Open Innovation at Tesla – Time for a Change?

Open innovation at Tesla – Time for a change?

At the turn of the 20th Century, electric vehicles dominated the automobile market. In 1900, they outsold all other automobile types and accounted for approximately 28% of automobiles production [1].  However, by 1925 Henry Ford’s mass production of the Model T, which run internal combustible engines fueled by hydrocarbons, made gas-powered automobiles cheaper than their electric counterparts.  Consequently, automobile innovation and production in the 20th Century was heavily geared towards gas powered vehicles while electric vehicles were left trailing behind.  Recent concerns about greenhouse gas emissions and climate change have brought electric vehicles out of the shadows and back into the public eye.  In addition, international agreements such as the Paris Agreement and Kyoto Protocol have solidified attempts at driving environmentally friendly innovation globally.

Tesla is an example of a company that is attempting to create alternative technologies that reduce the impact of greenhouse gas emissions.  The electric automaker’s mission is to “accelerate the world’s transition to sustainable energy” [2] and become “best manufacturer in the automotive industry” [3].   Despite these ambitions, cost-effective innovation for electric vehicles has yet to keep up with increased demand.  Some of the key challenges include high battery costs and uncompetitive performance [4].  If these and other challenges are not met, the electrical vehicle industry may be considered unlucrative from an investment perspective.

Tesla’s Open Innovation Policy [3] addresses the need for accelerated innovation among electric vehicle producers.  In 2014, Tesla informed its competitors and the general public that Tesla would not be issuing any patent lawsuits against any competitors who shared in Tesla’s innovative technology as long as the competitors acted in “good faith” [3].  Tesla believed this initiative would not inhibit their innovative progress because they couldn’t build enough electric cars to solve the carbon crisis by themselves, and alternative fuel vehicle sales formed less than 1% of total vehicle sales at top automobile manufacturers [3]. Thus, the company did not consider competition in electrical vehicle segment to be intense.

Tesla’s Open Innovation Policy could be crucial in addressing industry wide and company specific challenges with electric vehicle development.  A 2017 Harvard Business Review article stated that electrical vehicle battery performance may not match the performance of gas-powered options for another 50 years [5].  The article also highlighted some challenges specific to Tesla, including the fact that their current battery technologies are not better or cheaper than existing internal combustion options [5].  Knowledge sharing (i.e. open innovation) may help accelerate progress and overcome general industry challenges which would allow auto manufacturers like Tesla to focus more on forming their individual competitive advantages.

As stated earlier, limited competition and sales in the electric vehicle segment drove Tesla’s decision to adopt an open innovation strategy in 2014.  The former dynamic still persists with electric vehicles sales forming approximately 1% of all vehicles sold in 2017 [6].  However, in Tesla’s 2017 annual report, the company noted how competition in the electric vehicle segment had increased [7].  Although this shift in the competitive landscape may only be slight, it may signal a need for tweaks in Tesla’s approach.  A focus of deriving value via disruptive technology is one option the company should explore. It is not clear whether Tesla is considered disruptive player at the moment [5]. However, given the increased competition from more established auto manufacturers, Tesla may decide to focus on establishing a unique competitive advantage with disruptive technology.  Indeed, prior to announcing their open innovation policy, it was widely considered that a significant portion of Tesla’s value would be driven by its intellectual property rights and technological advancements [8].

Tesla’s brand name is arguably the strongest in the electric vehicle segment [9].  However, Tesla’s competitors could easily establish a comparable reputation given their expertise and success in the auto industry.  Toyota, Volkswagen, and the BMW Group have already announced plans to aggressively pursue the electric vehicle market [6]. These competitors could easily leverage Tesla’s technological advances via open innovation and use their greater resources to develop higher quality electric vehicles and squeeze Tesla’s current and future market share.

Recently, Tesla have had lot of troubles with declining stock prices, strenuous production targets, and pressures to be cash flow positive [10].  Going forward, should Tesla reconsider their open innovation strategy and move towards “closed innovation” if they stumble across disruptive technology? Even without disruptive technology, should a “closed innovation” policy still be pursued especially since protected patents could help drive up Tesla’s valuation?

