a report on tesla’s international expansion … · in its international expansion, tesla faces...
TRANSCRIPT
EXECUTIVESUMMARY
Tesla, Inc. pursues a global standardisation strategy because of high pressures for cost
reduction,particularlyitssaleofacommodity-typeproductandthehighlycompetitivenature
oftheautomobileindustry,andlowpressuresforlocalresponsiveness.Inresponse,Teslahas
standardised its product offering across markets and production processes, allowing for
economies of scale, experience curve cost savings and synergies between its product
divisions.By reducing theswitchingcostsofadopting fully-electricvehiclesand increasing
consumer perceived value, Tesla intends to scale up its production and international
operations.Thecompanycompetesinanexternalenvironmentshapedbylimitedpressures
forlocalresponsiveness,asittargetshomogenoustransnationalconsumersegments.Tesla
wouldbe,however,advisedtodifferentiateitsproductshorizontally,soastoreflectminor
variationsinculturalpreferences.Itsmainchallengesfornowaretochallengeconsumers’
doubtfulattitudetowardselectricvehiclesandscaleupproductiontomeetanever-rising
demand.
Tesla, Inc., previously Tesla Motors, Inc., engineers, manufactures and sells fully electric
vehiclesandenergystoragesolutions.Incorporatedin2003,andfoundedbyCEO,ElonMusk,
andCTO,JeffreyStraubel,amongstothers,Teslaofferscleanenergygeneration,storageand
consumptiontechnologieswithamissiontoacceleratetheworld’stransitiontosustainable
energy.Theautomotivesegmentcomprisesthedesign,productionandsaleoffully-electric
vehicles,targetingthepremiumsedanandSUVmarketsthroughitsModelSandModelX,
and themainstream vehiclemarket through its recently introducedModel 3. The energy
generationandstoragesegmentcomprisesthedesign,productionandsaleofsolarenergy
generationsystemsandenergystoragesolutionsto industrialandcommercialconsumers.
The company benefits from core competencies in powertrain engineering, vehicle
engineering,innovativemanufacturingandenergystorage.
Key financial figures & Peer
Analysis(FinancialTimes)
Tesla Ford Volkswagen
RevenueinUSD: 7billion 151.80billion 217.27billion
NetincomeinUSD: -674.91million 4.60billion 5.14billion
MarketcapitalisationinUSD: 42.87billion 46.18billion 68.72billion
Operatingmargin -9.53% 2.71% 3.27%
Numberofemployees 17.78k 201k 626.72k
Keyproducts Image Starting price in
USD
Keyfeatures
ModelS 62,000 218milesofrange
All-wheelDrive
Infotainment
System
COMPANYPROFILE
ModelX 77,100 237milesofrange
Autopilothardware
Safetyfirstdesign
Falconwings
Seatingfor7adults
Model3
35,000 215milesofrange
Autopilothardware
Seatingfor5adults
WhileamajorityofTesla’srevenuesaregeneratedintheUnitedStates(upto60%in2016,
accordingtoThomsonReuters), itsdomesticmarket,thecompanyhasrenewedeffortsto
expandinternationally,aimingtotaparisingtransnationaldemandforelectricvehicles(EVs).
TeslanotablytargetsEuropeanandAsianmarkets,soastodiversifyitsrevenuestreams.This
sectionpurportstoidentifyandevaluateTesla’sinternationalexpansionstrategy,andtooffer
anin-depthlookatTesla’sapproachtotheNorwegianmarket.
a. Globalstandardisation,Tesla’sstrategicresponsetohighpressuresforcostreduction
Teslatargetsthreekeytransnationalconsumersegments(Mangram,2012),whichitseeksto
penetratethroughastandardisedproductoffering.Firstly,thehigh-endsportscarmarketis
arelativelynichemarket initially targetedthroughtheTeslaRoadster, thecompany’s first
model,whoseproductionwasterminated in2012.Secondly, the luxuryvehiclesedanand
SUV market is a more competitive segment offering higher sales potential, which Tesla
intends to tapwith theModel S andModel X. Finally, themainstream vehicle consumer
segment allows for mass vehicle production, identified as Tesla’s next step as Model 3
productionbeingsinthesecondquarterof2017.
