Tesla Goes Big Not Home
Posted on June 17, 2014
Last week Elon Musk, the iconoclastic CEO of Tesla Motors declared that Tesla would effectively allow any competitor to use its patents portfolio. Shortly after, BMW and Nissan announced that they wanted to cooperate with Tesla on technology and standards. Between them, these three carmakers own almost all the market for electric vehicles and as such are natural competitors. So what motivates this recent cooperation: is it just good PR, is it plain altruism, or is there something more calculated?
Tesla has challenged the automotive business model on other occasions: it disintermediated car dealerships and then adopted a switching station model. Giving up the patent portfolio is a similar move that challenges the traditional business model. At the core of these moves is the realization that the conventional auto business model simply doesn’t work for electric vehicles.
In particular the competitive technology race that has characterized the evolution of conventional auto-makers is just not going to cut it for the electric vehicle industry. Instead, opening up the patent portfolio may finally create a structure where Tesla can capture more of the value of a more viable electric vehicles supply chain. It could do this in several ways:
- Creating scale: High component costs remain the biggest barrier to electric vehicle adoption. Part of these high costs come from the fact that a small number of electric vehicles are sold by a handful of suppliers relative to conventionally powered cars. This means component suppliers do not have the scale nor the reliability of demand to achieve cost efficiency. Given that Tesla’s pockets are far less deep than most other carmakers, it needs a quick way to get scale. Tesla’s best hope might be that its competitors like Nissan and BMW, which between than have almost 60% of the EV market adopt some of Tesla’s designs, thereby giving the electric vehicle supply chain the much needed scale economics long before its own sales will get it there.
- Building a charging infrastructure: As Tesla expands into Europe and Asia, it’s becoming clear that its own resources might not be sufficient to roll out a charging infrastructure at the speed necessary to break into these markets. Again, a faster path might be for the different players to converge on a common standard for chargers. By opening its patent portfolio, Tesla is hoping that some of its standards stand a better chance of becoming dominant.
- Offering upstream opportunities. Tesla’s business model is more than just selling electric cars. It also hopes to market some of its technology to other players. It has already supplied batteries to Toyota and Mercedes-Benz’s owner Daimler. Both carmakers are shareholders in Tesla. One potential future for Tesla could involve increasing proportions of its revenues coming from supplying batteries and other components to bigger car-makers. This will help sustain Tesla’s vehicle business despite its much smaller scale. Again this will be easier if more automakers adopt Tesla’s patents into their designs. It might eventually lead to an acquisition by one of the much bigger players.
In sum, Elon Musk’s opening up of Tesla’s patent portfolio might be motivated as much by strategic necessity rather than by altruism.
Karan Girotra and Serguei Netessine are professors of operations and innovation at INSEAD and co-authors of The Risk-Driven Business Model.
interesting insights, does opening up patents also act as a poison pill for potential takeovers? perhaps one could explore that as well.