Chris Umiastowski is the growth investor for Globe Investor's Strategy Lab. Follow his contributions here and view his model portfolio here.
About two weeks ago, Elon Musk, CEO of Tesla Motors Inc., took the stage to answer questions from his audience at the annual meeting of shareholders. One investor's question ended up revealing a lot about Elon Musk and the value of long-term thinking.
Mr. Musk has often said that he hopes other big automotive companies will launch high-quality electric vehicles to rival Tesla's because it would benefit the planet to move away from carbon consumption. The investor asked how Mr. Musk plans to balance his goal of getting a greener planet with his fiduciary duty to shareholders. Is it possible for a CEO to hold this belief and take actions that help the competition while also meeting his obligations to act in a manner that maximizes shareholder value?
At that shareholder meeting, Mr. Musk said he was considering doing something controversial with the company's patents. Nine days later, he announced that all of Tesla's patents shall be freely available to anyone who wishes to use them in good faith.
But don't patents have immense value? A consortium of Google Inc.'s competitors, including Apple Inc. and BlackBerry Ltd., paid billions to buy a portfolio of Nortel Networks Corp. patents to protect themselves against Android. Qualcomm Inc.'s entire business model is based on charging royalties for its control over much intellectual property in the mobile communications industry. How can Mr. Musk justify shedding the armour that is supposed to protect them against the competition?
I think the answer lies in taking a very long-term perspective on the industry. The bulk of Tesla's patents relate specifically to electric vehicles. Yet the vast majority of cars sold burn gasoline. As Mr. Musk explained, competitors are not anywhere close to having electric cars represent even 1 per cent of their total sales. If the competition is too busy making gasoline cars, Tesla's patents don't have much value to shareholders.
Instead of using patents to guard itself from competition that practically doesn't exist, Elon Musk has effectively taken his company's patents and started an open-source movement for electric cars, which may, in fact, create more competition. If the world is going to move toward electric vehicles, then competition must exist. It's essential. No car company can own the entire market. Tesla can boost shareholder value by accelerating its own growth and by building a powerful brand. By donating its patents to competitors, it hopes to accelerate the growth of the entire electric vehicle market. When meaningful competition exists I believe it will coincide with a trend toward consumers becoming much more open to the idea of battery-powered cars. If Tesla is the premium brand in this market, shareholders should enjoy the benefits.
Tesla Motors expects to deliver about 35,000 cars to customers around the world this year. This is a drop in the bucket compared to annual new vehicle production, which is approaching 100 million. Tesla would have to grow 28-fold to reach 1 per cent market share. Smart CEOs do not worry about competition when the effect of this competition won't represent an obstacle to growth until very far into the future.
While I can appreciate a healthy debate around the valuation of Tesla's shares, I think the controversy around what they've done with their intellectual property sends a strong message about long-term thinking. As an investor who aims to hold companies for decades, I like it when I see management behaviour that aligns with my thinking.
Much of Wall Street is focused on next quarter, where most CEOs are at least thinking about the next few years. But there are a smaller number of great executives who are thinking well into the future. When I see evidence of this happening, whether it be Facebook acquiring WhatsApp to potentially dominate mobile instant messaging or Google investing in self-driving cars, I tend to follow these stories with great interest. I want my investment portfolio aligned with where the world is going, not where it is today.
Disclosure: I own shares in Tesla Motors, and also hold it in my Strategy Lab model portfolio.
Chris Umiastowski