ThetransnationalhomogeneityofthesemarketsegmentsmeansTeslafaceslowpressures
forlocalresponsivenessandcanofferastandardisedproduct,withminimumdifferentiation
acrossmarkets.Tesla’smarketsegmentationisrevealingofitshigh-enddisruptioninnovation
model,perwhichthecompanypenetratedthehigherendoftheautomobilemarket,where
consumersarewillingtopayapremium,beforeloweringpricestocreateamassmarketwith
highunitvolume.
Initsinternationalexpansion,Teslafacesseveralpressuresforcostreduction.Tobegin,Tesla
markets a commodity-type product, cars, which satisfies a universal need for private
transportation.Furthermore,Teslaoperatesinahighlycompetitiveindustrywherepriceis
one of the key drivers of demand and consolidated industry players, such as Toyota,
Volkswagen and BMW have raised barriers to entry. Additionally, consumers face low
switchingcostswithregardstovehiclespoweredbyinternalcombustionengines(ICEs),but
IDENTIFYINGANDEVALUATINGTESLA’SINTERNATIONALEXPANSIONSTRAETGY
higher switching costswhenpurchasing EVs, because of added efforts to copewith their
limitedrange.Finally,therearetechnologicalconstraintstoTesla’sexpansion,particularlya
highminimumefficientscaleresultingfromhighR&Dandoperationalfixedcosts.
Tesla’sresponsetothesepressuresforcostreductionhasbeentostandardise itsproduct
offeringandproductionprocesses.Thecompanyischaracterisedbyalowproductvariety,
with its efforts concentrated on the production of Models, S, X and 3. Moreover, Tesla
displays concentrated production capabilities, with the production of vehicles located in
FremontandLathrop(California)andTilburg(TheNetherlands),andofbatterypacksinits
Gigafactory1(Nevada).Theseproductioncapabilitiesareverticallyintegrated,withseveral
manufacturingoperations,suchaspaintoperationsandfinalvehicleassembly,conjunctively
conducted at the Tesla Factory (Fremont). The company has also invested in flexible
manufacturingequipment,withmachinessupportingtheproductionofdifferentmodels.This
allows Tesla to reduce set-up times and improve quality controls.More importantly, the
concentrationofTesla’sproductioncapabilitieshasenabled thecompany tobenefit from
economiesofscale,asitshighfixedcostsarespreadoveralargerfleetofvehicles.Inaddition,
Tesla’smodularapproachtobatterysystemdesignhasallowedthecompanytostandardise
itsproductionprocesses,whichhelpeditmaximiseproductivityandridedowntheexperience
curve, thus fuelling cost savings. Likewise, there are synergies between Tesla’s product
divisions,asitsproprietarytechnologyisusedintheproductionofseveralproductswitha
viewtosupportfutureR&Ddevelopments.Forinstance,Teslahasuseditsvehiclecomponent
level technologies to enhance its energy storage products. Finally, the company has built
verticalstrategicalliancestoproduceitskeycomponents,partneringwithPanasonicinthe
constructionandoperationoftheGigafactory1.ThisalliancenotablyenablesTeslatoshare
fixedcostsandtheassociatedrisksofdevelopingnewbatterycapabilitiesandtoestablish
technologicalstandardsfortheEVindustry.
b. HowTeslahasincreaseditsproducts’customerperceivedvalue
Thecompetitivenatureofthecarindustryhasplacedhighpressuresoncostreduction,which
haspushedTeslatoincreaseitsproducts’customerperceivedvalue.Bycreatingvalue-added
services,throughaglobalnetworkofstores,servicecentresandSuperchargers,thecompany
supportscustomersintheirpurchasingdecisionsandreducestheswitchingcostsofbuying
EVs.Ontheotherhand,developinguniquecorecompetenciesinpowertrainengineeringand
energy storage has enabled Tesla to price its product at a premium. Finally, over-the-air
softwareupdatesallowTeslatolimititsproducts’obsolescence,strengtheningtheirvalue-
for-money.
