Tesla’s Entry into the Motor Vehicle Industry in China
Introduction
Tesla is currently at the forefront of the passenger vehicle industry. The company went public in 2010, and ever since then, it has remained a powerful, exciting, and innovative player within the automobile industry. The company recorded a market value of $100 billion within the first month of 2020 (Zhao 8). According to (Zhao 9), Tesla’s Model 3 is viewed as one of the best-selling plug-in vehicle models. The sales that were recorded in 2019 all stemmed from deliveries of the Model 3 vehicles. The numbers surpassed sales recorded for Model X and Model S, which were designed to appeal to the high-end market. With these record sales, Tesla is set to broaden its scope with regard to customer segments and come up with products that will be patronized all people across the globe. China has exhibited a higher affinity towards the Model 3, and this is what has caused the company to spread its wings into the country’s automobile industry. Tesla’s growth strategy in China encompasses satisfying this underlying demand. Their decision to venture into the Chinese market was both informed and forward-thinking.
Why Choose China
China is an integral part of any automaker’s business plan since it serves as a booming market for their automotive products. The country presented a large number of advantages that coincided with Tesla’s business model. For example, China had a very diverse consumer market that provided a high demand for the Tesla product. Secondly, the financial systems within the country were centralized. This means that the government had the power to make financial decisions if they deem the venture profitable. In which case, they were quite ready to invest in the Tesla company business portfolio. China possessed a mature industrial production chain that allowed for a sophisticated supply chain. Finally, China had a lithium-ion33 battery production capacity, which made it the best place to center their production (Teece 180). Moreover, China held a dominant position within the global market for rare-earth metals as well as an advanced electronic manufacturing propensity. Both of these elements are essential in the production of the three components of EVs, namely; batteries, electric controls, and electric motors (Perkins 475), thereby drawing Tesla to them.
Tesla took advantage of the possibilities of new technologies presented by China that new market entrants tend to ignore. They were able to develop new assets based on this new knowledge. Concerning demand, they satisfied both the investors and the customers’ appetites by giving them products that have exhibited excellent performance in terms of responsiveness, user interface, and range (Teece 503). Tesla had three objectives as a new market entrant into China. The first objective was to expand its shares into one of the largest markets for electric vehicles. The second was their desire to stay independent of any Chinese ventures that they would be forced to join and, thirdly, protection of their intellectual property. Tesla was able to achieve their objectives as they had forged them. They were able to retain 100% ownership of their enterprise in China, which is a feat that had not been achieved by any other foreign car factory (Teece 505). China has recently amended its law to provide autonomy to most foreign companies and thereby protect them from ‘forced technology transfers’ (Lin 7). Tesla is, therefore, fully protected from any threats to its independence.
Why has Tesla’s Business Boomed in China
Proper Understanding of Supply and Value Chains: The business model that the company has adopted is based on their ownership of their entire supply chain beginning from the point of manufacture up until the distribution. By doing this, Tesla has expertly cut down on their operation costs, the costs of goods sold, and the cost of manufacture. The resultant effect is the sustainability if the business. Tesla’s supply chain management strategy has a sole focus on long term growth strategy (Valikangas 470). Due to the company’s ability to come up with entirely new types of cars and redesigning of its manufacturing process, it has the upper hand within the industry value chain. It has altogether disrupted the automotive industry in the areas of battery charging infrastructures (Rarick 29). With its highly efficient integrated business model, it shall continue to maintain its top position within the Chinese markets.
Tesla’s Energy Ecosystem: From the onset of the business, Tesla recognized the importance of having their own energy supply systems. They have adopted the principle of self-sufficiency, which has enabled them to address the problem of supplying power (Musonera 122). Currently, they are working on the development of a new energy supply ecosystems that shall be distributed to superstations across China. Doing this ensures that they cut down on their operational costs and instead inject those funds into the production process.
Effective Retail and Distribution: Tesla has a hold on all of its sales outlets and dealers and is responsible for its own repair and maintenance. They have adopted a system that contravenes the traditional OEM’s that possess a pronged selling network (Alfayad 7). Instead, they are marketing their product through the internet and directly interacting with their potential customers. Conducting their sales model this way enables the company to have control over the customer experience and the channel touch-points. Having such authority ensures that in the event of new product development, they are at the forefront of dissemination.
Excellent Sales and Pricing: Tesla’s revolutionary sales model has been a significant aspect of their success within the Chinese Market. They practice online-only sales that give credence to fixed pricing. This means that at whatever time that you purchase a vehicle from the Tesla network, the retail price remains the same (Musonera 124). There are no fluctuations, neither are there downturns. This strategy gives them a unique quality that other brands cannot compare themselves to.
