Tesla’s Position in the Chinese Market - RUC.dk

Tesla’s Position in the Chinese Market

Source:https://www.energyservicesexperts.com/2018/12/07/tesla-set-to-start-production-at-chin

a-gigafactory-in-h2-2019/

Examination Group: S1926004339

Group Members: Peter Skjoldager Delfing Nielsen (57896)

Tobias Thuesen Pedersen (60535)

Supervisor: Ole Bruun

Character Count: 97.365

https://www.energyservicesexperts.com/2018/12/07/tesla-set-to-start-production-at-china-gigafactory-in-h2-2019/

https://www.energyservicesexperts.com/2018/12/07/tesla-set-to-start-production-at-china-gigafactory-in-h2-2019/


Abstract

This project evaluates Tesla’s chances in the Chinese market in order to give a better

understanding of foreign firms chances in general. It looks at how barriers to entry in the Chinese

EV market is very high, as the Chinese government funnels money into domestic firms and

award them contracts. However, Tesla have a significant advantage through proprietary

technology. In addition, Tesla have low dependency on its suppliers as they work as original

equipment manufacturer. This lower the supplier's bargaining power and ability to squeeze profit

out. Beyond the suppliers and the barriers of entry, there is an emphasis on the substitute

products and the rivals that present themselves on the Chinese market for Tesla. Here it looks

onward, to assess the competitiveness between these firms and goes to show the strength of Tesla

and their possible strengthening of their position. The bargaining power of the buyers on the

contrary, goes to show Tesla having some effects on the buyers on the Chinese market, as they

may choose them due to the high quality of their products, however the buyers present

themselves as a strong unit with multiple options to cause Tesla to reconsider their position in the

end. At the end a discussion regarding shortcoming of the analysis and other concerns addresses

the trade war, which can have devastating effects on Tesla, and how the Chinese is well know to

steal intellectual property from foreign firms.

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Table of Content

Abstract 1

Table of Content 2

Chapter 1 - Introduction 4

1.1 - Problem Area 4

1.2 - Problem Formulation 5

1.3 - Research Question 5

1.4 - Working Question 5

Chapter 2 - Methodology 7

2.1 - Philosophy 7

2.2 - Methods 8

2.3 - Data 10

2.4 - Structure 11

2.5 - Limitations 13

2.6 - Literature Review 15

Chapter 3 - Theoretical Framework 17

3.1 - Choice of Theory 17

3.2 - Structural Analysis of Industries 18

Chapter 4 - Analysis 26

4.1 - Barriers to Entry 26

4.1.1 - Economies of Scale 26

4.1.2 - Product Differentiation 28

4.1.3 - Capital Requirements 28

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4.1.4 - Switching Costs 29

4.1.5 - Access to Distribution Channels 29

4.1.6 - Cost Disadvantages Independent of Scale 30

4.1.7 - Government Policy 30

4.1.8 - Sub-conclusion 32

4.2 - Bargaining Power of Suppliers 32

4.2.1 Sub-conclusion 33

4.3 - Substitutes Products and Rivals 34


4.4 - Bargaining Power of Buyers 42


Chapter 5 - Discussion 45

Conclusion 47

References 49

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Chapter 1 - Introduction

1.1 - Problem Area

One of the most consequential issues of the 21st century is the trajectory of the chinese economy.

During the last decade the chinese economy has experienced a massive growth. The gross

domestic product went from USD 1.211 trillion in 2000 to USD 12.238 trillion in 2017, with the

annual growth skyrocketing in 2007 with 14.2% (The World Bank A&B 2018). One of the key

concerns regarding the Chinese economy is its excessive use of state capitalism. The use of state

capitalism results in China acting poorly in the global trading system. The Chinese government

are funneling money into state owned firms and actively ensuring domestic firms have an

advantage, thus putting foreign firms at a significantly disadvantage in the Chinese market.

This belief that China is manipulating the market is not just a Western belief, countries in Asia

agree. Chinese growth in the first quarter of 2019 may fall to 6%, which will be the lowest in

three decades. Despite the increasing demand for reform and limiting the state’s power in the

market by governments and businesses around the world, Xi Jinping, the Chinese President is

reluctant to do so. On the contrary, since 2013 the Chinese government has tightened its grip

(The Economist A 2019). In the United States (US), it is not only President Trump who is

unhappy and frustrated about China’s economy. There is bipartisan support for reform and the

business establishment agrees.

“China must protect the rights of foreign firms. Within China that means giving foreigners full

control of subsidiaries, including over their technological secrets. Beyond its borders it means

respecting intellectual property, which will be in China’s interest as its firms grow more

sophisticated” (ibid)

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Issues like these are reasons why a lot of foreign firms are reluctant to establish a factory in

China, especially highly technological firms. Tesla’s decision to open a factory in China, does

raise some concerns. However, the Chinese market has huge potential, as it has grown into the

largest market, almost four times the size of the US. In 2018 the sale of electric vehicles in China

was 1.26 million, compared to 361.307 in the US (Statista A 2019), offering a significant

potential as the Chinese market consisted of 56% of all electric vehicle sales globally in 2018

(EV-Volumes A 2019). The question then becomes if Tesla wants to enter the Chinese market,

how would it compete as a foreign firm in China against already established firms and what entry

barriers is there.

1.2 - Problem Formulation

The last few years China has become a massive market for electric vehicles, not only in public

transportation, but also electric cars. It is a growing market and Tesla’s announcement that it is

opening a factory in Shanghai, in order to have easier access to the market, raises some

questions. In short, how many restrictions and regulations does Tesla have to obey, what kind of

barriers are there and who will they compete against? These questions will help us understand if

Tesla will be able to succeed in the Chinese market. More importantly it will give us an overall

understanding of what foreign firms needs to be aware of when entering the Chinese market and

their competing chances.

1.3 - Research Question

To what extent is it possible for Tesla to successfully enter the Chinese market and compete with

Chinese firms?

1.4 - Working Question

Does Tesla have the ability to break the entry barriers of the Chinese market?

How much bargaining power does suppliers have over Tesla as they open a factory in China?

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Do the substitute products and rivals in China present a significant threat to Tesla, as they seek to

establish a firmer grip on the EV market in China?

How much bargaining power does buyers have over Tesla in the Chinese market?

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Chapter 2 - Methodology

In this chapter, the methodological choices will be outlined and explained to ensure a deeper

understanding of the research, and how we are analysing and the criteria set throughout the

project. Thus, giving the reader a accurate account of how the research was performed and the

purpose of the selected methodology. In addition, there will be reflections on alternative

approaches, that could have been used, in order to critically assess our methodology in relation to

other types. This will ensure a more valid and accurate research, and a better understanding of

the chinese market, in order to evaluate Tesla’s chance of success.

