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3 Ways Tesla's Patent Move Can Prove Critics Wrong

By Jake Mann - Jun 17, 2014 at 5:49AM

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Tesla made waves last week when it took the padlock off its patent library. How can the move pay off over the long run?

Tesla ( TSLA -7.33% ) surprised the media, customers, and just about everyone else last week when it announced it won't pursue litigation against competitors who use its patents "in good faith." The move understandably has its fair share of critics, including my colleague Daniel Kline, who think it will shrink the company's competitive advantage. But I'm not one of them. In fact, there are no fewer than three ways Tesla can silence the negative press.

1. Standardize the fast charger industry.
The fast charger industry has three main players: the Tesla Supercharger, CHAdeMO, and the SAE Combo. General Motors' ( GM -3.38% ) Chevy Spark and the BMW ( BAMXF 0.25% ) i3 support the latter, while CHAdeMO is used by everyone from Nissan ( NSANY 1.63% ) to Mitsubishi. Although CHAdeMO is currently the international standard, it's considered to be more cumbersome and less powerful than Tesla's technology.

Now, recall that one of Tesla's most essential projects is the ongoing construction of its Supercharger network. According to the company, 97 charging stations are operational in North America. It plans to extend coverage to 80% of the U.S. population by the end of this year, and 98% of the country by 2015.

Charging a Tesla Model S. Image via Jeff Cooper, Flickr.

Because Model S owners -- and presumably all future customers -- have free, lifetime access to the network, it's in Tesla's best interest to build as many stations as possible. And by opening up its patents, the company looks to be hoping that other automakers lend a hand.

If enough competitors eventually choose to adopt the Supercharger over the SAE Combo and CHAdeMO, Tesla could own the new industry standard. Assuming this leads to a larger Supercharger network, it'd ultimately be a boon to sales of the Model S, Model X, and the rumored Gen 3. The Financial Times reports BMW and Nissan are already interested in developing charging networks with Tesla, so standardization might be right around the corner.

2. Stimulate demand for Tesla's batteries.
The patent move may also boost Tesla's battery business. In March, the company announced it plans to build a massive "gigafactory" by 2017, which could have the capacity to produce more battery packs than the rest of the world combined. The factory's annual target is to power 500,000 cars by 2020, and it's possible Tesla will use a portion of this output to supply other automakers. While companies like GM and Nissan often use larger lithium-ion battery cells, these competitors could theoretically switch to Tesla's version.

Plenty of unknowns remain, including the extent of Panasonic's partnership. There's also a chance the gigafactory will produce lithium-ion batteries based on a more efficient silicon anode design, rather than graphite anodes, which the company currently prefers. But one thing is clear: Now that its patents are open, Tesla has a better chance of becoming a major battery supplier by the end of this decade.

3. Create a recruiting advantage.
Who wouldn't want to work for Tesla, right? Wrong. To this point, the company has surprisingly received rather mediocre reviews from employees. According to Glassdoor, just five in 10 approve of Tesla's work-life balance. 

CEO Elon Musk recently discussed how the company's patent move could improve its ability to recruit (emphasis mine):

Technology leadership is not defined by patents, which history has repeatedly shown to be small protection indeed against a determined competitor, but rather by the ability of a company to attract and motivate the world's most talented engineers. We believe that applying the open source philosophy to our patents will strengthen rather than diminish Tesla's position in this regard.

If taken literally, this statement suggests part of Tesla's strategy is to create a recruiting advantage. The New Yorker's Nicholas Thompson explains that an open-source ideology could attract employees looking to work for a cause. "Idealistic young lawyers work as public defenders. Idealistic young coders work on Linux. And Musk is hoping that idealistic young automotive engineers will want to work for Tesla," he writes.

The bottom line
While critics like Mr. Kline say Tesla's patent release is bad for business, I believe this viewpoint is ultimately shortsighted. Whether it's charger standardization, battery demand, or recruiting, there are multiple ways the move can pay off over the long run.

To read Daniel Kline's take, click here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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