July 25, 2014

Tesla’s Savvy Charity

By: Emma Elliott Freire

Tesla Motors, a California-based maker of electric cars, has announced that it will open its patents to the public. The move is intended to encourage other carmakers to produce more electric cars. This is an interesting twist in the development of Tesla, a company that sometimes promotes free-market competition but also relies heavily on government-granted privileges.

“Tesla Motors was created to accelerate the advent of sustainable transport. 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. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology,” wrote Tesla founder Elon Musk on the company blog. Musk is also the co-founder of Paypal.

He does not believe Tesla needs its patents to gain a competitive advantage. “Our true competition is not the small trickle of non-Tesla electric cars being produced, but rather the enormous flood of gasoline cars pouring out of the world’s factories every day,” he wrote. Currently, 100 billion cars are produced globally each year. Tesla’s annual global sales are around 35,000. In the US, Tesla represents just one-third of 1 percent of all car sales.

Technology experts and commentators rushed to try to understand the significance of Tesla’s announcement. Jason Perlow, writing for ZDnet.com wonders if Tesla aims to encourage other companies to start making the batteries that power electric cars. This could generate economies of scale since batteries are currently the most expensive component in Tesla’s cars.

Another positive effect could be the building of more power-charging stations as more electric cars take to the roads. This would benefit Tesla greatly. One of consumers’ top concerns is that the battery could run out of power without a charging station nearby.

Karl Ulrich, vice dean of innovation at the Wharton School of Business, told Forbes that he does not believe Tesla is giving away anything valuable in the patents. “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.”

Tesla could also be using the patents to bolster its image as a dynamic company with a strong social mission. This will help attract more talent. “It’s a bigger play on attracting talent and forcing the industry to develop innovation more rapidly,” Martin Ihrig, adjunct professor at the Wharton School of Business, told Forbes. “It’s similar to what Google and others are doing — do good and inspire people.”

While Tesla does rely on innovation and talent, it also relies heavily on government-provided privilege. Tesla was started with a $465 million low-interest loan from the Department of Energy. The grant came from the same program that also gave loans to companies like Solyndra and Fisker Automotive. While those companies went bankrupt and cost taxpayers millions, Tesla repaid its loan in 9 years.

The purchase of Tesla’s cars is also partly subsidized. The Federal Government offers a $7,500 tax credit. Many states also offer additional tax credits. Tesla’s website encourages individuals to contact their elected representatives to ask them to support further subsidies for electric cars. In early 2013, Tesla became profitable for the first times – but not by selling cars. Tesla earned $68 million by selling special credits awarded by the state of California to companies that produce zero-emission cars. Tesla sold them to other carmakers.

In contrast to its reliance on government subsides, Tesla has been standing up for free-market competition via its direct-sales policy. Currently, 48 US states ban or limit carmakers from selling directly to consumers. Cars have to be sold through third-party dealerships. Tesla conducts its sales online via its website. It also has showrooms where customers can view or test drive cars. As a result, in several states, dealership associations have filed lawsuits against Tesla. In March, New Jersey enacted strict new regulations that banned Tesla’s sales model. As a result, Tesla briefly stopped selling cars to New Jersey residents. However, New Jersey is currently enacting a loophole to the regulation specifically for zero-emissions cars. In July, Pennsylvania’s legislature passed a law permitting Tesla a total of five showrooms in the state. “We hope the process in Pennsylvania serves as an example for how productive cooperation can lead to a win for all parties involved, dealers and legislators included,” said Tesla in a statement.

A publicly-traded company, Tesla is currently valued at $12 billion. Tesla is highly regarded for its focus on design and innovation. The Model S sedan received the highest score of any car tested by Consumer Reports. Tesla’s cars travel three times further on a single charge than most other electric cars.

Follow Emma Elliot Freire on TwitterImage courtesy of Big Stock Photo.