c. Reducingswitchingcosts,Tesla’sprioritywhenenteringforeignmarkets
The low pressures for local responsiveness Tesla faces have allowed the company to
standardise itsproducts,andconsequentlytofocusonreducingcustomerswitchingcosts.
For instance, providing customerswith aUniversalMobile Connector allows these touse
differentchargingservicesworldwide.Similarly,developinganetworkofSuperchargers(790
as of 31st December 2016, per Tesla’s Annual Report) has made long-distance travelling
convenient and, thus, undermined the conception that EVs’ low range diminish their
usefulness.Teslahasalsoincreasedthenumberofchargingoptionsavailabletoconsumers,
byofferingdestinationcharging,inpartnershipwith4,140hospitalitylocations(TeslaAnnual
Report,2016).ThecollateraladvantageofTesla’snetworkofcustomerservicecentresisthe
highvolumeoffeedbackitcollectsfromcustomers,whoinformR&Dandfacilitateaquick
introductionofproductimprovements,thuspromptingcostsavings.
Additionally,Teslareducesitschannellengththroughdirect-to-consumerdistribution,made
possiblebyitsvastinternetpresence.Thelatterhascreatedacustomer-centricsupplychain
ataglobalscale,allowingforthemasscustomisationofTeslavehicles.Thispresenceismet
with high customer engagement, as most purchases have been conducted online (Tesla
AnnualReport,2016).
d. Casestudy,penetratingtheNorwegianmarket
NorwayhasthehighestrateofEVspercapitaintheworld,withEVsaccountingfor22.2%of
newcarregistrationsin2015(Jolly).ThevastdemandforEVsisaresultofNorwegian’srising
concernwithregardstoenvironmentalissuesandveryfavourablegovernmentincentivesto
purchaseEVs.Forinstance,importtaxes,taxesonnon-recurringvehiclesfeesandthe25%
value-addedtaxarenotimposedonthepurchaseofEVs.Overalltaxbreaksamountcircato
50%ofTesla’sbaseproductprice(Mirani,2013),meaningTeslaproductsareabouthalfthe
priceofrivalproductsfromthelikesofBMWandAudi.
Tesla capitalised on this high demand by investing in the development of charging
infrastructures, opening Superchargers for the first time outside of the U.S. Direct-to-
consumercapabilitieswerealsostrengthenedbytheopeningofshowroomsinOslo’sairport
andshoppingmalls,alongwithservicecentresinBergenandTrondheim.
Tesla’sinternationalactivityanddevelopmentarealsosubjecttoexogenousfactors,which
shapetheenvironmentinwhichthefirmevolves.Differencesacrossmarketscreatepressures
forlocalresponsiveness,whichlimitacompany’sabilitytostandardiseitsproducts.TheCAGE
distance framework, developed by Ghemawat (2007) measures cultural, administrative,
geographicandeconomicdifferencesacrossmarketsandhelpsfirmsgainvisibilityontheir
targetmarkets.Thispaperfocusesonasetofcountries,selectedfortheirhighGDPpercapita,
an insightful indicator with regards to the affordability of Tesla’s products in specific
countries.
a. Culturaldifferences
TherearelimiteddataonconsumerattitudestowardsEVs,thoughthesearepositedasthe
mainculturalbarriertoconsumerwidespreadconsumeradoption.Thisisbecauseconsumers
consistently doubt EVs’ range, ease of use, and disruptive technology. Positive attitudes
towardsEVsarehoweverwitnessedincountrieswhereindividualsshareconcernsregarding
theenvironment,andarewillingtotakeriskstocontributetoitsprotection.Therearealso
variationsinculturalpreferenceswithregardstocaroptions,whichTeslamustconsequently
incorporateinthemarketingofitsproducts.
