Research on strategy affecting the internationalisation of firms is growing interest. The internationalisation became a source of inspiration for many entrepreneurs aware of the opportunities offered by foreign markets.
In the contemporary world, businesses begin their operations domestically but must draw up a long-term plan on how the business will be going international^1.
Internationalisation can refer to a company that takes steps to increase its footprint or client base outside of its country of domicile and into international markets^2
Internationalisation can be achieved through very different ways. There are those companies that take part through exporting their products to foreign countries and continue to strengthen their home market.
Tesla for example has recently undertaken an expansion strategy in order to strongly internationalise into the Chinese market. Indeed, in June 2017 Tesla announced that it was exploring Shanghai’s local manufacturing possibilities to implement an auto plant called “Gigafactory” and that it was engaging in talks with local government.
It may be recalled that the vision and mission followed by the company are respectively “to create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles” and “to accelerate the world’s transition to sustainable 〖energy〗^15”, while the long-term objectives are global expansion, strategic partnerships, technological innovation and shift from ‘High Price Low Volume’ to ‘Low Price High Volume’. Tesla’s ambitions are therefore market-driven because the company is trying to develop its offer in foreign countries in order to expand global sales.
While a majority of Tesla’s revenues are generated in the United States, its domestic market (up to 79% in 2016 according to Tesla Magazine^3), the company has renewed efforts to expand internationally, aiming to operate an increase in transnational demand for electric vehicles (EVs). Since 2016, the company showed a growing interest in Asia by strongly targeting the Chinese market, so as to diversify its revenue streams^4. Tesla’s strategic move to internationalise in the Chinese market is likely to be due to the fact that the future of electric cars lies in China.
Targeting such a market is, in my view, essential. Although in the west, Tesla is still the pinnacle of the industry. In China, it is anything but. China holds the major cards, and electrification of transport will be led by China. If in 2015, sales volume of New Energy Vehicles in China is less than American market by 〖2000〗^8 (exh 4), today, China has become the world ‘s largest market for electric vehicles with a plug-in volume of 394 000 units sold in 2018 against 122 000 units sold for the United States (exh 5). Chinese drivers buy more new EVs, than anywhere else in the world according to the International Energy Agency^9.
This market seems to be promising and needs to be exploited in my opinion. However, it is necessary to have a deeper look at the Chinese market features. However, one question that comes to mind in regard to the Chinese market and its future: how is it that the EV business goes from strength to strength, not in the US, but in China?
One of the main explanations given, is the fact that the Chinese government plays an important role in the EVs market. Rapid growth in EVs has been made possible by China’s generous subsidy policy^10. To encourage the growth of the industry, China has provided manufacturing incentives to EV companies, as well as subsidies to consumers who purchase EVs. Chinese government spent $7.7 billion on EV subsidies in〖 2017〗^11 and wants seven million new energy vehicles to be sold in the country by 2025. That’s fuelled a sharp increase in the number of purchases in China over the last few years and this will continue for the next few years. It is understandable that consumer goods have become an important part of the political settlement in China. Car ownership has boomed and is now within the reach of the growing middle class, with possession rising from barely 20 per 1000 of the population in the early 2000s to more than 100 per 〖1000〗^13 today. At this point, the ambitions for Tesla to better access to the Chinese market make some sense. The future of EVs might be in China and the Chinese market could be strategic since there is a huge opportunity if the company seeks to enlarge its market by increasing its outputs and its sales.
Whereas the Chinese policy seems to be in favour of Tesla’s China strategy, another reason, more controversial this time, can influence this choice of internationalisation. The other reason that made Tesla turn to internationalise its production in China is due to the China-US trade war. Earlier this year, the Trump administration imposed sweeping tariffs on Chinese goods. The goods marked for tariffs will now face a punishing 25 percent border tax when they are imported into the US. The point is to punish China by making Chinese products more expensive for American consumers and businesses to buy. China then responded by imposing 25 percent tariffs on US goods, including automobiles^14. Thus, the company must focus on building out that market. Tesla cars cost more in China than in the U.S. because of the cost of shipping and the 40% tariffs recently raised in the ongoing U.S.-China trade war.