2.1 - Philosophy

The philosophical standpoint of the authors of this research paper, is that of a critical realist

viewpoint. The concept or philosophy of critical realism is not so much a specific philosophical

position, but rather a gathering of positions that include ontology, causation, structure, persons

and forms of explanation. The philosopher who “invented” or came upon the construction of

critical realism, Roy Bhaskar, was the initial person to begin the movement of critical realism

(Bhaskar, 1975). It is a position of philosophical reflexive stance, which is concerned with

entertaining the readers with informed explanations of the social sciences. As for Roy Bhaskar,

we receive the initial understanding of the authors position, philosophically. The Critical Realism

“theory” has the objective of conducting investigations based on real and internal mechanisms,

which will produce certain specific outcomes (Bhaskar, 1975). It is believed in Critical Realism,

that causal relationships are insufficient nor necessary to be established, and as such, what

critical realists say, is that science should be treated as an ongoing process, where we adapt and

improve on the concepts used to understand the studies (Bhaskar, 1975). In addition to this, the

realists, as well as Bhaskar, argue that there is an existence of the necessity for ontology. Critical

Realism general pursuit is to understand and explain the phenomena found and experienced in

the world, and not just the beliefs and experiences in the world itself. As such, Bhaskar argued,

that to understand reality, there is a necessity needed in a structure for openness, differences and

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stratification (Bhaskar, 1975). Therefore, we can say that the researchers viewpoint, during this

particular research paper, is to go in depth with the given data and/or information given and

gathered, with a critical view, to initially uncover and understand the meaning of the given

documents, and not simply aim to understand the beliefs and understandings of the people whom

have constructed the said documents and data in question.

2.2 - Methods

We have chosen to use a qualitative method to evaluate the selected segment of the Chinese

market, in relation to Tesla’s decision to open a factory in China. The qualitative method chosen

is document analysis as it will help us identify, analyse and evaluate key aspects in relation to

concepts outlined in Michael E. Porter's framework for analysing competitiveness within a given

industry, in the primary data gathered. This will be used to support our causality model, which is

built using the theoretical framework. Causality will be used as it shows a snapshot of how the

real world works. This will help us infer on the effects of the conditions in the Chinese, to give a

more accurate prediction (Goertz and Mahoney 2012: 42). It has been chosen as it will provide

us with the necessary information in order to assess and evaluate Tesla’s position in the Chinese

market, but also add to the overall evaluation of foreign firms chances. In addition, statistics will

be utilized during the analysis to illustrate certain aspects of the industry and its key components.

This method has been selected as there are limited information and case-studies investigating

equivalent aspects. This will ensure if some data is unavailable in certain areas, we can utilize the

theory to argue how certain conditions could affect Tesla’s factory and their entry into the

Chinese market.

Case Study

The research is a idiographic case study as it focuses to explain and infer Tesla’s ability to

compete within the Chinese market. However, it can also be used in order to say something

about the Chinese market competitiveness in relations to foreign firms. The case will be theory

guided through a system of mechanisms supported by a well known theory in order to accurately

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assess and infer on Tesla’s chances of success (Levy 2008: 4). This will provide us with a

in-depth understanding of the challenges Tesla will face and a more accurate evaluate.

Causality Model

The causality model used in this research is derived from Michael E. Porter’s framework for

analyzing competitiveness within an industry, as it highlights the most vital aspects in relations

to successes within the given industry. This allows us to interpret the world according to the

model and exclude minor aspects, as everything will have a minimal impact on the chances of

success. We have chosen to combine two of the forces, as they are very interconnected. Using

causality will allow us to predict on aspects, where there are not enough data, or lacking in it, to

give a clear representation of the situation. Thus, the research can still give us an overall

evaluation regardless. The model works as an equation, the higher all four aspects are, the higher

a chance of success, as the relationship between them is symmetric. Meaning, as X increases, so

is the likelihood of Y. It is a complex system consistent of multiple aspects. It is a series of

connected aspects that all play a role in the final outcome (Beach and Pedersen 2016: 26, 35). In

the research we have chosen to eliminate indirect factors as their impact is unpredictable and

minor, in addition to factors that only have a minor impact on the chances of success. Thus, the

model that will be used consists of four forces. As mentioned, these are connected to the

theoretical framework chosen, which will be explained in details later in the following chapter.

Since the model is built on a theory with a large N, it ensures that our model is accurate and can

be used to infer. However, it is important to note that this is in general, there can be outliers that

does not follow the theory (Goertz and Mahoney 2012: 47).

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2.3 - Data

The data used in this research ranges from secondary data such as peer-reviewed articles and

books to primary data such as government policy documents and statistics. In addition,

statements from Tesla and academics. The research will start with secondary data, in order to

identify certain key areas and discussions relevant to our analysis. This has been chosen as it

provides a quick and in depth overview of the different key aspects, in relation to our theory.

Thus, ensuring a more thorough selecting of aspects and a better outcome of the analysis.

The secondary data will be data such as peer-reviewed articles and books written on the Chinese

market in general and more specific to our case. However, non-peer-reviewed sources such as

articles and statements will be used as well. This will help us select the most relevant primary

data for the analysis. In order to avoid any biases when selecting key aspects from the secondary

data, multiple articles will be read before the selection. This will ensure that a particular author’s

bias is not present in the research carried out in this project. In addition, articles from the

Economist and other such sources will be used to highlight the current issues with China’s

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economy and how it is relevant to look at Tesla’s case to build a factory in China, in order to

supply the Chinese market with their cars, to give an understanding of the broader issues of

foreign firms in China.

The primary data will be government policy documents and financial statements from individual

firms, as they will provide an insight into what regulations, restrictions and obstacles Tesla will

face in the Chinese market. Thus highlighting the difference between foreign companies and a

Chinese. Statistics will also be utilized as it will give an illustrative aspect to the analysis, in

order for the reader to understand the magnitude and implications of key aspects (e.g. growth of

the Chinese auto and electric vehicle market, Tesla’s and its competitor’s growth, and Tesla’s

current export to China in relation to previous years). The data which will be selected will have

to meet a certain standard to ensure validity to our research. The first criteria and the most

important one, the data needs to come from an established and reliable source. However, data

from the Chinese government can be used with caution, as an extra critical mindset will be used

to ensure a reliable analysis.

The research would have benefited from an interview with Tesla, as it would have provided

valuable information. However, this was not possible.

2.4 - Structure

The structure of this project is chosen to give the reader a better overview of the project and

ensure a more in-depth understanding of the research. We have made it easy to find the different

aspects of the analysis as well as methodology.

Chapter 1 will introduce the problem area, problem formulation, research questions and working

questions. The chapter will outline why this specific topic is relevant and what its importance is.

Ensuring that the reader understands the relevance and importance of the problem is crucial in

order to understand our analysis and choice of theory. This is why the introduction gives an

account of the growth of China and its economy, more specifically the auto industry, and Tesla’s

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export to China and its growth. In addition, it formulates the problem short and concret to ensure

a clear and explicit understand of the research.

