6 Reasons Why Apple Should Buy Tesla

Recently, multiple-sources have published news regarding the possible acquisition of Tesla by Apple. Both opinions have been expressed that Apple should or should not buy Tesla, and the authors mostly reference either an insider report that Apple is actively talking to Tesla, or the financial analysis of both companies. Among all the related news articles that I have read, I like Michael Richard’s post “9 reasons why I think Apple might buy Tesla” the most. And yes, I also think that Apple should buy Tesla, and will show you my six additional reasons—and since I am a technologist and not a business analyst I will express my point of view from an innovation perspective.

At 4iNNO, we always look at any innovation opportunity through three lenses:  The consumer; the technology; and the business model. I will try to use the same framework to describe my six reasons.

1. Tesla is playing in the early majority market, competition from Apple is hurting EV’s development
The current Tesla Model S’s customers are no longer celebrities who care about their PR imagine, nor sports enthusiasts who want to experience the instant torque from the Tesla dual-motor Model S; they are regular early majority consumers who care about safety, interior, range, easy to charge, space, etc. They drive the Tesla Model S for their commutes on a daily basis and they recommend the same car to the people they know.

Thus, it is time for Tesla to harvest its success from the early effort and try to extend it. Actually, Tesla profit margin at 25% is much higher than the industrial average. The high return will help Tesla execute the plan to deliver family targeted E-SUV Model X and later a more economic EV Model E for mass market.

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However, the competition from Apple hurts the overall EV development in the short term because Apple has hired and is still recruiting engineers from Tesla and other battery manufacturers.  This is interfering with the existing R&D efforts in EV and the energy storage industry. The total net outcome in the short term will be a slower rate of technical development in EV and energy storage markets. We may argue that Apple can beat the competitors, including Tesla, in one strike—well, Tesla has a diversified talent ecosystem, which may not be significantly affected by poaching one or two engineers each time by Apple.  The picture on the left is a Tesla (the Greek temple in the middle) patent ecosystem indicating the Author-Organization relationship. After filtering the patent space and graying out some authors we can see a pattern indicating Tesla’s IP strategy has a good balance between group effort and individual effort. The authors on the outer circle are connected by multiple orange lines, which means they collaborated on several patents. There are also collaborations between groups, which make the whole outer circle like an interconnected web. Thus, recruiting away one or two engineers, or even the lead engineers may not hurt Tesla’s R&D plan because the knowledge is broadly spread in the company. On the other hand, we can also see some independent authors in the inner circle; they are specially tasked to experiment. We can expect them to merge into the greater “spider net”, once the experiment is successful. Since these are exploratory types of project, Tesla can replace a lost engineer and re-launch the project with relatively low cost.

2. Tesla has a strong consumer community to support crowd charging
If you think charging your Tesla Model S on a long distance road trip will be challenging, you probably want to learn about the Plugshare community where existing EV owners can post their address and share their plug with other owners. The following picture compares the numbers and locations of Tesla official charging stations and Plugshare charging locations around the Cincinnati area.

mapAs we can see in the picture, the Plugshare community covers all of metro Cincinnati, including Northern KY, so one can find a charging location with 15 miles in or around the city. Some consumers report successfully completing cross country trips in both the US and the EU using connected plug-sharing communities.

3. Tesla has strong core technical competence in battery pack technology
As we all known, combustible engine automobile manufacturers criticize EVs mainly for their relatively low range.  Range is determined by several factors including efficiency of the motor, energy management system, weight, etc., but the determining factor in the equation is the battery pack: total kW.h, battery design, thermal management systems, energy management system, charging system, etc.  Within the 465 patents that Tesla has there are 146 patents on battery pack technology. It is more than 30% of Tesla’s patent portfolio.  In addition, we can see a strong uptrend in Tesla’s patenting activity during the past two years because Tesla realizes the strategic importance of power storage (the apparent downtrend from 2013-2014 is because data for 2014 is incomplete).

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Thus, if Apple is going to develop a new environmentally friendly automobile, the options are limited in the EV market, and it will be a challenge to either: Disrupt the current EV power supply system by using some novel energy harvesting technologies; or use a different battery construction than what Tesla currently has locked up.

In addition to the technical restrictions of Tesla, Apple also faces the challenge of existing protected intellectual properties from multiple competitors. When Tesla went into the pure EV market, the IP space was almost wide open and that took Tesla 5 years from protecting the IP to delivery of Model S (2007-2012). People may think that Apple’s 1000 engineer army can speed this process up, but how much freedom to practice in this area still exists for near-term capitalization?

4. Tesla is the technology leader in some core EV technology areas
By deeper mining into Tesla’s patents, I found it has several high value items in the portfolio. The value of a particular patent can be analyzed by the size of the family and the citation from the competitors (competitors must cite extant patent closely relevant to their new filings, and this betrays that competitors are investing in the same technical domain). If the company values this patent, it will invest money to increase the size of the patent family to get IP protection in more countries and expand the protection period. (A single patent is protected for 20 years.)

The following analysis is from Patentinspiration.com and represents an analysis of the value of Tesla’s patents. There are approximately 50 patent families in Tesla’s portfolio. If we only consider those families that Tesla is heavily investing in, the number reduces to about 37. Assuming each family has an average number of only 5 patents, this totals about 185 patents out of the total 465 (~40%)! Citation analysis for two of these families demonstrates that some well-known players in the industry are heavily citing Tesla’s patents.

circles patentFamily

5. Tesla has huge potential in adjacent markets and applications
Michael Richard’s original post already mentioned that Tesla sees itself as an “energy innovation company”. The previous patent analysis has shown Tesla has a technology focus on battery pack, which is readily re-applicable to domestic and grid energy storage applications.

Moreover, buying Tesla can give Apple the opportunity to look ahead to the next S-curve and work on some disruptive technologies that potentially can transform the existing EV paradigm, instead of becoming part of the competition.

6. Tesla has a closed distribution system
Tesla’s own distribution system is unique in the automobile industry and they claim this is the only way they can guarantee an outstanding consumer experience. It is very similar to Apple’s culture and philosophy. By buying Tesla, Apple can operate on the existing closed distribution system and help Tesla clear some road blocks in the way to make this system available in more states in the US.

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*inno360 is a proprietary open innovation platform developed by inno360 inc.

Qian Li, PhD

Associate

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