Following this, the objectives of Elon Musk to produce Teslas in China are clear : Doing so offers better access to the domestic market, and it eases the effects of punitive tariffs for its Chinese customers.
Let us now give an executive summary to get a global view of Tesla’s strategy and
how the company handled to penetrate the Chines market.
The market entry strategy that Tesla pursues may be defined as a global standardisation strategy. On the Chinese market, the company is subjected to high pressures for cost reduction, particularly due to its sale of commodity-type product and the competitive nature between automakers^16. In response to that, Tesla has decided to standardise its product range across the Chinese market and manufacturing methods, allowing for economies of scale, cost savings and synergies in its production line. By adopting fully electric-powered vehicles, Tesla is trying to reduce the switching costs and therefore, driving up the perceived value of consumers. The potential hurdles that Tesla noticed when entering the market are the consumers’ hesitation towards EVs and meet the needs of an ever-rising demand. These points bring a broader understanding of context, concerns, and maybe limitations that the company faced when setting up its plan to enter the Chinese market. Now, let us go back on these points in detail in order to have an in-depth look at Tesla’s market entry strategy in China.
In its international expansion, Tesla sought to offer a standardised product with minimum differentiation across the market. To this end, the company established a Segmentation, Targeting, Positioning strategy matching with the Chinese market.
Let us first focus on Tesla’s market segmentation. The company segmented the Chinese market as a middle to higher-end sports car market where consumers are looking for an environmentally-friendly premium car. This segmentation thus encompasses both luxury vehicle sedan market and commercial vehicle segment. In my opinion, this segmentation is quite clever because getting on both markets allows the company to have a broader-based consumer adoption by producing a mass production vehicle. The company can gain reputation across the high-end car market where consumers are willing to pay the price and then create a mass market with high unit volume.
Regarding the targeting strategy, Tesla has distinguished different way to target the Chinese market through its car models. Firstly, the middle to higher-end sports car market which is a relatively niche market, dominated with Model S. Secondly, the luxury vehicle sedan market, more competitive and offering higher sales potentials, with the Model X. Finally, the Model 3 would target the mainstream vehicle consumer market allows for mass vehicle production. (Exhibit 7)
The last point to deal with is the positioning strategy. Indeed, Tesla wants to be clearly identified as environmentally friendly with a zero emissions policy. Extremely functional and attractive with a 17-inch touch screen inside the car or having a battery with ranges from 160 to 300 miles, useful life up to 7 years. (cheaperexhibit).
The segmentation, targeting and positioning strategy using by Tesla is, in my opinion, relevant because it gives a clear picture of the company in the EVs market in China.
The car industry in China is a competitive market. Thus, Tesla decided to standardise its products and reduce customer switching costs in order to increase the consumer perceived value. This strategy was Tesla’s priority when entering the Chinese market.
Tesla created added value services, through a dozen of network of stores and showrooms in China, service centres and superchargers, to support consumers in their buying decisions and also to lower switching costs when purchasing electric vehicles. For example, the company already installed over 1000 superchargers^17 in China and plan to build a few more (exhibit), the largest supercharger station of which is in Beijing^18. Tesla has also increased the charging options to consumers. To this end, the company worked in partnership with over 1000 locations and with Chinese companies or start-ups such as NIO^19 , which offers its own services and charging infrastructures to Tesla owners.
Additionally, the company has set up a wholly-owned subsidiary in Shanghai, Tesla 〖Shanghai Co.Ldt〗^24, which is a subsidiary of Tesla’s Hong-Kong company, marking the latest step in the march toward setting up factory in China. Indeed, Tesla recently made a deal with the Shanghai government to invest in a new factory in the city called “Gigafactory 3” and operate in Research and development. The Gigafactory 3, announced in June 2017, should starts production during the second half of 2019. The factory would be able to produce 500 000 vehicles a year^20. This strategy used by Tesla is a Greenfield investment. In this case, it can be explained by an investment where the company buy the land, build the facility and operate the business on an ongoing basis in the foreign market (China). It is certainly the most costly and holds the highest risk but some markets may require the company to undertake the cost and risk due to government regulation, transportation costs, and the ability to access technology or skilled labour^21. Tesla undertook such an investment due to the China-US trade war as explained above and thinks that it would be economically appropriate to build a factory in order to bypass the punishments on export tariffs imposed by the US government.
