Should a car be treated like a piece of software? That is essentially what Elon Musk, CEO of Tesla Motors, has done. The billionaire, who made his fortune by co-founding and selling PayPal, recently dropped a bombshell on the automotive industry: In the spirit of the “open source” movement, he announced this month that Tesla would share patents that cover its revolutionary electric vehicles for free.
“Tesla Motors was created to accelerate the advent of sustainable transport,” Musk wrote in a June 12 blog post, strangely titled, “All Our Patent Are Belong To You.” “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.” Musk added that Tesla would not sue anyone who uses the patents in “good faith.”
The move is significant. Tesla’s vehicles are known for traveling three times farther on a single battery charge than many other electric cars on the market. Other proprietary technology includes the company’s cooling and safety systems, environmental durability, motor design and software. At the end of 2013, Tesla held 203 patents and had more than 280 more pending globally, according to a filing with the U.S. Securities and Exchange Commission.
BMW, Nissan and Mahindra reportedly are taking a look at the Silicon Valley car company’s patents. Will Tesla’s decision to share its crown jewels jumpstart the electric vehicle market, or will it end up hurting the company by speeding up innovation at rival car companies? Wharton faculty and other experts welcome Tesla’s desire to encourage innovation, but they also note that Musk’s offer is less generous than it looks.
“I don’t believe Tesla is giving up much of substance here. Their patents most likely did not actually protect against others creating similar vehicles.” –Karl Ulrich
“I commend Tesla for this action. In many domains, the patent system is an impediment to innovation,” says Karl Ulrich, Wharton’s vice dean of innovation and professor of operations and information management. But Tesla’s offer is not particularly substantial. “I don’t believe Tesla is giving up much of substance here,” he notes. “Their patents most likely did not actually protect against others creating similar vehicles.”
When it comes to engineered, assembled goods, Ulrich says, patents rarely protect intellectual property as competitors find ways to work around them. Instead, patents become “ammunition in the arsenals of big companies, which they can use to bully smaller companies with the threat of litigation,” he adds. “With rare exceptions, big technology-based companies amass patent portfolios as strategic deterrence against infringement claims by their rivals.… Tesla is essentially deciding it doesn’t want to spend money litigating patents, which is a great decision for its shareholders and for society.”
Tesla’s initiative also is not technically “open source,” Ulrich notes. “If Tesla were truly going open source, it would publish the engineering documentation for its vehicles. That would be disclosing a great deal more than the patents do.” Instead, Tesla is providing a free license to use its patents. “Intrinsic to the patent system is the idea that the patent must teach the invention to the rest of the world. That information was already available,” he says.
The Tesla Dilemma
Tesla’s first vehicle, the Tesla Roadster, debuted in 2008 and debunked stereotypes about how an all-electric car would look and perform. The two-seat convertible zoomed from zero to 60 miles per hour in 3.7 seconds and could travel as fast as 120 miles per hour. It had a range of up to 245 miles on a single charge, according to the company’s SEC filing.
Tesla’s latest, the four-door luxury sedan Model S, hit the market in 2012. It goes from 0 to 60 mph in 4.2 seconds and can travel up to 265 miles per charge. That compares to 84 miles for the Nissan Leaf, the most popular U.S. electric car. The Mitsubishi i-MiEV clocks in at 62 miles while the Ford Focus Electric lasts up to 76 miles, according to the U.S. Energy Department.
“[Tesla] backed up its ambitious rhetoric with products that have proven to be really excellent,” says John Paul MacDuffie, a professor of management at Wharton. But Tesla’s distinctiveness goes beyond battery performance and speed. The company is so meticulous that it even obsesses over every vehicle’s paint job.
In a 2013 documentary that aired on the National Geographic Channel, Tesla disclosed that its signature red paint is infused with glass flakes so it would sparkle. Indeed, one engineer says Tesla wants its paint jobs to look like a piano finish. Cars are inspected on a bamboo platform because Tesla believes that one can only see beauty framed against beauty, the documentary says.