b. Administrativedifferences
Government regulations regarding health & safety and component standards and
governmentincentiveprogrammesdifferacrosscountries.Giventhatpriceisakeydriverof
competition in the automobile industry, these incentive schemes are often crucial to
customers’purchasingdecision.Equally,variations in importdutiesoncarsmayadversely
affectTesla,byraisingthepriceofitsproducts,andquestioningitschoiceofimportationas
an entry mode into foreign markets. Additionally, government policies regarding the
implementationofchargingstationsisdecisiveinunderminingtheperceptionthatEVsare
inconvenientforlong-distancetravel.
c. Economicdifferences
EVALUATINGTHEEXTERNALENVIRONMENTINWHICHTESLAEVOLVES
Economic conditions shape demand and Tesla’s revenue streams and cost structures.
Variations in fuel prices, for instance, affect the cost of ownership and may incentivise
switchingtoEVs.
Source:WorldBank’sWorldDevelopmentIndicators
Teslawouldbeadvisedtotargetcountrieswherefuelpricesarehigh,suchasNorwayand
Switzerland,soastodifferentiateitsproductfromvehiclesusingICEs.
GDPpercapitaisalsorevealingastotheaffordabilityofTesla’sproducts,withcountrieswith
highGDPper capita representing significantmarket opportunities for Tesla, provided the
marketsizeisnottoorestricted.
Source:WorldBank’sWorldDevelopmentIndicators
0
0,5
1
1,5
2
2,5
Pumppricefordieselfuel(US$perliter)
2010 2012 2014
0
50000
100000
150000
GDPpercapita,PPP(currentinternational$)
2014 2015
AkeymetricforTeslaiscurrencystabilityagainsttheU.S.dollar.Ontheonehand,giventhat
Tesla’s products prices are denominated in U.S. dollars, the appreciation of the currency
raises the price of imports for foreign countries. On the other hand, certain expenses
associatedwiththeproductionofgoodsaredenominatedinforeigncurrencies,forinstance
battery cell purchases in Japanese yen. The risk is that a depreciation of the U.S. dollar
increasesthecostofgoodssold.
Source:WorldBank’sWorldDevelopmentIndicators
Astrongvariabilityinacountry’sexchangeratedeepensdifferenceswiththeU.S.marketand
increasestheriskofoperatinginthatcountryforTesla.
d. Geographicdifferences
Geographic differences, including natural resources endowments and transportation
infrastructures,complicatecompanies’ internationalexpansion.With regards toTesla, the
qualityofacountry’sroadnetworkiskeytothesuitabilityofthecompanies’products,which
aredesignedforgoodroadconditions.
02468101214
Officialexchangerate(LCUperUS$,periodaverage)
2010 2011 2012 2013 2014 2015
Source:OECD.Stat
Countries with higher infrastructure investment and maintenance spending thus displaybettergeographicpredispositionsfortheuseofTeslaEVs.
Finally,accesstoelectricityisakeylimitingfactorforTesla’sexpansionabroad.
Source:Euromonitor
TheabovegraphthusexplainsTesla’sinitialfocusonNorthAmerica,EuropeandAsia,and
evidencessteepdifferencesthatmayimpedethecompany’sexpansioninLatinAmericaand
theMiddleEastandAfrica.