Chapter 2 will outline the methodology used to carry out the research. It will be outlined in

subsections to ensure a easy overview. In addition, each choice made during the research will be

outlined as well as some alternative approaches. This will show that we have knowledge of the

different approaches and have critically selected ours.

Chapter 3 will introduce and outline the theory and the key concepts from it, as it is important to

have an in-depth understanding of it before reading the analysis. It will also highlight why this

theory have been chosen, compared to other theories within the same field, and introduce the

author of the theory selected.

Chapter 4 is the analysis. It consists of subsections that have been identified from the theory.

This has been chosen in order to structure the research and allow for a better overview of the

different areas included in the analysis. At the end of each section there will be a sub-conclusion

to sum up the analysis from the current section. This will provide the reader with an easy access

to a summary of each section, instead of reading an entire section.

Chapter 5 will discuss the findings in the analysis and to what extend Tesla’s decision to open a

factory in China is a good choice. It will use the different aspects of the analysis in order to

highlight shortcomings within the analysis and provide a theoretical discussion to them. This

will provide the reader with a theoretical understanding of the area, thus still contributing to the

conclusion and highlight aspects that was not in the analysis.

Chapter 6 will conclude the research. It will sum up all the findings in the analysis and the

discussion in order to give a valid and accurate assessment of Tesla’s decision to open a factory

in China and their chances of success. In addition, the findings will be used to evaluate foreign

firms chances in general in the Chinese market.

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At the end of the project, there will be a list of all the sources used. It will be grouped in the

different kind of sources - articles, books, PDFs, and websites - and alphabetical order. This will

provide a better overview of the different sources.

2.5 - Limitations

In the situation of our research paper, revolving around Tesla and their interest as well as their

operation to construct a factory in Shanghai, more specifically their Free Trade Zone, there are

several limitations, which has shaped our project. When speaking of limitations, it pertains to

any sort of restriction that has limited or constrained the project in any way. In this particular

case there exist three significant project constraints. These three are schedule, scope and cost.

The first mentioned of the limitations, the scope, involves our goals and tasks which define the

boundaries of our research. More particularly, the research as well as the working questions have

forced us to be within certain boundaries, researching specific areas within China, including their

governmental and local policies, mainly focusing on their trade policies. In addition to this, we

are focused on Tesla, where we are mainly aimed at their Chinese section, however trying to

look at their policies, investments, statistics, competition and their marketing strategies. As a

result, this has limited our research in the way that we do not research or attempt to understand

the entire vehicle industry, nor are we attempting to pry open and investigate the entirety of the

Chinese governmental system or Teslas entire operation. We are simply aimed at a fraction of

what operates within these boundaries, mainly Tesla and their specific operation in Shanghai,

coupled with the Chinese governmental policies revolving around trade. As a result we have

chosen to exclude certain analytical tools, such as the SWOT analysis, which would of given us

the opportunity to understand the strength, weaknesses, opportunities and threats of all the

companies involved. This has in the end resulted in the narrowing of the research, to specific

parts of Tesla, the Shanghai Free Trade Zone and the Chinese government. The second

limitation found in this research pertains to the schedule. Scheduling has been a significant factor

for the researchers, as the research itself has been granted with a four month time limit before it

had to be delivered. This has automatically constrained the research, as within such a timeframe,

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the researchers can only do and research so much in a given timeframe. Additionally, the

schedule has constrained the time given, as it spans from a period where it intertwines itself with

both examinations and lectures required to further understand the research itself, or simply it has

importance for the researchers due to their educational limits and aspirations. As a result of this,

the time constraints that has shown itself to us, has limited us due to us having to attend lectures

granting us new tools for our research, not to mention the limit to how much a single individual

can gather of data and process within the specific time period. Of course, this does not go to

mention, that the researchers have to manage the time given in a way that allows them to not

only fulfill the requirements of the research but to at the least grant a satisfactory research paper

with knowledge of a new subject. As such, we as researchers may say that, the time allowed to

construct and process such a significant research has been limited by time and the events within

that time, to the point given, that the time left within these four months has been shortened.

However, if we had the free reigns and the tools before the beginning of said research, the

project may have been given more time in the sense that less lectures or examinations and such

would have constricted the time given. Of course, us, the researchers have to manage the time

given to us, which is done through project management, by setting goals, deadlines and using the

time together, working on several days to create a satisfactory result. The final limitation found

is the cost, which can also refer to resources. In the case of this research paper, this is the amount

of research and data that can be processed within the time limit, as well as the limit of resources

available, may it be on the world wide web, in a library, articles or even news papers or

interviews. All these aforementioned data points have a limit of the amount that can be found

within a specific field. As such, this research paper has been limited as to what we have been

able to conjure up from the given available data, in the attempt to develop and complete the

paper. Additionally, we as researchers have a limited amount of assets, financially speaking, as

such we have been limited, unable to go to China to gather data first hand, from their

governmental policies or even go directly to Tesla in United States or China to conduct research

and/or interviews. As such the culminated limitations goes to show that both the limited time as

well as the resources to spend in such time, has resulted in us as a researcher, have to focus on

certain areas within the paper.

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2.6 - Literature Review

There are plenty of research of the Chinese EV industry and policies surrounding it. However,

when it comes to Tesla, there are very limited information. Thus, most literature will be

regarding the industry environment of the Chinese EV industry and some on Tesla.

Hao (et al. 2014) have researched the policies regarding subsidies for the consumer and how this

will affect the future sale of EVs in China. The Chinese government have significantly increased

its subsidies from 2005-2012 (ibid: 722-4). They have increased the subsidies and the scope of

them significantly. However, they are currently trying to scale them back as the industry is

booming and trying to phase them out entirely (ibid: 724). In addition, all projects have been

awarded to Chinese EV manufacturers. In addition, there have been an increase in government

control on the issuing of license plates, which is needed to drive. Some cities are auctioning them

of, others are awarding them to random individuals, just like a lottery. This does present a

dilemma for producers as it makes it harder to obtain a license plate and being able to drive a

new vehicle (Hao et al. 2011: 1017-9).

On another note, there are some research showing that exporting from Europe, is a reliable

practice as China is becoming more political and economical stable. In addition, more Chinese

firms have started to invest in Europe as well (Lin and Liu 2018). This includes a more

competitive price from Europe, in comparison to the US. Furthermore, China have an increased

preference for compact EV SUVs and relatively cheap high end cars, which are usually not

produced by Chinese firms (ibid: 8).

When we are talking about the rapidly development of the EV industry, one of the vital

components are the original equipment manufacturer, as they are the backbone of the industry

(Rong et al 2017: 234). As a result, the Chinese government have encouraged joint ventures

between domestic and foreign firms to increase the development of R&D in domestic firms.

