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What Tesla Knows That Other Patent-Holders Don’t

What Tesla Knows That Other Patent-Holders Don’t

by Walter Frick  |   5:15 PM June 12, 2014

Tesla made a seemingly unusual move today: it invited competitors to use its patents, for free. In apost on the company’s blog, CEO Elon Musk declared that Tesla’s “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.”

Rather than worrying about car companies copying their technology, Tesla now hopes they will do so, in order to expand the overall market for electric vehicles.

This counterintuitive strategy is more than good PR — although that too — say several IP experts. In fact, it reflects a keen understanding of both innovation and talent.

The first thing to note is that Tesla is not truly giving away its secret sauce, the source of its competitive advantage. “There’s a lot of thinking in the research these days on the gap between the codified knowledge that is patentable and gets disclosed versus tacit knowledge that really exists in how you actually produce,” says Orly Lobel, a law professor at the University of San Diego specializing in intellectual property. “That gap is probably relevant in this market.”

A Tesla vehicle is quite literally more valuable than the sum of the parts, even when the value of the patented technology is included. “They have this sexy car that people are increasingly liking,” says Lobel. “It’s something different from just the aggregation of the knowledge in the patents.”

That thinking is echoed by Alberto Galasso, another IP expert at the University of Toronto, who put it this way: “A patent on a great technology is worth nothing if there is no threat of imitation.” Access to the patents doesn’t ensure that a competitor can execute on an equally innovative product.

Tesla is trying to thread the needle of expanding the industry without giving up its competitive position. By giving away access to its patents it is offering competitors a leg up, but not fully ceding its lead in innovation.

“Tesla is very much the dominant innovator in the industry, so it can afford making that move,” Lobel told me, adding that the company may hope that it will trigger reciprocal action by others equally committed to furthering the industry.

But there is another advantage to the strategy. The move may also help with recruitment, says Lobel, either directly, by attracting engineers committed to open innovation, or indirectly by boosting the brand.

Tesla will presumably keep patenting for defensive purposes, Lobel suggests. But the basic idea articulated in Musk’s post that “Technology leadership is not defined by patents” holds. As Lobel puts it, “Really, the innovation is in creating the end product really well.”

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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