This investment is in my opinion, one of the key points of Tesla’s market entry strategy. Such a partnership with China’s National Government will allow the company to be a major player on the EVs market. Nevertheless, I think that the company will face financial issues. A massive investment is required ($5 billion) to build the factory, but to invest billions of dollars, it would require a major injection of fresh capital which means that Tesla will have to tap capital market, in a big way. Thus, Elon Musk will need more money and must find massive capital injections. However according to Bloomberg, some companies such as Panasonic Corp. are already willing to team up with Tesla, particularly on its plan to build a factory in Shanghai. I strongly believe that Tesla will work with other relevant partnerships which will allow the company to carry out its Gigafactory and to limit some investments.
However, if the market entry strategy seems to be perfectly leaded now, Tesla
initially struggled to penetrate the Chinese market. In early 2016, the company faced issues in the cultural, legislation and geographic area.
Culturally speaking, Chinese consumers were at first sight reluctant to embrace electric cars because of acquisition and maintenance costs (exh 8). Tesla then adapted the marketing and prices of its product to gain confidence of consumers and to promote the purchasing decision.
Regarding the legislation, the company had to adapt its products to meet market standards (e.g different plug standards) or negotiated with local authorities to bypass restrictions on exports (cf “Gigafactory 3”). Making such a deal with the local government gives Tesla an advantage over its rivals and allows the company not to rise prices.
Furthermore, Tesla had to manage some geographic issues such as the lack of charging infrastructures, by developing a network of Superchargers or providing free home chargers. The quality of the road network is also important to consider for Tesla.
Tesla already undertook an expansion into the Norway market in 2013-2014. The fleet of plug-in electric vehicles in Norway is the largest per capita in the world^22 (exhibit 9). Just as China, the growing interest for EVs results from government goals and incentives with a “zero emission vehicles” policy. That is why Tesla targeted this promising market in 2013 and became quickly the most popular carmaker in Norway in late 2017. Since 2013 the Tesla Model S was top selling new car four times^22. As of March 2016, Tesla built over 7,500 electric recharge points in Norway and about 200 supercharger stations. Regarding taxes, the tax exemptions policy in Norway cut Tesla Model S price in half. (In Norway, the Tesla Model S costs roughly $80,000 to $92,000 plus options against $78,000 to $130,000 in the United States and $110,000 to $190,000 in China^23 exhibit)
Finally, the company opened showrooms in Oslo and in some shopping malls.
However, although Tesla is strengthened in Norway and more generally in Europe, the company plans to locate a new Gigafactory a priori in Germany or Netherlands. We can thus notice some similarities between Tesla’s strategy in China and in Norway.
Finally, in terms of corporate strategy, Tesla has focused its intensive expansion strategy on both market penetration and product development. In order to penetrate the Chinese market, Tesla has used the marketing mix (or 4Ps) for its marketing plan. Tesla maintains significant managerial control in all components of its marketing mix. Such a control optimizes revenue and customer’s satisfaction.
Let us now focus on the product and place aspect of Tesla’s marketing mix.
Tesla’s products are electric vehicles, batteries, energy storages and generation (cf network of Superchargers in China), and powertrain components (exhibit 10). The company offers a wide range of product made from the latest technology^25. In a B2B model, Tesla encourages partnership with other companies by supplying products and services (cf Panasonic Corp.), but also a B2C model by offering luxury, family, and mass market models, strengthen by the Gigafactory 3 plan.
Concerning the place, Tesla added more places and venues as it expands. Tesla makes them available in the company-owned stores and luxury galleries, located in malls of big cities (Shanghai, Beijing…) However, customers order through the company’s website. Moreover, customers can charge their cars thanks to charging stations. Thus, these venues are limited but strategic locations for Tesla’s business.
During its process of internationalization, Tesla has adopted a pure global strategy. Indeed, the elements of Tesla’s marketing mix remain the same across markets, and therefore in China.
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