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However, policies surrounding these joint ventures have been rather unfavorable for foreign

firms (ibid: 238).

In terms of Tesla, when we are talking R&D and joint ventures, they are one of the frontier.

They are considered one of the backbones, as they are considered a original equipment

manufacture and have had multiple joint venture with other firms. However, none of them

Chinese as a result of unfavorable terms (Edward et al. 2015). Tesla is a firm that have heavily

invested in R&D and export some of their in-house produced parts to multiple other firms around

the globe. This includes joint ventures with well known car manufacturers globally (ibid and

Cheong 2016: 1-3).

China is already Tesla’s number two sales destination, even though there was a 15% import tax

on their cars. The opening of the new factory in Shanghai, does produce an opportunity for Tesla

to avoid the new heavy 25% import tariff and any further complications, as a result of the

Trump-China tariff war (Industry Newswatch 2018).

Jiang and Lu (2018) suggest that Tesla is not necessarily a competitor to Chinese EV firms as

their cars advertise to different consumer groups. In addition, they do not believe Tesla wants to

dominate the EV industry as such, but wanna share in its potential (ibid: 494-5).

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Chapter 3 - Theoretical Framework

Evaluating a potential scenario, such as Tesla’s potential position in the Chinese market, requires

a solid theory that can guide and hypothesize if data is unavailable. This is one of the reasons we

have chosen to utilize Michael E. Porter’s theory on structural analysis of industries. It will

provide us with the necessary concepts to identify and evaluate key factors in a hypothetical

scenario and an in-depth analysis of Tesla’s chances in the Chinese market. In deciding what

theory to use, an important aspect was the hypothetical part and the factory is not build. This

required us to utilize a theory that would analyze certain aspects of the market. A theory such as

SWOT, assumes that the firm is already present, evaluates its current position, and does not take

into account government policies and entry barriers. It is a simple evaluation of the company. A

theory that could have been utilized is PESTEL (political, economic, social, legal,

environmental, technological). Both looks at the competitive standing of a company in the

market. However, in the end, we decided to utilize Porter’s five forces as we believe it will

highlight the different key aspects in our case.

3.1 - Choice of Theory

The theory used in this research is initially from 1980. However, it has been developed and

improved since then. The core concepts have not been altered since. In a article in the Harvard

Business Review from 2008, Porter uses the exact same framework to explain how they can help

shape strategies to successfully compete within an industry (Porter 2008). The core concepts (the

five forces) have not changed, despite being developed in 1980. In addition, his framework has

been considered to be one of the 20th century most influential works.

Michael E. Porter

Porter is an American known for his theories on economy and business strategy. He attended

Princeton for his undergrad in mechanical engineering, Harvard Business School for his graduate

in Business Administration and a PhD in Business Economics. He graduated top of his class

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every time. Already in college he started working with his competitive forces. He have published

18 books including numerous articles. In addition, he is one of the founders of Monitor Deloitte

in 1983. It is a consulting firm that specializes in providing corporate and business unit strategy,

demand analytics, organization and leadership, economic development and security, marketing,

pricing and profitability to governments and businesses.

He has published a total of 24 books and articles. Most of these works are research within

competitiveness strategy, however, he have also published research within US political

competitiveness, domestic health care, and global health care. His stance is very liberal as his

later works shows an clear notion that businesses need to create societal value, and not only

profit (Denning 2012).

3.2 - Structural Analysis of Industries

In this section the theory will be explained in a structured way, introducing and explaining the

concepts individually, to ensure an in-depth understanding of the overall theory.

Barriers to Entry

There are six crucial sources when talking about barriers to entry. Each describes a specific

aspect that plays a major role in determining whether a business will be profitable in a given

market.

The first is economies of scale and refers to the unit cost of production in terms of cost

disadvantages or advantages. In simple terms, it is the “unit cost of a product as the absolute

volume per period increases” (Porter 1980: 7). Smaller companies that only focus on one market

will usually be at a disadvantage compared to firms that have joint costs. An example of this is

air passengers services: A plane can only accommodate a limited amount of people, and the

remaining space can be used for a different purpose, freighting. This would produce a cost

advantage as the expensive cost of flying is shared among the two products. There are more than

one way to achieve a cost advantage such as shared operations or functions, thus producing a

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product that can be used for multiple purposes (e.g. small electric engines for fans, cooling

systems). This is also known as a multibusiness firm as it produces one product with multiple

usages. The last aspect is the intangible assets, meaning the sharing of brand names or know-how

(ibid: 8-9). One or all of the above mentioned methods can be used to create economies of scale

and produce a cost advantage in a market.

The second is product differentiation and refers to the advertising, customer service, and product

differences. This is connected to brand identity and customer loyalty, and results in entrants

needing to spend heavily in order to overcome existing loyalties to rival brands. The process of

building customer loyalty takes time and a huge amount of capital, but once it is established, it

provides the firm with an advantage (ibid: 9). The importance of this aspect when entering a

market, depends heavily on the nature of it.

The third is capital requirements and refers to the capital needed in order to compete. This is

usually associated with unrecoverable up-front advertisements, research and development, but

also the capital for production facilities, inventory and start-up losses (ibid: 9-10).

The fourth is switching cost and refers to the one time cost for the buyer, from switching from

one supplier to another. This includes the training of new employees, cost of new equipment,

cost and time associated with testing and qualifying a new sources (ibid: 10).

The fourth is access to distribution channels and refers to the entrant’s need to secure distribution

of its products. If there already is an established distribution channel among existing firms, the

entrant needs to persuade the channel to accept its products through various methods such as

price breaks and cooperative advertisements. This effort will reduce the entrant’s profitability

(ibid: 10).

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The fifth is cost disadvantages independent of scale and refers to the advantages not replicable

by potential entrants. This includes proprietary product technology, favorable access to raw

materials, favorable location, government subsidies, and experience (ibid: 11-12).

The sixth is government policy and refers to the most important entry barrier. It is policies set by

the government to limit or restrict industries. In addition to having control over licensing

requirements, access to raw materials, and regulations in industries (ibid:13).

Bargaining Power of Suppliers

Suppliers have bargaining power over firms in the sense that they can threaten to raise prices or

reduce the quality of the goods purchased. If a supplier is powerful enough, it is possible to

squeeze the profitability out of an industry. The characteristics of a powerful supplier is few

dominant companies and a concentrated industry, there are no substitute products, the industry is

not an important customer, the product is crucial in the buyers output, products are differentiated,

and they pose a threat in terms of forward integration (ibid: 27-28).