Informed Customer Segmentation: The customer base for the Tesla market is vastly different from those of other carmakers. Its goal thus far is to create an affordable product for the mass market. The customer segments that are in demand for battery and recharge systems need to match those of the vehicles (Chen 239). The homogeneity of these market segments translates to lower pressure for local responsiveness since Tesla can provide a standardized product across all markets.
Tesla’s Success in China
Tesla was probably the first company to come up with a robust EV powertrain and battery pack (Chen 240). Its unique branding approach has set it apart from other carmakers and has attracted a variety of loyal clientele. Their business and operational model sought to address critical issues that the Chinese vehicle buyers faced. Tesla is not free from competition within the Chinese market. Both foreign and domestic automakers are giving them a run for their money in the manufacturing and sale of electric vehicles. Different foreign car companies have seen the potential within the Chinese market and are fast-tracking their local production of electric cars so that they can penetrate their market. However, Tesla has firm government support in China and have already solidified their position within their economy. They have been afforded a special dispensation that gives them the benefit of independence as a foreign auto manufacturer.
Chinese automakers have also been beneficiaries of Tesla’s success and support their development through their cohesive interactions. They have acquired a sum of $60 worth of incentives and subsidiaries since 2012 (Zhao 9). This monetary support is meant to aid them in research and development and financial backing for their battery charging stations. Non-Chinese automakers such as Audi and Toyota have also cemented their positions in Asia and their activities being carried out through agreements and partnerships with local entities.
Conclusion
The decision made by Tesla to manufacture vehicles in China is one that they will not be regretting any time soon. The levels of profits that they have garnered from their activities are enviable by other electric car manufacturing companies. The government support, revolutionary sales model as well as identification of proper customer segmentation were critical drivers of their success. Each multinational automaker’s China profitability strategy needs to be based on effectively evaluating the EV market. Strong sensing capabilities will allow other firms to deduce the direction in which the industry is heading and enable management to identify assets that need to be enhanced. This is precisely how Tesla made its decisions and became successful within the Chinese market.
Works Cited
Alfayad, Fadye S. “ECONOMIC REFORM AND WHOLLY FOREIGN-OWNED ENTERPRISES IN CHINA: MARKETING LESSONS FOR SAUDI ARABIA IN IMPLEMENTING ITS OWN ECONOMIC REFORMS.” Academy of Marketing Studies Journal, vol. 23, no. 3, 2019, pp. 1-11.
Chen, Luguang, et al. “Interstudy Reproducibility of Dark Blood High-Resolution MRI in Evaluating Basilar Atherosclerotic Plaque at 3 Tesla.” Diagnostic and Interventional Radiology, vol. 24, no. 4, 2018, pp. 237-242. doi: http://dx.doi.org/10.5152/dir.2018.17373.
Lin, Junzhu, and Huajie Liu. “Influence Factors of Exporting EU Vehicle to China.” Journal of International Trade, Logistics, and Law, vol. 4, no. 2, 2018, pp. 1-12.
Musonera, Etienne, and Carol Cagle. “Electric Car Brand Positioning in the Automotive Industry: Recommendations for Sustainable and Innovative Marketing Strategies.” Journal of Strategic Innovation and Sustainability, vol. 14, no. 1, 2019, pp. 120-133.
Perkins, Greg, and Johann P. Murmann. “What does the Success of Tesla Mean for the Future Dynamics in the Global Automobile Sector?” Management and Organization Review, vol. 14, no. 3, 2018, pp. 471-480. doi: http://dx.doi.org/10.1017/mor.2018.31.
Rarick, Charles A., Arifin Angriawan, and Kasia Firlej. “BYD of China: An Automotive Company on the Road to Global Dominance?” The Journal of Applied Business and Economics, vol. 19, no. 6, 2017, pp. 27-36.
Teece, David J. “China and the Reshaping of the Auto Industry: A Dynamic Capabilities Perspective.” Management and Organization Review, vol. 15, no. 1, 2019, pp. 177-199. doi: http://dx.doi.org/10.1017/mor.2019.4.
—. . “Tesla and the Reshaping of the Auto Industry.” Management and Organization Review, vol. 14, no. 3, 2018, pp. 501-512. doi: http://dx.doi.org/10.1017/mor.2018.33.
Välikangas, Liisa. “Forum on Tesla and the Global Automotive Industry.” Management and Organization Review, vol. 14, no. 3, 2018, pp. 467-470. doi: http://dx.doi.org/10.1017/mor.2018.30.
Zhao, Fuquan, Han Hao, and Zongwei Liu. “Technology Strategy to Meet China’s 5 L/100 km Fuel Consumption Target for Passenger Vehicles in 2020.” Clean Technologies and Environmental Policy, vol. 18, no. 1, 2016, pp. 7-15. doi: http://dx.doi.org/10.1007/s10098-015-1019-5.