0
0,5
1
1,5
2
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Transportinfrastructureinvestmentandmaintenancespending(asa%ofGDP)
Australia Canada France Norway Switzerland UnitedStates
0
20
40
60
80
100
120
AsiaPacific Australasia EasternEurope LatinAmerica MiddleEastandAfrica
NorthAmerica WesternEurope
PopulationwithAccesstoElectricity(asa%oftotalpopulation)
2011 2012 2013 2014 2015 2016
e. Casestudy,TeslainChina
Tesla’sinitialstruggletopenetratetheChinesemarket,positedtobecomethelargestmarket
forEVs,resultsfromhigherthanusualpressuresforlocalresponsiveness,asevidencedinthe
followingtable:
Differences Tesla’sresponse
Cultural Preferenceamongstownersofluxuryvehiclestobechauffeuredaround.ConsumerreluctancetowardsEVs,becauseofallegedunreliabilityandmaintenancecosts(Wang,2014)
Additionofa$2,000executiverearseatoption(Bloomberg,2015)toitsproductoffering.
Administrative - Differentplugstandards- 25%importdutieson
foreignvehicles(Bloomberg,2015).
- RequirementthatforeigncarmakerscreatejointventureswithlocalplayerswhenlocalisingproductioninChina.
- Lotteriesandauctionstoregisternewvehicles.
- Adaptproductstomeetmarketstandards.
- NegotiationswithJinqiaoGroupforasharedinvestmentof$9billioninconstructionofanotherGigafactory(Bloomberg,2016).
- Negotiationswithlocalauthoritiestobypassregistrationrestrictions.
Geographic Lackofcharginginfrastructures,underminingconvenienceofTeslaproducts
- DevelopinganetworkofSuperchargers.
- Providedcustomerswithfreehomechargers
Highpressuresforcostreductionandlowpressuresforlocalresponsivenesshaveenabled
Teslatoadoptaglobalstandardisationstrategy.Thecompanyhassuccessfullyconcentrated
itsproductioncapabilitiesandcreatedtechnologicalandoperationalsynergies,allowingfor
economies of scale and experience curve cost savings. Three homogenous transnational
consumersegmentshavebeentargetedthroughalimitedrangeofproducts,whichrelyon
uniquecorecompetenciesandvalue-addedservicestodifferentiatethemselvesfromthatof
competitors.Tesla’sinternationalexpansionstrategyconsistentlyreliesonthedeployment
ofnetworksofchargingstationstoincreasecustomerperceivedvalue.Thoughthecompany
faces low pressure for local responsiveness, it is highly subject to national regulations,
particularlywithregardstoitsautopilotfeaturesandgovernmentincentiveprogrammesto
purchaseEVs.Tesla’s internationalexpansionsstrategyalsoplacesseverepressureson its
cashresources,whichquestionsthesustainabilityofthecompany’sbusinessmodel.Finally,
repeateddelaysinthescaling-upofproductiongeneratefrustrationamongstconsumersand
mayunderminethefirm’sbrandimageonwhichitreliestoovercomeconsumerreluctances.
Wordcount:2,459
CONCLUSIONS
Bloomberg News. 2015. Musk Reboots Tesla’s China Strategy. [Online] Available at:https://www.bloomberg.com/news/articles/2015-03-29/musk-reboots-tesla-china-strategy-as-range-anxiety-crimps-sales[Accessedon:25/03/17]
Bloomberg News. 2016. Tesla Eyes Shanghai as Front-Runner for China Production. [Online] Available at:https://www.bloomberg.com/news/articles/2016-06-20/shanghai-said-to-be-front-runner-for-tesla-china-production-site[Accessedon:26/03/17]
Euromonitor. 2017. Passport Database. Access via UCL Login. [Online] Available at:http://go.euromonitor.com/passport.html[Accessed:27/03/17]
Ghemawat,P. 2007.RedefiningGlobal Strategy. Boston,Massachusetts:HarvardBusiness SchoolPublishingCorporation
Jolly,D.2015.NorwayIsaModelforEncouragingElectricCarSales.TheNewYorkTimes.[Online]Availableat:https://www.nytimes.com/2015/10/17/business/international/norway-is-global-model-for-encouraging-sales-of-electric-cars.html?_r=0[Accessedon:20/03/17]
Mangram,M.E.2012.TheglobalizationofTeslaMotors:astrategicmarketingplananalysis.JournalofStrategicMarketing20(4),pp.289-312
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