How Does Patent Sharing Help Tesla Motors Inc?

Where does the recent news of Tesla releasing its patents fit into its business plan?

Jul 8, 2014 at 1:25PM

"In business, I look for economic castles protected by unbreachable 'moats'." This is just one of many analogies Warren Buffett uses to pick great companies. However, electric-car manufacturer Tesla Motors (NASDAQ:TSLA) has just filled in its unbreachable moat with dirt. It recently announced it would not file lawsuits against anyone who uses its technology in good faith. Opening valuable patents goes against most rational business sense, but let's look at Tesla's current situation and see how this move can help Tesla's business in the long run.

Where Tesla is today
Tesla is one of the most innovative companies today and its name is almost synonymous with the electric-car revolution. It has great management and an aggressive business plan. It has already made one of the highest-rated cars in the Model S. Nevertheless, Tesla must increase the demand for electric cars and gain the ability to produce more cars.

Currently it only produces around 30,000 cars per year. Unfortunately, Tesla cannot get enough batteries to mass produce its cars at its desired scale. The solution? Enter the Gigafactory.

The Gigafactory is an ambitious plan from Tesla and partner Panasonic (NASDAQOTH:PCRFY) to create a plant that will produce more than todays world production of lithium ion batteries for electric cars by 2020 at around 500,000. Tesla will need to produce this large amount of batteries to meet its aggressive sales projections which include over 100,000 sales by 2016 and the release of their new model X in 2015.  

Now that Tesla has already solved its problem of production it just needs to solve the problem of demand. Sharing its patents will help solve this problem. While Tesla has been on the front lines of revolutionizing transportation, it cannot do it alone.

Lowering the drawbridge
Why would Tesla want to give up it competitive advantage? Right now, Tesla lacks competition and adding some could help it in the long run. In the blog post announcing that the company would open up its patents, Tesla CEO Elon Musk said that he was "wrong that big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla." By opening up the patents Musk hopes to help speed up production and technology development for electric cars so "that Tesla, other companies making electric cars, and the world would all benefit" But how will Tesla benefit from this?

Tesla cannot force large car manufacturers to make electric cars, but maybe sharing technology will help other car manufacturers finally make the jump into electric cars. There are large manufacturers that have electric cars on the market today, including General Motors (NYSE:GM) with its Chevrolet Volt, and Ford (NYSE:F) with its electric Focus. These electric cars have only half the range of a Model S. Therefore, we can expect to see an increase in electric-vehicle range from the large car manufacturers through Tesla's technology.

New electric cars with twice the efficiency will lower the barrier for buyers who want an effective electric car, but do not want to pay for a luxury car like the Tesla's. This helps Tesla because more effective and less expensive electric vehicles will be on the roads competing with gas-powered cars. As we see more people warm up to the idea of buying electric vehicles, Tesla will be the go-to for high-end EVs.

Another way this will  benefit Tesla is through higher demand for charging infrastructure. Right now, there are only around 20,000 charging stations in the U.S. This is one of the largest barriers for potential electric-car buyers. Tesla has its own plans to fix this through its Supercharger stations. Tesla says that by 2015 it will be able to cover 98% of the population of the U.S.

This sounds nice, but Tesla still cannot do this alone. If Tesla's technology can increase the demand for electric cars made by the large manufacturers then big corporations, and maybe the government, will want to quickly build out a countrywide charging infrastructure. With better infrastructure it would become more likely that consumers will switch from gas to electric, which would be great news for Tesla.

Tesla seems genuinely interested in developing the electric-car industry. It was reportedly in talks with BMW and Nissan last week to develop global charging standards. Tesla will probably not only open up its patents but also work directly with car manufacturers to help them improve their electric cars. Tesla is already an established brand with a highly awarded lineup of products and likely will not have to worry about competing luxury electric cars in the next few years.

Making the world a better place
Elon Musk is determined to make his vision of a day when only electric cars are on the streets become reality. Tesla has come a long way with its innovation of the electric-car industry, but Musk knows that Tesla alone cannot produce all of the innovation necessary to fulfill his vision. Musk knows that increasing competition will also increase innovation so he has taken it on himself to spur that competition. Luckily, for investors in Tesla and other car manufacturers, this is a situation where they can all win. Large manufacturers will be able to make more efficient cars, and Tesla will be able to benefit from increased demand for electric vehicles.

Warren Buffett’s worst auto-nightmare (Hint: It’s not Tesla)
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 mega-trend. Click here to access our exclusive report on this stock.

Howard Cranford has no position in any stocks mentioned. 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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