Tesla Motors Inc. to Give Away Patents -- Good or Bad for Investors?

Before today, Tesla (NASDAQ: TSLA  ) was already open to sharing technology. It had provided electric powertrains to competitors, and was open to sharing its Supercharger network to manufacturers who would build a car that could handle a 135-kWh charge. Tesla has made its intentions clear from the get-go: Its first priority is to accelerate the advent of electric vehicles. But now, Tesla says it will take this mission to a whole new level by opening up its patents to other companies that will use them "in good faith."

Model S. Image source: Tesla Motors.

But what about fiduciary responsibility?
Musk's determination to see this vision through sparks a controversial debate about fiduciary responsibility. Could CEO Elon Musk's vision to see the world adopt electric cars be in conflict with his responsibility to build shareholder value?

Indeed, this particular concern sparked a question from a shareholder during the Tesla annual shareholder meeting. Paraphrasing the shareholder, he asked Musk how he balances the company's mission to accelerate the advent of sustainable transport even when it may mean enabling peers. Musk responded by explaining that he does not see the successful launch of a compelling electric vehicle from a competitor as mutually exclusive to Tesla's success. Further, Musk said he would soon make a related announcement; hence, today's blog post from Elon Musk.

Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology.

During a Q&A following the announcement, Musk gave further details: Its move toward opening up its patents includes every Tesla patent. But there are limitations. Those who use Tesla's patents, Musk said, should do so "in good faith." What may this mean? Companies should, for instance, be willing to share some of their patents with Tesla in exchange for use of Tesla's patents -- though Musk acknowledged that Tesla wouldn't request to use patents that are clearly of higher value than the particular Tesla patents a competitor wants to use.

Musk justified the move as a sensible business decision in the blog post.

Given that annual new vehicle production is approaching 100 million per year and the global fleet is approximately 2 billion cars, it is impossible for Tesla to build electric cars fast enough to address the carbon crisis. By the same token, it means the market is enormous. Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world's factories every day.

Further, Musk said he thinks Tesla will "benefit from a common, rapidly evolving technology platform." He even made an argument that an open source philosophy to Tesla's patents would help Tesla "attract and motivate the world's most talented engineers," which Tesla said is what ultimately defines technology leadership.

Good or bad?
The immediate-term influence of Tesla's decision to share its patents in a quid quo pro manner will likely have a muted effect. Currently, there aren't enough lithium-ion batteries in the world to support the demand for even Tesla's current demand. And considering the company's efforts to build a Gigafactory, or a factory that supports a higher level of lithium-ion battery production under one roof than all the world produced in 2013 combined, there are some large hurdles to overcome before electric vehicles could be produced in mass, anyway.

But over the longer term, if auto peers choose to build electric cars that rival the Model S (or the Tesla's planned lower-cost car), the broader auto industry could help Tesla solve its biggest challenge: revolutionizing the global supply chain of raw materials needed for batteries.

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Read/Post Comments (9) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 13, 2014, at 1:56 AM, sliderw wrote:

    In my book, social responsibility and profitability are not mutually exclusive. The world needs more socially responsible corporate leaders like Musk (assuming this move by him is genuine).

  • Report this Comment On June 13, 2014, at 10:35 AM, ffbj wrote:

    Anyone who invested in Tesla when it ipo'd or even within the last few years or so could have made their initial investment many times over. Their is really no way to complain that they have abandoned their fiduciary responsibility by open sourcing their patent portfolio. Tesla has said all along, as you point out, is to spread ev technology throughout the world, and accelerate the adoption of the ev.

    This move is essentially doing just that.

  • Report this Comment On June 13, 2014, at 10:40 AM, XXF wrote:

    The best thing for Tesla investors would be for their charging standard to become the industry standard. If Tesla has to go back and retrofit designs for to swapping batteries or different voltage charging platforms numbers won't look pretty.

  • Report this Comment On June 13, 2014, at 12:39 PM, TMFDanielSparks wrote:

    Thanks for all the great comments. I personally think Musk's move is a great idea. Over the long haul, it should help EV adoption -- which should help Tesla.

    @sliderw: I agree. they are not mutually exclusive, especially for investors with a Foolishly long time horizon on their investments.

  • Report this Comment On June 13, 2014, at 12:58 PM, drax7 wrote:

    Lots of mumbo jumbo rationalization to support this decision.

    Elon is generous but not naive. He is basically giving nothing to hurt him in the near term.

    Longer term these patents will be absolete .

  • Report this Comment On June 14, 2014, at 12:06 AM, TMFAeassa wrote:

    Superb article, Daniel. Thanks for writing.

  • Report this Comment On June 14, 2014, at 8:41 PM, gogiants2010 wrote:

    Musk is a visionary. To understand him you have to think like him. He already built the best electric car out there. Building new versions of the same technology is not exciting to him unless ofcourse he is looking to make that car fly!

    But what's on his mind is one word: Gigafactory. Ask him to share whatever patents he's got for this or is planning to get:)

    The factory can only be called Gigafactory if there are enough cars out there needing a battery.

    You see he's always reaching for the moon!

  • Report this Comment On June 15, 2014, at 6:58 AM, CraigWPowell wrote:

    It is good for investors. Positive Tesla stock forecast:

    http://seekingalpha.com/article/2263503-tesla-stock-forecast...

  • Report this Comment On June 16, 2014, at 5:44 PM, timlonely wrote:

    No one knows the ramifications of this announcement. Chinese car manufacturers might be the first ones to jump on this news but the ICE exists for nearly 100 years and there are no Chinese cars in the caliber of a BMW or any luxury brand so not sure they can deliver a EV of the same caliber of a Model S.

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