The Model S is a refinement of the Roadster. The five-passenger vehicle has door handles that retract automatically into its groove. There are virtually no buttons in the console of the car. Instead, the driver uses a 17-inch tablet to do everything from opening the glass roof to customizing interior temperature. The car’s battery is a long, flat piece of hardware that attaches to the floor, so there is storage space under the hood and the trunk. There is space for two rear-facing child seats as well.
“[Tesla] backed up its ambitious rhetoric with products that have proven to be really excellent.” –John Paul MacDuffie
In 2013, the Model S was named “Motor Trend Car of the Year” and also garnered the highest rating ever from Consumer Reports of 99 out of 100. MacDuffie says he has not seen such high marks before: “The Model S has gotten really superb reviews.” Tesla made 2,500 Roadsters in 2012 when it stopped production; the goal is to deliver 35,000 Model S cars this year, according to the company’s SEC filing. MacDuffie describes Tesla as an “Apple-like” company due to the excitement it generates about its hardware, software, design aesthetic and social values.
While Tesla vehicles outperform rivals, they are pricey: the Model S costs from $62,400 to $72,400 including a federal tax credit of $7,500. There is a performance model priced at $85,900. Coming later this year is the Model X, which will sport the roominess of a minivan and the styling of an SUV. A less-expensive vehicle, the Gen III, also is under development. Tesla has set a goal of 2017 for the production of a mass-market electric vehicle. Compared to Tesla, Nissan Leaf comes in at a much more affordable $29,000 to $35,000 before credits.
Realizing the need for charging stations, Tesla is building out “Superchargers” in the U.S. and Europe. The company has 98 stations in North America, 23 in Europe and three in Asia. Tesla says it takes about an hour to fully charge one of its cars and half charges would take 20 minutes. The carmaker is offering free charges to buyers of its vehicles. While electricity is fired by fossil fuels, Musk has argued that it is a more efficient use of energy than combustion engines in traditional cars.
Tesla also is breaking ground on several “Gigafactory” sites to mass-produce lithium ion batteries and drive down costs. The Tesla battery is a compilation of these batteries linked together with software managing resulting heat and other issues. “Most others make much bigger batteries with slightly different chemical properties and risk profiles” that are run by energy management software, MacDuffie says.
Meanwhile, competition is heating up. The Electric Drive Transportation Association reports that there are 19 plug-in and fuel cell models currently being offered and another 17 are coming, through 2016. Tesla says several established and new automakers have entered or plan to enter the alternative fuel vehicle market, according to its SEC filing. These include BMW, Lexus, Mercedes, Mitsubishi, Nissan, Ford, Renault, Fiat, Volkswagen, General Motors, Toyota and Audi. There also are foreign electric carmakers in China and elsewhere.
Still, the electric vehicle market remains miniscule. Some 47,700 plug-in vehicles were sold in the U.S. in 2013, according to the trade group. While electric vehicle sales more than tripled from 2012, it remains just one-third of 1% of total U.S. vehicle sales of 15.5 million. Musk notes in his blog that two billion cars are on the road on Earth. Given such big disparities between the number of electric vehicles and fuel-burning cars, “it is impossible for Tesla to build cars fast enough to address the carbon crisis,” he writes.
Managing Knowledge Assets
To be sure, Tesla does face a few risks by sharing its patents, but these are short-term. “The obvious potential risk is that you allow a competitor to catch up with you quickly in an area where you’ve had some advantage,” MacDuffie notes. “You will have less ability to differentiate.” Tesla can better justify its premium pricing if it sets itself far apart from the crowd.
But other advantages, such as enhancement of Tesla’s brand and reputation, would outweigh the potential risks to the company, MacDuffie adds. Tyler Wry, a Wharton professor of management, says Tesla’s brand is enhanced because sharing its patents gives it a “nice claim to authenticity.” He believes the move could play a role in growing the electric vehicle market.
