A REPORT ON TESLA’S INTERNATIONAL EXPANSION … · In its international expansion, Tesla faces several pressures for cost reduction. ... one of the key drivers of demand and consolidated

AREPORTONTESLA’SINTERNATIONALEXPANSIONSTRATEGY

INDIVIDUALASSIGNMENT

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

Mirani,L.2013.WhyTeslaisfocusedonoil-richNorwayasitexpandsbeyondtheUS.Quartz.[Online]Availableat: https://qz.com/119662/why-tesla-is-focused-on-oil-rich-norway-as-it-expands-beyond-the-us/ [Accessedon:20/03/17]

Organisation for Economic Cooperation andDevelopment. 2017.OECD.StatDatabase. [Online] Available at:http://stats.oecd.org[Accessed:25/03/17]

Tesla,Inc.2016.AnnualReport.AssubmittedtotheUnitedStatesSecuritiesandExchangeCommission.[Online]Available at: http://ir.tesla.com/secfiling.cfm?filingID=1564590-17-3118&CIK=1318605 [Accessed on:06/03/17]

Tesla,Inc.,CompanyWebsite.[Online]Availableat:https://www.tesla.com[Accessed:13/02/17]

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