Substitutes Products

Substitute products or firms that bring a new product to market, which will compete with

existing products, will eventually cause the existing products to be limited with potential returns,

as it places a ceiling on the prices, firms in the industry can profitably charge. Additionally, they

also reduce the bonanza (sudden increase in profits) an industry can reap in boom times. When

looking at what a substitute product may be, it is important to understand that it is a matter of

searching for products that can perform the same function or service as the product delivered by

your own company (ibid: 23) In the case of Tesla these may be other car, motor cyclist and other

transportation manufacturers. More specifically other electric vehicle manufacturers. Generally,

the impact shown by substitute products can be summarized through the industry’s overall

elasticity of demand.

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Rivalry Among Existing Firms

Rivals as a definition is a broad term, as it encompasses all sorts of competition. Generally the

rivalry among existing competitors boil down to them utilizing tactics such as price competition.

Additionally, using advertisement, not only to show their own product but at times rack down

upon their competition (ibid: 17). An example of competition between two existing competitors

can be the rivalry between Coca Cola and Pepsi, as they have made numerous advertisements to

not only get themselves onto markets but to also show that they are better than the other

(https://www.youtube.com/watch?v=DijFob8vxgI). In rivalries it does not only pertain to

advertisement, but it also shows that rivalries in general, occur whenever a competitor or a new

business on the market, experiences the pressure or finds the opportunities to improve their

position or to take some sort of advantage against their competition. In addition, to companies

actions, it also causes their competitors to retaliate in different types of ways of simply counter

the move that the company is doing (ibid: 17). These sort of retaliations or moves that companies

may do, depends on the origin of the firm and what comprises it. An example of such events

maybe when law firms attempt to poach the competitions’ clients, causing the opposition to

retaliate either by filing lawsuits, attempting to keep their clients, or to retaliate through the

attempt to take the other firms clients in return. In addition, issues can occur in that business,

through separate businesses. What I mean is, that if a company is being sued by a law firm such

as a prison, then the companies who constructed the firm or provides the workers for the prison

may have issues with these lawsuits, as it would give them a negative reputation. Essentially,

when looking at existing rivalries between companies there are many intricate ways of seeing

them, and we will be looking at equally balanced competitors, industry growth, high fixed and

storage costs, lack of differentiation and switching costs, capacity augmented in large increments

and diverse competitors.

Numerous or equally balanced competitors

When it comes to the competition between balanced competitors or when there are numerous

companies, these competitors generally have the habit of attempting to make moves and

decisions that will in some way impact their competition, and do so without being noticed. Of

21

https://www.youtube.com/watch?v=DijFob8vxgI


course, in a situation where the companies are somewhat equally balanced in terms of resources

and manpower, it may cause some severe instabilities, if a single company gains a distinct

advantage above the rest of the competition, which may eventually cause the competition to

retaliate in different and dangerous ways, or they will eventually “die out” as the competition

from the company with the advantage may be too difficult to handle (ibid: 18). In addition to

this, in a situation where a single or a select few companies control the market due to the sheer

size and their competitive strength, such as in the situation of Aerospace Engineering (Boeing

and Airbus), it is highly known that they dominate the market, and not only that, it is considered

highly difficult if not impossible to compete with these two firms, as they control the market

entirely (ibid: 18).

Slow Industry Growth

In a situation where the growth is slow in an industry, it causes the firms to turn the competition

into a game for market shares, as it is one of the most effective and profitable ways to create

expansion in such a situation (ibid: 18). In such a situation, a company can seize assets, market

shares and more through different means, or some companies can be authorized to be allowed to

have a merger, resulting in two companies becoming one, effectively increasing their strength,

size and competitive power.

High fixed or storage cost

The high fixed cost also related to storage cost, causes a generally strong pressure for a company

to fill capacity, which in turn will create escalating price cutting, when there are an excess

amount of available space. Many companies suffer from such situations, especially large

industries involving, aluminium, paper, steel etc. Generally, we can see that high fixed cost is

one where the products have a high cost for storage. In a situation like this companies, may be

tempted to either hide or shade prices to insure sales, or if cost is simply too high, they may

liquidate or sell off products. An example can be H&M, a clothing company, whom have been

known to sell or send their clothing to factories to be burned to produce heat, electricity and

more (ibid: 18).

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Lack of Differentiation or switching costs

This is the stage, where the product in question has turned into a commodity, and generally the

buyer is choosing his or her products through pricing and service, which causes severe

competition. This type of competition is fierce, however, through product differentiation, you

may create a layer of protection towards competitors. This is of course due to preference, loyalty

and more from buyers (ibid: 19). Of course, examples of heavy competition and differentiation

can he shown through the clothing industry, such as the competition between Nike, Adidas,

Hummel and more, whom create products that may be very similar in looks, with different

brands on them, it is more of a way of showing preference and loyalty through these companies.

Capacity Augmented in Large Increments

Capacity is generally a risk, in the way, that it adds to and can be disruptive to the supply and

demand in an industry. As such, in a situation like this, there is a risk of bunching capacity

additions, especially if the industry faces recurring periods of exceeding capacity and pricing,

especially in manufacturing.

Diverse Competitors

Competitors have a very diverse and substantially different way of strategizing on the market,

they even have different personalities, relationships between partners and unique goals specific

to their company and the different sectors. As such this gives companies a high level of difficulty

in reading and understanding one another's intentions. Additionally, it is important to mention

that some decisions made by one company may be wrong for another, generally depending on

the type of company, size, goals etc.. If we look at foreign companies, they bring a diverse set of

values, goals and norms with them to the new market. The intentions, goals and perspective also

depends on the type and size of company, as if it is a owner-operators company of a small

manufacturing company, it may be satisfied with mediocre rates of return.

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Bargaining Power of Buyers

The bargaining power of buyers, is shown through their competitiveness in forcing the prices

down, demanding higher quality and more services, and generally playing competitors against

one another. This is generally at the expense of industry profitability. These buyer groups depend

on several characteristics which range from market situation to the relative importance of its

purchases. The factors which make a buyer group powerful in front of the industries are as

follows:

Purchasing in concentrated or large volumes

In this case, the buyers are aiming for buying a large portion of sales, this eventually raises the

importance of the buyer’s business in results. Large volumes buyers are heavy hitters in the

industry, as they aim for fixed costs and they are strongly competitive towards the industry, as

the different businesses would want such a buyer on their list.

The products they purchase, represent a fraction of the buyer’s cost or purchases

Here the buyers aim to shop for a favorable price, and general purchase selectively. Generally

buyers are less sensitive if they purchase products which hold a fraction of the buyer’s cost.

Standard or undifferentiated products

Even though buyers can find alternative products, they may force companies to compete for the

buyer’s by playing them against one another.

Switching costs

The buyers power is generally enhanced if the seller faces switching costs, causing their products

to fluctuate in pricing.

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Low profits

Low profitability, increases the incentive for a company to decrease their prices. For a company,

it also translates into their suppliers, where the suppliers may be pressured into delivering higher

quality than before, which may change prices as well as relationships.