“[Musk] shared part of Tesla’s intellectual property to drive innovation. He’s following a knowledge-based strategy.” –Martin Ihrig
Musk’s initiative also could motivate rival automakers to innovate faster, notes Wharton’s Martin Ihrig, an adjunct professor who teaches a course on the strategic management of knowledge assets at Wharton Executive Education. “[Musk] shared part of Tesla’s intellectual property to drive innovation,” he says. “He’s following a knowledge-based strategy.” But Ihrig believes Musk’s goal goes beyond building a larger electric vehicle market and creating a more robust network of charging stations. “It’s a bigger play on attracting talent and forcing the industry to develop innovation more rapidly,” he says.
Indeed, the best engineers could flock to Tesla, attracted by its spirit of openness, innovation and dedication to a social mission. “It’s similar to what Google and others are doing — do good and inspire people,” Ihrig says. “Many people want to work for these companies.” In its SEC filing, Tesla says the company’s roots in Silicon Valley have “enabled us to recruit engineers with strong skills in electrical engineering, power electronics and software engineering.”
Even if Tesla is sharing its patent-protected technology, Ihrig notes, the company retains the know-how of its engineers and other employees, which in the long run is a better strategy because it strengthens the company’s core competency. Wry agrees: “It’s one thing to have patents. It’s another thing to put it all together.” Ihrig observes that Tesla engineers could already be on their way to developing even more advanced technology while rival car companies are still trying to absorb its shared patents. “Technology leadership is not defined by patents, but talented workers,” he says, citing Musk’s own comments in his June 12 blog post.
Tesla’s move is a bid at establishing an industry standard, which could help a new technology diffuse more rapidly, MacDuffie notes. An industry fragmented by differing standards would have more hurdles to growth because of incompatibility issues. For example, Shanghai is not installing charging stations that use Tesla’s interface because it is different from those of other carmakers, he says. Giving up its patents is a “creative way to say this market is not going to grow fast enough with lots of different standards,” MacDuffie adds.
Established carmakers might be less inclined to adopt Tesla’s technology beyond some fundamentals because they have developed their own technologies. “All big automakers in the U.S. have been exploring and patenting electric vehicle and battery technology for a long time,” MacDuffie says. So Tesla’s offer might appeal more to car companies in developing countries or automakers who have not entered the market and now see a quicker way in, he adds.
Still, striking partnership agreements with well-entrenched carmakers such as BMW and Nissan can only help Tesla. “They have influence, they have access to capital, they have access to public subsidies, or [they can] influence public subsidies,” MacDuffie notes. “Whether it’s licensing per se or a partnership … either way I think works well.” Not that Tesla is doing poorly. In 2013, sales hit $2 billion, nearly quintupling from the year before, according to its SEC filing. It posted positive cash flow from operations in 2013, and its net loss has narrowed over the years: Tesla lost $74 million in 2013 compared to a loss of $396.2 million in 2012.
Tesla could build other businesses besides making cars; it could also develop and license a customized version of its technology specifically for a client. “This could also be seen as an invitation to licensing agreements that go well beyond the patents,” MacDuffie notes. “It’s another way to boost demand.” Another possibility is that Tesla could build a substantial business in battery manufacturing at its Gigafactory sites – a business that could eclipse its car sales.
Tesla has stated that once the company is able to produce batteries at scale, costs could drop by more than 30% after the first year of production of its mass-market vehicle. That would lead to lower electric car prices. Tesla’s cars have many fans, but its prices make the vehicles elusive to many. “Look, if Musk can get the price of his Tesla sport sedan down to $35,000, I’ll buy one myself,” wrote Jason Perlow, senior tech editor at ZDNet, in a June 13 column. “And if Chyrsler, Ford, GM and all the rest can make a family electric vehicle for $25,000 or less using his technology, then we have an industry.”