverage by 2015. It has already covered Norway and has plans to move through the rest of Western Europe as follows:

By March 2014, we plan that more than half of Germany should be covered, with complete coverage by mid-2014. By the end of 2014, we expect that the entire population of the Netherlands, Switzerland, Belgium, Austria, Denmark and Luxembourg and about 90 percent of the population in England, Wales and Sweden will live within 320 km of a Supercharger station.

As Tesla just started selling its Model S in China this quarter, it's in the early stages of building out its Superchargers in that country. China now has three sites, though Tesla will surely be just as aggressive in setting up Supercharger stations there as it has been in North America and Europe.

More EVs = more potential paying customers for the Gigafactory's battery packs
If more automakers start producing EVs, demand for lithium-ion-battery packs will increase. Enter Tesla's Gigafactory to help meet that demand.

Tesla anticipates that its massive $5 billion factory will drive down the per-kilowatt-hour cost of its battery packs by more than 30% by the end of 2017, which is the first year its Gen III vehicle is scheduled to be manufactured. If this goal is met, Tesla would seemingly be able to make a tidy profit by selling battery packs to other automakers. While the Gigafactory will likely not have excess capacity right away, it should sometime after 2020. By that year, Tesla expects its factory to be able to produce more lithium-ion batteries annually than were produced worldwide in 2013, enough to supply it with batteries to manufacture 500,000 vehicles per year.

As to the Gigafactory, Tesla plans to break ground on up to three sites in order to minimize the risk of delays arising after construction begins. The company plans to break ground on the first site this month, so we should soon learn whether the first dig will occur in Nevada, Arizona, New Mexico, or Texas. Although Musk recently said "California was potentially back in the running," it's probably safe to say that the Golden State is out of the running for the first site. Nevada is widely viewed as the favorite, given its proximity to Tesla's auto manufacturing plant in Fremont, Calif. Additionally, the Silver State has rail transportation available and is home to a large lithium factory, and there are lithium reserves located relatively nearby in Wyoming.

Foolish final thoughts
Musk has demonstrated that he can spot good business opportunities and exploit them to his companies' advantages. If he decides to share some key patents, investors should probably trust that the potential financial upside likely outweighs the downside. If automakers start to develop EVs based on Tesla's patents, Tesla's revenue stream could rev up as there will be more potential paying customers for its Supercharger sites and battery packs. 

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Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On June 09, 2014, at 9:20 PM, chronosflow wrote:

    I trust Elon Musk in his choice to share patents of Tesla's EV engineering to ramp up EV manufacturing from other car companies. But I'm wondering of this is a situation of to little to late considering the lengthy time Tesla seems to take on releases. And are Tesla's charging stations so state of the art the other big auto manufacturers (say Ford or GM) would be unable to produce something similar? I love Tesla's business model and revolutionary thinking. But can this dissesion come back to bight in the butt?

  • Report this Comment On June 10, 2014, at 8:24 AM, ayekappy wrote:

    Nice! Hadn't quite clicked on this thought. I figured it would drive down costs, but I keep forgetting they are going big on being able to supply needed for practically every electric car in the future.

  • Report this Comment On June 10, 2014, at 9:11 AM, TMFMcKenna wrote:

    @chronosflow,

    Your question about whether Tesla's Superchargers are reproducible is a good one. I don't think anyone can know the answer to that for sure. My guess would be that even if they are patented, state-of-the-art, etc., that the big auto cos. would be able to develop something similar with enough effort. That's largely because they have considerable financial resources. So why wouldn't they just so? They wouldn't have to go to the huge expense of building out an extensive worldwide network of chargers. They could let the customer pay the upfront Supercharger lifetime access cost. Will this scenario occur? It's impossible to know.

    The big make-or-break, though, is the Gigafactory. Tesla needs to be able to drive down battery costs enough to profitably make the Gen III.

    Thanks for commenting.

    Beth McKenna

  • Report this Comment On June 10, 2014, at 11:29 AM, tomgraham01 wrote:

    Nice article. As a hard core car enthusiast, I have always felt that Tesla as a vehicle manufacturer, while interesting, has not justified the high price. As you state, the Gigafactory is the key for Tesla going forward. I think Musk understands that Tesla cars will never be an onslaught on established large auto manufacturers, and that continuing long term, high growth will have to come from elsewhere. Personally, I find the concept of Tesla as a long term energy play with a sideline in fine cars much more palatable than as a stand alone car manufacturer. Could we forsee the day that Musk sells the car business to develop and expand the energy component?

    One bit of caution that I noticed in news today is that Toyota is going to start offering hydrogen powered cars next year. Southern CA. has a small infrastructure to fuel these cars. Musk might have a small lead refueling electric, but as hydrogen cell manufacture increases so will the the infrastructure to serve those vehicles as well. I think it's going to be a horse race between the two technologies. Hydrogen cell technology has quietly leap-frogged from 5 -10 years ago while we all gushed about electric cars Ultimately hydrogen is cleaner since there is no need to produce electricity from carbon, and there is no waste disposal of spent batteries. Toyota is taking a shot across the bow of Tesla with this move. I won't be surprised to see other manufacturer following suit soon. Tesla on the other hand is leaner, hungrier and most importantly, quicker to act than the big manufacturers. Meanwhile I'm waiting for more realistic valuation on Tesla.

  • Report this Comment On June 10, 2014, at 11:48 AM, dlwatib wrote:

    Whatever Tesla can do to get other auto manufacturers to use the supercharging network will in the end benefit Tesla. But I don't think patent royalties are what's holding them back. It's the business model of charging an up front fee for lifetime free charges. They would much prefer to have a pay-per-charge infrastructure operated by independent companies.

    The gigafactory is not nearly big enough for all the uses that can be made of it. In order to convert the entire auto industry to EVs there will have to be about 200 gigafactories according to Musk. Even just to grow Tesla to the size of Toyota they will need 20 gigafactories. Then there's all the stationary storage that SolarCity could sell on top of that.

  • Report this Comment On June 10, 2014, at 8:41 PM, TMFMcKenna wrote:

    Tom,

    Great comments. I, too, think that Musk likely believes he needs another ace or two besides selling EVs to keep the high-growth story going over the longer term. Yes, I could see the day when the car business is separated from the energy business.

    Several big automakers have recently announced pushes into hydrogen-powered vehicles. While big money isn't everything, it certainly can help move things along. So, I agree that hydrogen fuel cell vehicles shouldn't be written off.

    diwatib,

    Nice add. Yes, automakers will prefer a pay-per-charge infrastructure. They'd not have to tack $2,000 or more onto the base price of an EV for a lifetime access to Superchargers option. There's no way Musk will give in on that one, IMO.

    Thanks for the comments!

    Beth McKenna

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