Backward integration

If a buyers motivation are based on safety of supply or non-price factors, this will end with

companies being forced to grant price concessions for safety precautions. A good example of a

company is General Motors and Ford, whom are well known to use the threat of

self-manufacturing as a bargaining chip with their suppliers. This is due to them producing some

of it themselves, will importing parts for their vehicles from outside manufacturers. As such their

threat for further integration and increase in their own production, is highly credible, and will

cause other manufacturers to give more reasonable pricing.

Unimportant to the quality of the buyers’ products or services

When the quality of the products are highly affected by the industries products, the buyers are

less price sensitive.

Buyers have full information

In this case, the buyer have full information about the demands, actual market prices and the

suppliers costs. This gives the buyers more leverage than when informed poorly. This gives the

buyer opportunity for more favorable prices.

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Chapter 4 - Analysis

This chapter will analyze Tesla in four subchapters, corresponding with the causality model. The

first part will evaluate the entry barriers of the Chinese market. The second part will evaluate the

suppliers and how much bargaining power they have. The third will evaluate substitute products

and rivals within the Chinese market. The fourth part will evaluate the buyers and how much

bargaining power they have. Dividing the analysis up into 4 sections will ensure an in-depth

analysis can be carried out without the reader getting overwhelmed with information from 4

different areas.

China is not known for its transparency or the protections of foreign firms rights such as

intellectual property rights or in general lacking free market values. However, China is a

complex example. This is rooted in the fact that there are different regions within China, where

the local governments decides certain legislation. In the research there will be a focus on the

region of Shanghai, as this is where the factory is being build.

4.1 - Barriers to Entry

There are certain aspects of a firm that is needed in order to be able to establish itself in a market.

Those aspects will be analyzed and evaluated in this section of the analysis. Barriers that is

considered is economies of scale, product differentiation, capital requirements, switching costs,

access to distribution channels, cost disadvantages independent of scale and government policies.

These factors determine whether it is possible for a firm to establish and enter a certain market.

4.1.1 - Economies of Scale

When we talk about Tesla and economies of scale, it is a complex answer. Not long ago there

was significant problems with the production of their cars. During the last quarter of 2018 and

the first of 2019 they were significantly lacking in their ability to keep up with the demand. Elon

Musk promises that in 2018 Tesla would be able to produce half a million vehicles. However, it

26


turned out to be a lot less, 254,530 vehicles to be exact (Tesla A 2019). Economies of scale is

different from industry to industry. In relation to Tesla it would be at the point where they could

most effectively produce vehicles. In the first quarter of 2019, the production was at

approximately 77.100 vehicles, with a goal of producing a total of 360.000 to 400.000 in 2019

(Tesla A 2019).

Tesla’s production numbers are far from ideal. However, the production of electric vehicles

(EVs) are still changing as it has not been perfected yet. Then the question becomes, how far in

the EV production evolution is Tesla compared to competitors in the Chinese market. When

comparing the production of EVs and plug-in hybrid electric vehicle (PHEV), there are only

slight differences between Tesla and the Chinese Build Your Dreams (BYD). They produced

152.150 EVs and 72.986 PHEV (Car Sales Database A 2019), which is approximately the same

as Tesla.

Something that have a significant impact when we are talking economy of scale is the ability to

share some aspects and research with other products. Tesla is well known for its car, but beside

its car production, they are also producing batteries for storing power at home, and solar panels.

This allows for economy of scale to a certain degree. In the EV industry, the battery is on of the

most debated topics and considered a crucial aspect. Tesla can share their research and

development (R&D) between their car battery and the home power storage unit. This provides a

significant advantage as they can share R&D between their two products. Despite most parts

used in the Tesla is produced in house and is patterned, they earn revenue from partnerships and

original equipment manufacturer. They sell electric powertrain components to other automakers

such as Daimler and Toyota (Cheong 2016: 2). This allows Tesla to sell components to other

automakers and they can then sell it under their own brand name. In other words, it allows Tesla

to sell their product to another purpose. This dual-purpose has a huge impact as it does not

require anything extra from Tesla. This also includes the dual purpose of their batteries, as it is

used in more than one product. In addition to the dual purpose products, Tesla have also had

shared ventures with other car producers such as Mercedes-Benz to produce the Smart Fortwo

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E-Cell and Toyota to produce RAV4. If we take a look at BYD, the Chinese EV and PHEV

producer, we can see that they have a larger production number as mentioned above. However,

what makes a significant difference is that they are producing so many different products, with

more or less the same technology. They produce EVs, battery-powered bicycles electric busses,

forklifts, rechargeable batteries, and trucks. In terms of technology their R&D can be used in

multiple fields. They can use the same technology in the EVs, PHEV, electric busses and

battery-powered bicycles. Providing a significantly impact on economy of scale relative

compared to Tesla.

4.1.2 - Product Differentiation

There are currently a backlash from customers in China, specifically those who already

purchased a Tesla. This backlash is a result of customers paying a significantly higher price, in

some cases up to thousands of dollars, before their price cuts (The Wall Street Journal A 2019).

However, despite the backlash Tesla have a fairly strong brand identity in China and have

managed to establish some credibility in accordance with Tu Lee from Sino Auto Insight. Their

EVs are more expensive than a majority of their competitors, which comes from targeting a

slightly different market segment (Business Insider A 2019).

4.1.3 - Capital Requirements

There are two ways in which Tesla could enter the Chinese market. The first on through

importing its EVs. However, currently this makes the car much more expensive for the customer,

as there are a 25% import duty on cars (Industry Newswatch 2018) This significantly increases

the price for the Chinese consumer. The second option is the establishment of an factory in

China, which would circumvent the import duty. However, building a factory costs a significant

capital. Tesla is currently building a Shanghai Gigafactory, which will open in 2020. Tesla said

in a statement, that it estimated the factory to cost around $2 billion (CNBC (A) 2019). This is a

significant capital invested into the new production in China. However, this does provide Tesla

with the opportunity to implement their new production techniques. The new production

platform that will be implemented is reducing the unit cost of up to 50%. As a result the new

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Tesla Y, an EV SUV, will be the cheapest in its class. It is estimated to cost $48.000, which is

$20.000 less compared to other EV SUV models produced by other brands (Tesla (B) 2019: 2).

However, in terms of startup losses and R&D needed to enter the Chinese market, the only

significant loss is the capital needed to build the factory. They already have the R&D they need

in order to produce the EVs in china, including the research on the new production platform.

4.1.4 - Switching Costs

One problem with the opening of the new factory in Shanghai, is the training of new employees,

in order to produce its products. The employees will have to learn the necessary skills. This will

provide in start-up loses, as employees need to master certain skills, which can only be learned

through experience. In addition, the new factory needs equipment, in order to produce its

products. However, this is included in the $2 billion spend on the factory.

