5 More Reasons Tesla's Open Source Policy Could Make It Rich

Tesla wants the competition to help pick up the tab.

Jun 30, 2014 at 7:32PM

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The T of Tesla Motors logo made by 13 Tesla Model S electric cars.  Source:  Wikimedia Commons 

It was almost as if somebody was concerned that Tesla Motors (NASDAQ:TSLA) wasn't front and center in the news during the week. "No problem," said Tesla CEO Elon Musk, "I'll whip something up and post it on our blog letting all of our competitors know that they are free to use our patents." Of course, Musk didn't really use those exact words. In reality, the open source policy the company recently adopted regarding its patents is a smart move, and I'll tell you why.

Help build the roads
Imagine a world without roads where Tesla would be responsible for building and paving them. It would be a daunting, time-consuming task. Kind of like building supercharging stations all by its lonesome. No wonder it wants some more competition. Just like having to lay asphalt on that roadless word, having somebody else to help pick up the massive overhead tab would be really helpful.

The more electric charging stations that go up, and the faster, the better it is for Tesla. It's a network effect. The network effect basically means that as a greater number of consumers adopt something, like say the telephone, then the telephone becomes more appealing to each individual simply because other people are using the same thing. In this case, the more charging stations that are available in the network, with competitors adding to it, the more perceived value an electric Tesla vehicle will have.

In a similar way, Tesla would be helped by competitors through industry advertising, or at least media attention and word of mouth that gets more people to trust and adopt electric vehicles. Musk says in his blog post that the real competition isn't from each other, when it comes to electric cars, but from gas-powered vehicles. By working together, either directly or indirectly, it will help more people join the electric-car movement.

Economies of scale
As Musk points out, the electric-vehicle market is still a bit less than 1% of the car industry. Part of the reason for the big automakers' domination for decades has to do with mass production capabilities and the economies of scale that come with it. Tesla, operating on a relatively small scale, doesn't get those per-unit pricing benefits that large automakers get.

As production increases and more competition surfaces, certain key parts will be mass produced on a greater scale and therefore become cheaper for all. By Tesla allowing competitors to duplicate self-engineered parts and processes, they can all benefit.

On a related note, the bigger the electric-car industry itself gets, the more talented engineers will be attracted to it. This should inevitably lead to superior and cheaper design. Musk put it succulently when he stated, "We believe that Tesla, other companies making electric cars, and the world would all benefit from a common, rapidly evolving technology platform."

The wild card
Finally, Tesla is planning to build its Gigafactory to take on the task of massive lithium-ion battery creation and recycling. It is probably unlikely that a new competitor would seek to duplicate the factory anytime soon. Competitors may have an interest in becoming customers, thereby generating more revenue and profits for Tesla. As a possible bonus, the economies of scale factor would likely come into play, as producing and selling larger quantities of batteries should lead to cheaper costs for all.

On that note, it's a good idea to keep an eye out for word of further developments from various auto manufacturers. For example, Mark Reuss, North America President of General Motors, said in 2013, "I believe, and we at GM believe, that the public will accept and embrace electric vehicles." In contrast, it looks as though Ford believes electric cars don't have much of a future for years to come. Sales of its Focus Electric have been pitiful, for lack of a better word. 

Meanwhile, Mark Platshon of BMW iVentures (a company founded by BMW), has said that the electric car industry is close to the tipping point. BMW, Nissan, and Tesla are reportedly in talks about collaboration on standardization and expansion of the Supercharger network. Keep your eyes and ears open for developments on that especially.  

Foolish final thoughts
In summary, the five reasons are: quicker build out of the charging networks, quick adoption of the electric car by the public, cheaper costs, more talent attracted to the industry, and new revenue streams for Tesla. The bottom line is that it seems to be a smart move for Tesla to throw out this bait. Will any of the larger fish take a bite? I for one would love to see a partnership, for starters, with at least one competitor to jointly build out the Supercharger network. It will be interesting to learn what develops in the quarters ahead.

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A major technological shift is happening in the automotive industry. Most people are skeptical about its impact. Warren Buffett isn't one of them. He recently called it a "real threat" to one of his favorite businesses. An executive at Ford called the technology "fantastic." The beauty for investors is that there is an easy way to invest in this megatrend. Click here to access our exclusive report on this stock.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends BMW, 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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