Toyota showcases the dynamism of IP strategy in the auto sector

While much of the discussion around IP value creation may focus on the high-tech and life sciences sectors, one of the big trends over the past few years has been the degree to which the auto sector has become part of the conversation. An increasingly significant factor has been the convergence of different technologies in today’s vehicles, many of which are increasingly connected to wireless networks and resemble – as industry players are fond of pointing out – smartphones on wheels.

But it is also a result of how the cars of today include new forms of traditional technology, such as how the vehicles themselves are powered in the form of hybrid and electric engines.

The traditional, petrol-powered internal combustion engine may still have some life in it, but for years now automakers have been churning out more environmentally friendly vehicles and building up their stockpiles of patents that read on the new technologies.

Toyota has long been an IP leader in the auto sector with one of the largest patent portfolios in the industry; recently it launched a major initiative that has once again highlighted its patent savvy, as well as its lead in the hybrid electric vehicle space. In April, the Japanese car giant announced that it was opening up around 24,000 patents for licence on royalty-free terms. As part of the move the company also expanded a previous pledge it made in 2015 to grant access to rights related to fuel-cell vehicles.

Toyota is responsible for 80% of global hybrid car sales according to Reuters, while patent studies show that it is the automaker with the largest portfolio in the field (see table for how Toyota dwarfs its Japanese rivals). The company says that it wants to provide fee-based technical support services to rivals that choose to implement its royalty-free electrification technologies.

The decision to enter a business such as hybrid electric vehicles depends on a lot more factors than IP rights, but the move suggests that Toyota may have realised some business value from its earlier, more tentative fuel-cell move.

As we wait to see the impact of Toyota’s move, here are some of the stand-out details from the programme.

The fine print

Here is what the company is saying about what technologies are on offer:

The patents included are for parts and systems, such as electric motors, power control units (PCUs), and system controls […] Together, Toyota will offer approximately 23,740 patents awarded over more than 20 years of electrified vehicle technology development. The grant period will start immediately and last through the end of 2030.

Toyota says that in addition to hybrid vehicles such as the Prius, the patents can also support the development of plug-in hybrids, as well as fuel-cell vehicles.

The new offer also significantly expands the company’s fuel-cell patent deal, which was originally slated to run through 2020:

Toyota has already been offering 5,680 patents related to its fuel cell electric vehicles (FCEV) since January 2015. Now, Toyota is adding approximately 2,590 patents related to electric motors, 2,020 patents related to PCUs, 7,550 patents related to system controls, 1,320 engine transaxle patents, 2,200 charger patents, and 2,380 fuel cell patents (bringing the total of fuel cell related patents to 8,060).

The key thing that is not included in the deal is electric vehicle battery technology, which Toyota develops jointly with Panasonic.

Toyota has previously licensed out hybrid tech

The key question when a company opens up a free or open licensing programme is whether the technology was generating any royalty revenue in the first place. In the case of Toyota, we do know that it has licensed out hybrid-related technology to other automakers in the past.

Toyota first licensed its hybrid technologies to Nissan in 2002. In 2004, Ford acquired the rights to use a smaller subset of Toyota’s intellectual property. Deals with Subaru and Mazda followed in 2010.

We do not know how much revenue Toyota reaped from this series of deals. At the time of the Ford deal, analysts did not expect it to be a big revenue generator – although they may have meant in the context of the automaker’s massive global auto sales.

However, licensing may have become less of a business necessity for Toyota’s hybrid programme over the years. The first generation of the Prius (manufactured from 1997 to 2003) was not profitable for the company, so licensing was an attractive way to offset its development costs. Since then, Toyota has continually figured out ways to make the Prius propulsion system more efficiently, cutting production costs by 75% to the current generation and making the car a big money maker.

Toyota’s IP team, led by Kenji Kondo, has apparently concluded that the revenues from these and potential future patent deals are likely to be eclipsed by the money that Toyota could make from helping other companies to develop hybrid models of their own.

Would-be hybrid makers still face patent risk

Patent analyses show that Toyota is the pre-eminent automaker when it comes to hybrid-related patent holdings. That is no surprise given its dominance of the commercial market for hybrids.

But there are other obstacles. Toyota itself fought a drawn-out US patent battle with licensor Paice LLC, which claims early and foundational hybrid technology patents. Toyota was reportedly furious about the assertion, dubbing Paice a ‘patent shark’ – when the two sides eventually settled in 2010, the deal included an agreement to state publicly that Toyota’s hybrid technology had been invented independently.

Paice is still active and last year it inked new deals for various hybrid-related patents with Ford and Honda.

How successful was the 2015 fuel-cell pledge?

Four years ago, Toyota made its offer to license more than 5,000 fuel cell patents on a royalty-free basis. As mentioned above, its decision to significantly expand that programme and introduce a much bigger one in hybrid technology could be seen as a signal that Toyota thinks the open patent offer created some value for the company.

Critics at the time suggested that Toyota had made a bad bet on hydrogen fuel-cell technology that was destined to lose out to battery electric technology championed by the likes of Tesla, and that the open patent programme was either a publicity stunt or a self-interested attempt to drive creation of more hydrogen refuelling infrastructure.

Four years later, it is fair to say that hydrogen fuel-cell vehicles are still marginal compared to their battery electric rivals, with hydrogen-powered offerings such as Toyota’s Mirai and Honda’s Clarity being dwarfed in the market by battery-powered models from Nissan, Tesla and others.

While there are plenty of technological and infrastructural reasons for this state of affairs, there are some interesting things happening in the fuel-cell space. Batteries dominate when it comes to personal vehicles, but the big advantage of hydrogen is its energy density, making it attractive in large-scale applications such as trucking and shipping. Nikola, an electric trucking company founded around this concept, was set up in 2014 and says that it has booked $14 billion in orders (it is also suing Tesla’s truck business for $2 billion over alleged design patent infringement).

It is unclear whether new entrant Nikola formally took advantage of Toyota’s open patent pledge, but the company has certainly benefited from the fact that the Japanese company is not interested in crowding competitors out of the fuel-cell field. Nikola CEO Trevor Milton told an interviewer in February: “Toyota’s main goal is to get hydrogen everywhere. They don’t look at us as a competitor. We’ve had talks with them; they’ve been very friendly.”

Hybrid tech expected to grow

Predictably, some are now criticising Toyota’s hybrid-tech offer, echoing reactions to the automaker’s 2015 fuel-cell move. The argument is that Toyota is trying to prop up a technology (hybrid electric vehicles) that is destined to lose out to a superior solution (full battery electric vehicles), just as it did with hydrogen fuel cells.

However, this deal is significantly different. For one thing, hybrid vehicles currently have double the global market share (3%) of fully electric ones (1.5%). A recent forecast by JPMorgan suggests this gap will be maintained or even widen as hybrids and fully electric cars proliferate dramatically over the next decade. The market for hybrids, the bank predicts, will “swell from just 3% of global market share to more than 25 million vehicles or 23% of global sales” by 2025.

If that analysis is correct, the global auto market will look very different by 2030 when Toyota’s royalty-free licence offer runs out. The company has concluded that patent licences are not the best way to make money out of this explosion in the use of hybrids. No doubt a lot of IP and commercial analysis went into that call. How it plays out could have a big impact on the industry.