4.1.5 - Access to Distribution Channels

In order for the product to be sold, Tesla will need access to distribution channels. This provides

Tesla with the means to sell their cars to the Chinese consumer. In recent years, Tesla have

opened more physical shops around the world, and at the same time started to focus more on the

online platform (Cheong et al. 2016: 2). In addition, Tesla owns its distribution channels, as their

products are only sold in their physical and online shops. Currently they have a total of 24 shops

in China (5 in Beijing, 2 in Chengdu, 1 in Shenzhen, 3 in Guangzhou, 1 in Zhejiang, 1 in

Hangzhou, 1 in Nanjing, 1 in Ningbo, 3 in Shanghai, 2 in Shenzhen, 1 in Tianjin, 1 in Hubei and

1 in Xi'an) (Tesla (C) 2019). This will ensure, that Tesla does not need to compromise or give

offers to local car sellers or other forms of distribution channels, in order to sell their products.

This allows Tesla to sell their product at the determined price, that they see fit. Including, not

having to train local sellers in the techniques of selling their cars. Thus, a focus on vertical

integration (Jiang and Lu 2018: 497).

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4.1.6 - Cost Disadvantages Independent of Scale

In terms of cost disadvantages independent of scale, Tesla does have an edge over some of the

competition. This comes from Tesla having proprietary technology that some of the other rivals

does not, as they operate as a original equipment manufacturer (Cheong et al. 2016: 2). However,

a disadvantages for Tesla is, projects are usually only assigned to Chinese companies, which

provides subsidies and financial aid. This is a disadvantage for Tesla as projects provides large

contracts with cities within China.

4.1.7 - Government Policy

There are two major points when we talk government policies. The first being grants and

subsidies in relation to consumers. The second is in relations to R&D. Since China is well known

for its state-capitalism and state owned firm, it will not come as a surprise that the government

invest in its domestic industry. If we look at BYD, we can clearly see that a significant amount of

cash flows in from the government, in forms of grants and subsidies. As mentioned above one of

the disadvantages for Tesla is the fact that China funnels cash into domestic businesses. In

addition to larger contracts are usually only assigned to domestic businesses as well. This can be

seen in the table below, as it demonstrates BYD’s grants and subsidies awarded.

2017 (RMB) 2018 (RMB)

Subsidies on industry development fund for Changsha Automobile Zone

73.055.000 72.647.000

Subsidies on research and development for batteries of electronic vehicle

41.113.000 42.632.000

Subsidies on marketing incentives for new energy automobiles

n/a 600.000.000

R&D subsidy Taiyuan car battery project

n/a 267.459.000

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Incentive subsidy on Shanwei BYD Industrial projects

135.305.000 14.695.000

Table 4.1.7.1 - Government Grants and Subsidies (BYD (A) 2019: 103).

However, if we return to the first part of government policy, the consumer subsidies. In other

words, this is where the government provides incentives for the consumer to buy an EV, by

subsidizing some of the price. There have been major changes to this policy over the last 10

years. There have been two major phases. The first phase was from 2009-2012 and the second

phase from 2013-2015. Each providing an increase and broader scope of subsidies given to

consumers wanting to buy EVs. However, during the last year, these subsidies have been scaled

back, and are planned to be phased out completely around 2020 (Hao et al. 2014: 724, 731).

Other vital policies are the limitation of license plates for vehicles, which was implemented in

order to limit pollution in major cities. Some cities are auctioning them, others it is randomly

picked who gets one (The Economist (C) 2019). This does present Tesla with an issue, when

selling their cars.

In addition, one of the reasons that many foreign producers are unwilling to open a factory in

China is a result of policies preventing them from doing it alone. In general, the policy is that it

has to be a joint venture with a domestic firm, in order to build a factory. However, in Tesla’s

case, Shanghai does not have such policy, this allows Tesla to open a factory, without sharing its

industry secrets with a Chinese firm. Joint ventures can be beneficial, as mentioned in economies

of scale, however, usually only on a limited scale.

4.1.8 - Sub-conclusion

We have talked about multiple factors in terms of what barriers Tesla have to overcome, in order

to enter the Chinese market. We can see that Tesla does have economy of scale to a certain

extend, as they can share research between products to reduce R&D costs, in addition to having

patterns on advance parts they sell to competitors. Another thing Tesla will not have to worry

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about is distribution channels, as they are vertically integrated. They own their distributor and

produce a majority of their own parts in house. However, things that will make it difficult for

Tesla is the fact that they have certain disadvantages in terms of contracts and grants, as the

Chinese government and cities funnels millions into projects and the development of the

domestic EV industry. In addition, the new factor is a huge investment, with a new platform for

producing cars and a completely new operators. This does result in huge start-up loses as they

need to learn the know-how and the capital needed to build the factory is significant.

4.2 - Bargaining Power of Suppliers

Tesla is in a unique position in terms of suppliers, compared to a majority of its competition.

Tesla works as a original equipment manufacturer, which means they are producing a majority of

their vital components in-house through vertical integration (Cheong et al. 2016: 2-3). This

prevents suppliers from bargaining higher prices for crucial and specialized parts, that might only

be produced by a single or very few suppliers. As a result suppliers will not have a strong

bargaining power over Tesla. However, this does not mean that suppliers does not have any

bargaining power. Tesla produces all its own parts, except for windshields (AGC Automotive),

breaks (Brembo), power seats (Fisher Dynamics), instrument panel (Inteva Products), battery

cooler (Modine Manufacturing Co.), acoustic dampers (Sika), liftgate gas spring (Stabilus), and

power steering mechanism (ZF Lenksysteme). These are the only parts that is not produced

in-house (Maverick 2018). This does on the other hand strongly support the fact that suppliers

have very limited bargaining power, as most of these parts are not high tech and can be produced

by other parties. However, it does not mean that it would be cost efficient to switch to another

supplier. Another question that does have an important factor is, if Tesla can import these parts

to China, without having to pay a hefty duty. AGC Automotive have production in Asia, both

China and Japan, thus will not affect prices in terms of a new factory in Shanghai. The same goes

for Brembo, Fisher Dynamics, Inteva Products, Modine Manufacturing Co., Sika, Stabilus, and

ZF Lenksysteme. This allows Tesla to buy products without having to pay import duties, nor

finding a new supplier. In addition, a important aspect of bargaining power of suppliers is the

density of suppliers providing the above mentioned parts. Tesla on the other hand, does have

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some bargaining power as a supplier, as multiple car manufacture uses certain parts produced in

house (Cheong et al. 2016: 9). In addition, the parts that is not produced in house are not very

advance or technological and can be/are being produced by multiple other firms.

