Car manufacturers or part suppliers: who’s in the patent driving seat?

The automotive industries have long been a legal battleground. Car manufacturers’ once-total control was first challenged by calls to open up the market for parts and components to greater competition. Then, greater standardisation of parts saw economic power shift from the motor brands to suppliers, which no longer relied on a single customer. Now, in an era of open innovation, suppliers not only make parts to order but also innovate whether in tandem with their customers or with other suppliers to create value-added product enhancements over which they have control. If bargaining power is a function of IP ownership, it has been slipping out of the hands of the manufacturers, which may have been able to secure the IP rights in the fruits of collaborative research with suppliers but have no such leverage over the increasing volume of innovation that is supplier generated.

The past 18 months have seen the most rapid and stunning shifts yet in this turbulent industry sector, as Tesla, Ford and Toyota have opened up several thousands of automotive patents, mainly in the electric vehicle, battery and fuel cell fields. In the cases of Tesla and Toyota, this use is free. Why?

Major car manufacturers are not charitable foundations. They are driven by investment and depend for their continued existence on delivering a return. Patents are cash-generating assets. If they are to produce value correlative to the cost of developing them, how can this be done if they are neither sold nor commercially licensed and are dropped as barriers to market entry?

Opening an automotive patent portfolio for free use can achieve many things strategically.

First, it reduces the risk of defending invalidity claims and, while patent litigation in the sector has never been close to the white-hot intensity of mobile telecommunications, it has been expensive and unsettling enough to be worth avoiding.

Second, it provides a basis on which the patent owner’s innovations can become normative within the sector, or at least a ground on which they can be part of a standard shared with other manufacturers. This may have the result of locking recipients of free licences into products, components and manufacturing processes that will give them the option of related improvements and innovations that are not free to use – and for which they will have to pay. This Cipher Snapshot of the spread of fuel cell patents at the time of Toyota’s opening-up illustrates that it is virtually impossible for a single player to monopolise the entire market, which indicates that some sort of sharing or standardising arrangement offers the most realistic opportunity to benefit from an investment.

Third, if there is a struggle between the car manufacturer and its suppliers for control of the direction the industry takes, opening up thousands of patents for free licensing can take the wind out of the sails of innovative suppliers, whose backers will ask what is to be gained by investing in new technologies that, however good they may be, are competing with free-to-use ones.

Is this third point plausible? Figure 1 below offers a matrix of the current portfolio size of granted patents, tracked with new families of patent applications filed within the past three years. Looking beyond Toyota, the stand-out performer and clearly in a league of its own, the suppliers are in a powerful position. Denso – hardly a household name among drivers but the world’s largest auto-parts maker and historically linked to parent Toyota – has the biggest patent portfolio, while German multinational engineering company Bosch comfortably leads the race to file. With the exception of patent-rich Honda, no other car maker comes close. A future in which product specifications are designed, innovated and made by suppliers, reducing branded vehicle manufacture to assemblers playing little more than an expensive game of LEGO may be the fear behind the open-licence move.

Figure 2 reinforces this fear. It shows patent-seeking activity by manufacturers and suppliers over an extended timeline from 1985 – when the then-European Community first started regulating vertical agreements and concerted practices – and 2013, a little before the recent free-to-use frenzy. While the level of patent filing among suppliers has often exceeded that of manufacturers, the gap between them appears to be widening with the passage of time.

What will be the result of the three car manufacturers’ free-to-use patent policy? Inevitably, much will depend on the patchy nature of the current global economy recovery and the conflicting fortunes of the US, European and Asia-Pacific markets. Figures 3 and 4 below show which businesses are best placed to influence these three segments of the global cake. Bearing in mind that the main automotive innovators have been remarkably choosy in their where-to-patent decisions, the influence of free-to-use licensing policy may yet depend on issues as arbitrary as which market recovers most strongly and which players have patents to enforce  – or to license  – when it does.