Word Count: 738

Sources

[1] Thompson, C. (2017). How the electric car became the future of transportation. [online] Business Insider. Available at: https://www.businessinsider.com/electric-car-history-2017-5#the-electric-car-burst-onto-the-scene-in-the-late-1800s-and-early-1900s-1 [Accessed 13 Nov. 2018].

[2] Tesla.com. (2018). About Tesla | Tesla. [online] Available at: https://www.tesla.com/about [Accessed 13 Nov. 2018].

[3] Tesla.com. (2018). All Our Patent Are Belong To You. [online] Available at: https://www.tesla.com/blog/all-our-patent-are-belong-you [Accessed 13 Nov. 2018].

[4] Bcg.com. (2010). [online] Available at: https://www.bcg.com/documents/file36615.pdf [Accessed 13 Nov. 2018].

[5] Downes, L. and Nunes, P. (2017). Is Tesla Really a Disruptor? (And Why the Answer Matters). [online] Harvard Business Review. Available at: https://hbr.org/2017/08/is-tesla-really-a-disruptor-and-why-the-answer-matters [Accessed 13 Nov. 2018].

[6] Totty, M. (2017). Will Electric Vehicles Replace Gas-Powered Ones?. [online] WSJ. Available at: https://www.wsj.com/articles/will-electric-vehicles-replace-gas-powered-ones-1510628461 [Accessed 13 Nov. 2018].

[7] Ir.tesla.com. (2018). SEC Filing | Tesla, Inc.. [online] Available at: http://ir.tesla.com/node/18501/html [Accessed 13 Nov. 2018].

[8] Abrams, A. (2014). http://time.com. [online] Time. Available at: http://time.com/2865496/tesla-opens-patents/ [Accessed 13 Nov. 2018].

[9] Energysage.com. (2018). 2018 Best Electric Car Companies and Manufacturers | EnergySage. [online] Available at: https://www.energysage.com/electric-vehicles/buyers-guide/top-ev-companies/ [Accessed 13 Nov. 2018].

[10] Assis, C. (2018). Tesla meets Model 3 production goals and sales targets, but shares still fall. [online] MarketWatch. Available at: https://www.marketwatch.com/story/tesla-meets-model-3-production-goals-and-sales-targets-but-shares-still-fall-2018-10-02 [Accessed 13 Nov. 2018].

 

 

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23 thoughts on “Open Innovation at Tesla – Time for a Change?

  1. I’m shocked that Tesla is so open with their innovative technology. How are they able to convince shareholders that this is in the best interest of the company? This essay does a solid job of laying out Tesla’s reasons for open innovation. It does leave me wondering a) which companies are taking advantage of this collaborative offering b) how is the information actually shared c) what does disruptive technology mean in this context?

    In this semi-competitive environment, it seems to me like Tesla would want to partner with production partners rather than go free-for-all with its IP. If production capacity is their greatest limitation, their capital and labor should focus there. If their innovation is plateauing, it would seem to be that you’d want to do more than open up to outside innovation. Targeted contests that would energize the public around tackling certain pieces of the puzzle could greatly benefit R+D at Tesla.

  2. Great article about Tesla and overview of the e-vehicle industry. I feel as though Tesla does follow a “closed innovation” policy when it comes to the actual battery that runs the car.

    E-vehicle’s are mostly about the battery technology (which I think Tesla is very secretive about and does not share publicly). Tesla uses a lithium technology platform which is JV with Panasonic of Japan. I am given to understand that even among batteries, the Tesla battery, has the highest energy density. Once the battery of the car is obtained the rest of the car – is not very complex, since there is really no IC engine involved. E-vehicles have such few moving parts.

    But overall, great article, well written, articulated and relevant discussions were made.

  3. This is definitely a thought-provoking subject. On one hand, the old adage that “a rising tide lifts all boats” seems to apply here. If the industry as a whole does well, and Tesla is able to preserve its competitive advantage via the high reputation of its brand among consumers, then continuing to advocate for a policy of open innovation is a logical choice.

    On the other hand, it is possible that Tesla enjoys the existing valuation it has due to the underlying intellectual property that it owns. If that’s the case, then legally protecting that IP via a more closed development system makes sense.

    The underlying assumption of your argument is that Tesla’s policy of open innovation has in fact contributed to its lagging stock performance. In actuality, I think that Tesla’s cash flow problems, its absurdly high valuation in relation to its earnings, and systemic concerns about government protections for clean energy platforms are the generally accepted explaining factors for its performance.

