Why Tesla Should License Its Technology

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Because Tesla (NASDAQ: TSLA) began as a startup company, it was able to take some risks that other car manufacturers were unable to. It invested time and energy into developing lithium-ion battery technology that other car companies were unable or unwilling to get off of the ground. 

Now that Tesla has proven its mettle with two consumer-grade vehicles, it should think about licensing its technology to create strategic partnerships with select manufacturers. Why would the company want to give its secret sauce to potential competitors? One word: revenue.

Tesla still needs to conquer the problem of revenue

Tesla lost $396 million dollars last year on $385 million in automotive sales plus $27 million in development services revenue. What's interesting is that the revenue derived from development services for the company went down 50% from $55 million development revenue during 2011. 

The company's method of internal design processes coupled with emerging technology research should give it an upper hand in helping other manufacturers. Yet, for some reason, this revenue went down. Could it be because other manufacturers are working on electric technology on their own?

While General Motors (NYSE: GM) has had trouble generating revenue from the Volt, it quietly decided to discontinue its development of hybrid trucks. It seems like Tesla could help GM while still retaining ownership of  its own technology. 

Competition plays a huge role

In the United States, Tesla is doing things that are so innovative that it is hard for the likes of General Motors and Ford (NYSE: F) to want to work with the company. From 1984 until 2010, GM and Toyota, who were bitter rivals, had a factory in California because a joint venture was the only way they could make money-making cars in the state. Who owns that facility now? Tesla. 

GM is doing well. Only a few years after being bailed out by the government, it had a record year in 2011. That was followed up by a dip in profit in 2012, which might have had something to do with a jump in operating expenses to a whopping $182 billion, a 26% increase.

Ford had a down year in 2012 compared to 2011 as well, but it is selling more of its flagship F series trucks, 645,316 of them, which was its best output since 2007 when the company sold 690,589.

Both Ford and GM are afraid of working with Tesla, and the upward trending car market in the United States is making it easy to avoid electric technology. Plentiful natural gas might also be playing a role going forward in R&D spending. But as we've seen in the past ten years, the energy and economic environment changes quickly. Things are good now, but the landscape can shift rather quickly. 

Tesla needs to be selective in the companies it works with

Tesla is already helping other car manufacturers with electric technology. It sells components to Daimler AG. It also built an electric drivetrain system for Toyota to use in its RAV4 EV SUV. Yet, the common theme in those two partnerships is that neither of those companies are American manufacturers.

The synergy between these two and Tesla makes sense. Daimler can help Tesla in European market. Toyota can help in the Asian market, especially emerging ones. It is expected that Tesla's sales there will double the number of electric vehicles on the road in Hong Kong. 

Should Tesla continue to license and offer development services? The company still has not had a profitable financial year. And while it can continue to raise money, it seems like it's playing a high stakes game. When you look at the company's financials, the numbers are getting bigger and the losses are moving up higher. When you are competing with gigantic carmakers that have a full lineup of vehicles, you are challenged and forced to think differently. Sometimes, it might be better to work together than to simply be enemies.

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Daniel Cawrey has no position in any stocks mentioned. The Motley Fool recommends Ford, General Motors, and Tesla Motors . The Motley Fool owns shares of Ford and Tesla Motors . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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