Why Tesla Motors Released Its Patents

Why did Tesla give up its moat? Because nobody bothered to try to cross it.

Jun 15, 2014 at 2:05PM


Tesla's Model S has brought the company an interesting problem: It can't make enough to satisfy demand. Source: Tesla Motors

Tesla Motors (NASDAQ:TSLA) CEO Elon Musk said on Thursday that the company would not sue rivals who infringed its patents "in good faith".

In a way, it was a bombshell: Tesla's arsenal of patents on electric-vehicle technology have been seen by many investors as the closest thing the company has to a "moat", a way to fend off its (much, much larger) potential competitors, the giant global automakers.

But now, Musk doesn't want to fend off the big global automakers. In fact, he now wants some serious competition. Here's why.

The moat that nobody has bothered to try to cross
When Tesla first went public, many auto-industry watchers (including your humble Fool) were very skeptical: What was to stop the big automakers -- with their huge war chests and vastly greater global scale -- from eating Tesla's lunch if there proved to be a market for electric cars?

Tesla's patents, the company's fans said. But the sense I had, from talking to people in the auto industry, was that Tesla's patents at best gave the company an incremental advantage, not a massive one.

After all, companies like General Motors (NYSE:GM) have been experimenting with electric cars for decades. The basic principles are well known. 

Whatever "special sauce" Tesla had was likely to be in its battery-management software -- an incremental advantage that might get Tesla's cars a bit more range from a given number of batteries.

As I've been saying for awhile, Tesla's plan to get to 500,000 sales a year could be stopped dead in its tracks if a company like GM or Volkswagen (NASDAQOTH:VLKAY) or Ford (NYSE:F) got serious about building a rival to the Model S. 

I'm far from the only one to make that observation. That's why Tesla had a "wall of patents" in its Palo Alto headquarters: Musk and his team felt that Tesla needed all the ammo it could muster to fend off those huge rivals. 

But Musk ordered that wall taken down this week. Why? Because even though Tesla seems to have proven that there's a market for a high-quality, premium electric car -- it turns out that nobody else seems interested

Several automakers are dabbling with electric cars on a small scale, but nobody's going all-in. In fact, some, like Toyota (NYSE:TM), are turning away from battery-electric technology

There's no viable Model S competitor on the immediate horizon. And that has actually turned out to be a problem for Tesla.

Why Tesla needs some real competitors, soon
Tesla has hit an interesting roadblock in its efforts to ramp up production: It has the award-winning car, it has the customers -- but it can't get enough batteries to build as many cars as it could sell.

That's why Tesla and its battery partner, Panasonic (NASDAQOTH:PCRFY), want to build a "gigafactory" that will produce lithium-ion electric-car batteries on a huge scale

The problem is, to justify that scale, Tesla may actually need some competition: It may need a giant automaker (or two, or more) buying batteries in big quantities in order to make the gigafactory worthwhile.


Tesla's upcoming Model X SUV could boost its sales even higher -- if it can get enough batteries to satisfy demand. Source: Tesla Motors

Now that Tesla is an established brand, rival electric cars are less of a threat. In fact, they will actually be helpful at this point: The more electric cars there are, the more infrastructure -- recharging stations, knowledgeable mechanics, and so forth -- there will be. 

Tesla can't do a whole lot to convince Ford or Toyota or other big-league automakers to cannonball into the electric-car pool. But it can make sure that its patents aren't holding back anyone who might otherwise be ready to jump in, and now it has done so.

A long-term vision, but a short-term need
In a post on Tesla's official blog on Thursday, Musk said, "Tesla Motors was created to accelerate the advent of sustainable transport. If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal."

Put another way, the grand vision of Tesla is to convert the whole world to electric cars. 

But in the near term, Tesla's vision involves making a whole lot more Teslas. To get there, it's going to need a lot more batteries. But to get those batteries, Tesla might need a big rival or two.

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John Rosevear owns shares of Ford and General Motors. The Motley Fool recommends Ford, General Motors, and Tesla Motors. The Motley Fool owns shares of Ford and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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