    For that reason, I would advocate for continued open innovation.

  4. Great piece on Tesla and an interesting question about whether the organization should take its IP and technology development back behind closed doors. I recall my reaction when I read about Tesla opening up its innovations and IP to the public years ago. I was positively surprised, really supporting the idea that EV development was something important to society and should be embraced by other auto manufacturers.

    I would argue that Tesla should remain open. This is mainly because it makes no difference if they close their innovation – competitors will still be able to reverse engineer Tesla products. They would then begin leveraging Tesla’s pioneering tech to improve their own and consequently will catch up eventually. The only way Tesla maintains its competitive edge is to continue being the icon for innovation in EV technology, which is supported by its open innovation policy.

  5. I think open innovation in a hardware-driven category is really risky. In answer to your question of whether they should “close” if they come across really disruptive technology, I think the answer is yes. Open innovation in a hardware-driven category is really risky, given much of the challenge is identifying how to do something – repeating it is less difficult. I think the “rising tide lifts all boats” adage is appropriate for software, but it feels like Tesla’s technology is part of what feeds it’s brand, therefore commoditizing that too much could dilute it’s brand.

  6. Very interesting article! I think that Tesla should not reconsider their open innovation strategy for two reasons. First, the company is generally ahead of its competitors in terms of innovation, so the fact that they share their past developments won’t put their business at risk. Their competitive advantage is based on their research and development skills, which enable them to continuously enhance previous developments. Hence, they can always be ahead of their competitors by being more creative and disruptive in terms of improving previous developments. Secondly, I think that Tesla should leverage open innovation to work in collaboration with some competitors to jointly develop technologies. For example, Toyota and BMW are working together to co-develop green technologies. I think Tesla can find strategic partners in the industry to share knowledge and leverage R&D skills. I suggest looking at the below article (pages 23-24) to expand on this idea of collaborative open innovation.

    https://www.pwc.com/gx/en/automotive/industry-publications-and-thought-leadership/assets/pwc-highway-to-growth-strategies-for-automotive-innovation.pdf

    Overall, great job on analyzing this very interesting topic.

  7. Great insights, thanks for sharing!

    I agree with the fact that an open innovation policy in a market that’s trending might be difficult to sustain.
    Tesla’s under great pressure to deliver and, although it might have enjoyed a competitive advantage in the last couple of years, the press and public are demanding more and more from it. When I see the whole pack of auto companies coming quickly behind Tesla, building on top of what the company has already achieved (due to the open innovation policy), then a leading position might be difficult to sustain.
    I think that in order for Tesla to survive the crunch of a soon-to-be overcrowded market for electric vehicles, it needs to hold on to a few key innovations in a closed loop form.

  8. Thanks for the insights on an interesting topic and company.
    After reading this, I think Tesla is in a difficult position. Although I can see the initial logic in its open innovation policy (rising tides raises all boats), I think its current financial position and new competitor base leaves them vulnerable.
    In terms of the financial position, Tesla is currently sitting on a massive amount of debt and is burning cash at alarming amounts. At the same time, they are falling behind on production promises and are asking their suppliers for longer payment terms.
    At the same time, their competitor base is not coming from additional start-ups, but instead from major automakers. These companies have significant capital and manufacturing know-how to leverage in their electric vehicle development.
    Looking at this landscape, I think Tesla should very much consider going towards a closed-innovation policy in an effort to maintain their advantage of being more advanced. That head start may not last long.

  9. I really enjoyed reading this! While I admire the benefit that Tesla is hoping to provide to the decrease in carbon emissions across the world via this open innovation strategy, it does seem like it is at the expense of their own shareholders. For very new innovations, there are high upfront R&D spends which Tesla and its shareholders is hypothetically footing for the benefit of other companies. Thus I do think they should consider more of a “closed” policy unless they feel like they are equally sharing in the benefits of this open learning.

