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.
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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