Tesla’s Open Source Cars Could Expedite the Growth of the EV Market

Tesla Motors (TSLA 1.85%) intends to make its patents available to rival electric vehicle (EV) makers, stating that it would apply an "open source philosophy" to its patents and not sue companies that used them in "good faith."

While it's unclear exactly how "good faith" is legally defined, CEO Elon Musk clearly believes that Tesla should help its rivals build an EV market that's too big for governments and energy companies to ignore. Will Tesla's bold gambit work, or could it backfire by revealing too much of Tesla's technology know-how to rivals?

Tesla's Model S. Source: Tesla.

More Silicon Valley than Motor City
Tesla's open source approach to EVs is a brilliant idea that originates from its Silicon Valley roots instead of Motor City. Being a Silicon Valley company, Tesla has witnessed the costly patent clashes between Apple and Samsung, Oracle and Google, and countless others.

But Tesla has also witnessed how a well-designed, open source OS like Google Android can spread like wildfire among hardware manufacturers. Just as Google showed hardware makers a more efficient way to make touchscreen-based smartphones and tablets, Tesla wants to share its knowledge of EVs to help competitors produce more marketable vehicles.

Tesla holds approximately 250 patents, which mostly cover EV battery and related technologies. Here's why Tesla's patents could be lucrative to rivals like Nissan (NSANY -0.14%), General Motors, Ford, and Mitsubishi Motors:

Source: Fueleconomy.gov.

Tesla's rivals would clearly be able to boost their mileage range if they had access to Tesla's EV designs. Moreover, Tesla-based redesigns would address worries about battery life and range -- which topped the list of misgivings about plug-in EVs in a recent survey from AutoTrader.

Why would Tesla help its competitors?
While it might seem counterproductive for Tesla to assist its competitors, the strategy makes a lot of sense in the long run.

Tesla is more concerned about the growth of the electric charging infrastructure than it is about its competitors. There are only 8,300 electric charging stations (excluding private stations) in the U.S., compared to 121,000 traditional gas stations. Meanwhile, the 93,000 plug-in EVs sold in the United States in 2013 accounted for just over half a percent of the total market of 16.5 million vehicles.

Tesla has tried to fill in the gaps with nearly 100 Superchargers across North America, which offer free charging to Tesla owners. Energy giant NRG Energy (NRG 1.56%) has also rolled out eVgo Freedom Stations across several states, which allow customers to charge their EVs at participating gas stations, convenience stores, and other retail locations. Nissan has also partnered with NRG by offering two years of free public charging through eVgo with the purchase or lease of a new Nissan Leaf, starting in July in select markets.

If the higher overall range of EVs leads to higher EV sales, it could encourage retailers, companies, and governments to expedite the construction of the charging infrastructure.

Nissan's Leaf. Source: Nissan.

Investors should also remember that Tesla occupies a different market as Nissan's Leaf, the best-selling EV in the U.S. and Europe in 2013. The Nissan Leaf costs as little as $21,480 after federal tax savings. Tesla's Model S, its cheapest vehicle, costs roughly $62,400 after those deductions. In other words, comparing the Leaf and comparable EVs to the Model S would be like comparing a Ford to a Lexus.

Simply put, Tesla isn't risking market share by offering its patents to its rivals -- it wants to help them build a market that it can then dominate with higher-end vehicles.

Could the plan backfire?
But for this plan to work, Tesla would have to be able to meet higher market demand with higher vehicle production -- an issue the company has struggled with in the past.

Last November, Musk acknowledged that Tesla was "production-constrained" and "not demand-constrained." Last quarter, Tesla delivered 6,457 vehicles, stating that it was on track to deliver 35,000 vehicles by the end of the year. By comparison, Nissan has sold 50,000 Leafs in the U.S. since its launch in December 2010. At the end of fiscal 2013, Nissan reported worldwide sales of 110,000 Leafs, capturing nearly half of the global EV market. Tesla simply can't match that kind of manufacturing muscle yet.

Tesla's plan could backfire if Nissan or another competitor launches a higher-end EV to compete against the Model S. For example, Toyota (TM 0.05%) -- which has alternated between supporting hybrids and hydrogen-powered cars -- could emerge as a major threat to Tesla if it launches a high-end Lexus EV. However, that's unlikely to happen anytime soon, considering that Lexus recently launched (then subsequently pulled) a controversial anti-EV ad to promote Toyota's investments in hybrids and hydrogen vehicles instead.

The Foolish takeaway
In conclusion, Tesla's open source offer indicates that it needs healthy competitors to guarantee the growth of the EV market and charging infrastructure. But once that growth has taken off, Tesla investors should be on the lookout for potential competitors in the higher-end market that could emerge as viable threats to its core business.