  10. Great article! Thanks for sharing.
    It’s really impressive how Tesla is driving innovation not only through its products but also in its way of working. However, I believe Tesla will not achieve its (supposedly) well-intended program of fostering innovation in the electric car industry for two reasons.
    First, although electric cars seems as a really attractive industry to apply innovation mechanisms, it is already led by Tesla, which is so sure about its leadership that it proposes an open innovation policy. Therefore, potential competitors may be reluctant to even enter the industry, as they will be defeated by this strong auto manufacturer.
    Secondly, if a potential new competitor is actually successful and starts gaining market share from a currently-harmed Tesla, would Tesla allow this? Or would Tesla lawsuit its competitor by questioning its “good faith”? I think it would be the latter case.

  11. Great piece! I suspect Tesla’s open innovation policy is less open than it seems. As noted, battery innovations are likely mostly commoditized, and as such, open innovation can only benefit Tesla through battery improvements. However, Tesla’s true advantages come in its ability to manufacture (the Gigafactory) and its excellence at product design and safety. These competitive advantages are not accessible through Tesla’s open innovation policy and thus remain its major points of differentiation. Although Tesla is a new entrant in the industry, it has already surpassed the world’s carmakers in on-board electronics, software features, and safety. These are the cutting edge innovations that drive adoption as much as the cars’ identities as electric vehicles. But this “secret sauce” is not patented, it’s driven by internal design processes that are not easily copy-able.

  12. Thanks for sharing this thought-provoking piece. I am definitely curious to see how Telsa will play out in the next few years. On the issue with open innovation, I do feel that they have taken the right move when the market has not yet mature. It must have been a calculated risk to have an Open Innovation Policy, as they were trying to build momentum to shift an entire market of gasoline-fueled car industry into electric car industry. The magnitude of conversion must have been so large, that Tesla believed that net-net, it would be more beneficial to increase the pie of the electric car market through having more players. Additionally, they managed to establish a market-leading position through their leadership in this and many other initiatives. That said, I do share similar concern on whether this would be sustainable, especially as incumbent players in traditional industry with deep pockets start entering the industry more and more aggressively. My take would be that they should selectively patent some technology that they believe gives them an edge in the market. This is premised on the assumption that they have already created sufficient competition and momentum in the consumer space, and protected patents would go a long way in ensuring they can defend their position in the gradually maturing market.

  13. Thanks for sharing this and for your efforts putting it together!

    From my perspective, the question of whether this is good policy depends partially on what Tesla’s goal is. If they are purely a profit maximizing firm, I think it is likely a bad policy. The “rising tide lifts all boats” impact will likely not compensate for the lost market share from sharing their innovations. On the other hand, if their overall goal is to improve the world from reducing emissions, the lost revenues for them would be made up in spades through the long-term benefit to our global society. Of course, this is dependent on Telsa maintaining enough profits to fund future R&D.

  14. Great read about Tesla’s open innovation policy! I agree with some of the commenters above that Tesla is likely quite “closed” when it comes to their most important IC (e.g., batteries) and also maintains a significant competitive advantage in terms of factory production capabilities. ksimmons raises an interesting distinction between the utility of open-source for hardware vs software companies. I agree that open source makes much more sense for software companies. As I think about the future of vehicles, I could see this moving to a more software driven business (e.g., self-driving vehicles). Tesla’s current policy may be helping to orient it for this software based future.

  15. Thanks for sharing this! I did not know that how thirsty Tesla was for open innovation and knowledge sharing.

    After reading this essay, I have one major question in mind: Since electric cars are very niche topic, could Tesla really benefit from public opinion? I think that Tesla employees have probably the greatest knowledge in this niche area throughout the world. I am wondering if there are any specific examples that Tesla leveraged some ideas from open innovation and made profits out of those ideas.

  16. Two thoughts. What does Tesla mean by “in good faith”? This is very vague language and potentially malicious. For example, would Tesla still avoid reinforcing its right to its patents if it starts being beat out by a competitor? Tesla might paint this as an altruistic attempt to spur the electric vehicle industry, but it could at any time pull the plug on this. As a conservative competitor, you can never be too sure of where Tesla falls.
    This leads me to my second thought. All of the more successful electric carmakers today are all traditional carmakers, who first started cranking out hybrids, but are increasingly turning to fully electric vehicles. This seems to show that Tesla was ultimately not successful in generating more competition in the electric vehicle space; otherwise, more boutique electric car manufacturers would probably have emerged on the scene. Perhaps these traditional behemoths would not have been able to do so without Tesla’s open innovation philosophy. But it is noteworthy that it is only the same companies with all the resources in the world who have been able to develop competitive electric vehicles.

  17. I think that in the short and medium terms, Tesla’s Open Innovation Policy makes sense for three reasons. First, Tesla needs electric cars to become a much higher percentage of total cars sold if it is to fulfill its mission and vision; a feat it will not be able to achieve by itself in the near future. Second, there are a lot of synergies for other Tesla assets in case more electric cars are sold; e.g., by selling battery packs to other players, it can gain the necessary scale to produce Tesla cars more efficiently. Third, Tesla gained substantial good PR exposure due to its Open Innovation Policy.

  18. Thanks so much for the interesting read and perspective! Tesla’s “Open Innovation Policy” reminded me a lot of how many technology companies have a policy/culture of open source to encourage innovation and collaboration within the industry with the goal of bettering society. I question whether open innovation hurts Tesla – given that only 1% of vehicles sold use alternative energy, it’s my sense that the only way for Tesla to drive down costs (and become more competitive in the industry) is for there to be a larger mass of alternative-energy cars being made by other manufacturers. I’m curious how other manufacturers have responded to this policy – do they feel any pressure to also adopt this policy from Tesla/their customers?

  19. I think it is extremely admirable that Tesla has committed to their Open Innovation Policy, IP is definitely their most valuable asset and they are sharing it with the world in the hopes that all can benefit. While this opens the door for abuses to the policy by their competitions, you would hope that this sets a standard or example for other companies to follow suit in the same way to allow for sharing of best practices and best ideas to really accelerate innnovation in places that can advance technology that could be beneficial for all. I think the fact that the pharmaceutical industry, tech industry and academic research is so protective of their research really honestly inhibits the innovative potential of society. There are probably much larger gains if competitors were not competitive at all, as society can gain for the research all of these respective firms have done and it would reduce waste or double work. However, this is pretty impractical and unrealistic, or else patents wouldn’t exist and IP wouldn’t be so profitable.

  20. Very interesting! I was not aware that Tesla was so open with their technology or that they aren’t issuing patent lawsuits against competitors utilizing their technology. I see this as an example of the old adage “a rising tide lifts all ships.” Given that electric car vehicle sales are such a small segment of car sales, it makes sense that opening up their technology to competitors could lift this entire industry. It will be interesting to see if Tesla opens up their battery technology in a similar fashion in the spirit of open innovation.

  21. Fascinating topic and very well-written essay.

    This remarkable decision by Tesla reminds me of Volvo’s decision to not patent the invention of the 3-point seat belt. Similarly, the company thought that it was too important an innovation for humankind for a company to profit from it. It probably benefitted Volvo’s brand equity so much that it outweighed their likely loss in sales due to competition.

    Probably this is also true about Tesla. Although other companies are increasingly competitive in the EV space, the Tesla brand is certainly unique and, as long as they are able to deliver on their promises, they should incur too much of a problem due to this OI policy.

  22. Thank you for writing this. Great read!
    On the question that you posted regarding the potential impact that could patent earned via “closed innovations” on the stock price, I think that Tesla should pursue any mechanism that allows it to innovate faster than its peers. Especially because patents do not add significant barriers to entry that could dissuade the competition; in an industry with a high level of manufacturing complexity such as this, barriers of entry are not solely created by patents but by having the manufacturing facilities to produce the cars, which very few players in the world have.

  23. Very interesting read. Given all that’s been in the news lately about Tesla, including the insane push for the roll-out of the latest Tesla car, it’s quite surprising to read that Tesla has no intention of filing any patent lawsuits under their open innovation policy. This seems incredibly benevolent given the value of IP in this industry when you first think about it. Yet, on second thought, unlike other industries there are very few auto manufacturers who survive worldwide and I imagine the electric vehicle space will eventually pan out in a similar manner where brand value — above IP will determine the ultimate winners. If this is the case, then Tesla’s open innovation policy is clearly brand-additive and something they should continue to promote.

    On a side note, I was curious whether this policy drove more collaboration in the industry overall and found that this was sadly not the case — The article linked below describels a patent lawsuit that Tesla is facing today from a hydrogen trucking company. (https://techcrunch.com/2018/11/14/nikola-trucking/).

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