Something to mention when we are talking about suppliers, is that Chinese firms do not have the

same technological advantage as European and American firms. However, a majority of products

are produced in China, despite it being designed by outside firms (Jiang and Lu 2018: 493). This

is important to note, especially as designing parts can happen outside China and still be produced

there, which eliminates import duties for Tesla, and makes it significantly easier to switch

supplier, if it is needed. Thus, many substitute products for parts that is not produced in-house,

and this will prevent them to squeeze the profitability out of Tesla. This is also closely connected

to the fact that Tesla produces high technological and R&D heavy parts in house.

4.2.1 Sub-conclusion

Tesla’s suppliers does not have a strong bargaining power, as most technological and R&D

heavy parts are produced in-house, as a result of Tesla’s vertical integration. This ensures that

suppliers can not significantly increase prices on vital parts, and squeeze profits out of Tesla.

However, Tesla does import certain parts, but non, which cannot be produced by other firms,

both inside and outside of China. That being said, switching a supplier will result in a initial

loose in cash as they need to be taught how to produce them and have a production started,

which takes time.

4.3 - Substitutes Products and Rivals

In our previous chapters where we have laid out the necessary information of the Porter’s Five

Forces, we placed the threat of substitute products together with rivals in constructing the Causal

Relationships Model for Competitiveness. In this section of the analysis, we will delve into our

data, while containing our focus on who the substitute products are for Teslas vehicles in China

and more specifically in Shanghai. Additionally, we will be attempting to thoroughly answer

who their rivals are as well as the level of threat there is from both substitute products and rivals

33


in such circumstances. In this case, we would refer back to our theory concerning substitute

products and what defines a substitute product. As defined in chapter 3, a substitute product is

any product that may compete with existing products, generally defined as being a product that

can perform the same functions or service as the product delivered by your own company, which

in this case is Tesla. In the case of Tesla, these substitute products are any and all transportation

devices that is available to the public, such as gasoline vehicles, diesel vehicles, hybrid vehicles,

electric vehicles, motorcycles, or at least this may be how it seems at first glance. The factory

which is undergoing construction in Shanghai will be producing Model 3 and Model Y from

Tesla, and it is claimed that they will be producing the first vehicles by the end of 2019 (Clean

Technica, 2019).

To further clarify what products deliver the same type of service and function as Teslas Model 3

and Y, we have to understand their two products. The first of the mentioned vehicles is the

Model 3, which has a range of 310 miles per charge, and is constructed of a mix of aluminum

and steel creating a strong structural rigidity. It has been granted a five star safety rating,

meaning that with its energy absorbent crash structure, rigid passenger compartment, and its

incredible side impact protection and lowest rollover risk it comes with great safety for anyone

driving the vehicle. In addition to safety it also focuses on the performance of the vehicle, which

is capable of accelerating from 0-60 miles per hour in as little as 3.2 seconds, which is a thrill to

buyers and car enthusiasts. In addition to this, it has a dual motor all-wheel drive, with lowered

suspension for added control in all weather conditions, as well as focus on stability at high speed.

To delve into the dual motor made by Tesla, it is two independent motors, which digitally

controls the front and rear wheels, allowing for better handling and traction, and the car can

switch between either engine, allowing for safety of not being stuck on the road due to a problem

with one of the engines. The information that the Model 3 has a range of 310 miles per charge,

and is capable of being charged in less than 15 minutes, dwindles when you receive the

knowledge that the Model 3 is fitted with all-glass roof, wifi, and live software updates, as well

as a touchscreen and many more luxurious features. This all goes to show that Tesla albeit

aiming for more competitiveness and being capable of selling their vehicles to considerable

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prices, the Model 3 does not only allow you to drive from one destination to another, it also

grants a considerably high level of luxury with all its different features, and may even have some

future technology allowing for Tesla vehicles to drive without the necessity for a driver, granting

a higher level of luxury (Tesla Model 3, 2019).

On the other hand we have the Model Y, which is roughly the same size as the Model 3, with a

slightly shorter range of 300 miles per charge. It also utilizes similar safety features to the Model

3, with its low center of gravity, rigid body structure and large crumple zones, which provide a

high level of protection. Additionally, the Model Y is a more versatile vehicle as it has room for

a total of 7 passengers, where the seating and storage is versatile and changeable, with easy

access to the trunk. All seats are capable of being folded flat, allowing for storage of skis,

furniture, luggage and much more. The Model Y is also situated with the all-wheel drive dual

motor, similarly to the Model 3, giving it high level of responsiveness, independent motors that

digitally control the front and rear wheels, giving better handling, traction and stability.

Additionally, it is stated that it can handle both in rain, snow, mud and even off-road. The range

and charging time is roughly the same as the Model 3, and like the Model 3 you have the

possibility of charging your vehicle either at home overnight or visit one of their superchargers

which allows you to charge your vehicle in less than 15 minutes. This specific vehicle comes

with the autopilot feature, which has 360 degree visibility and with ultrasonic sensors and radar

that goes 160 meters forward, which then has emergency braking, collision warning, blind-spot

monitoring and much more. The model will have full self-driving capability, enabling automatic

driving on city streets and highway pending regulatory approval, as well as the ability to drive to

your location if necessary. Like the Model 3 it comes with all the luxury perks of all-glass roof,

touchscreen display, wifi and software updates being just a few of the features found (Tesla

Model Y, 2019).

With these two types of electric vehicles in mind, with their considerably advanced features and

capabilities as a vehicle for transportation, you have to consider that substitute products which in

our case is any transportation device available to the public, such as cars, motorcycles and more.

35


Now these vehicles which are considered substitute products are any and all transportation

devices, meaning that there are a considerably high amount of substitute products on the Chinese

market, especially seeing as it is one of, if not the largest automobile industry in the world. To

support this, we have acquired data concerning the EV stock and manufacturing of electric

vehicles in China. From 2014 until 2016, the United States would have been considered the

leading country within the Global EV stock with an increase from 293,630 to 563,760 globally.

However, they were quickly surpassed by China in 2016, whom had acquired a total of 721,070

in EV stocks, and as of 2018 it had increased to 2,610,000 compared to United States 1,102,450

(ZSW (A), 2019). With these numbers it is visibly shown that China has become the largest

player when it comes to the electric vehicle market, but we need to delve further into the market

to see who the main actors are within it. To do so, we have acquired the information of

manufacturers as well as the models constructed.

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Table for 4.3.1: Largest manufacturers.

Retrieved: (ZSW (A), 2019) - See bibliography

With the above table we are able to determine the development of the electric vehicle market,

and as we can see in 2014 it was actually Nissan that was the largest EV manufacturer. However

surpassed by BYD and Tesla. Now, these numbers show that Tesla and BYD by the year of

2018, both manufactured 215,000 and 233,000 electric vehicles world wide respectively. When

looking at the list of manufacturers, we can determine that there are a considerable amount of

competition within the market, with manufacturers from China, USA, Japan, Germany etc (ZSW

(A), 2019). This goes to show that there are several substitute options for the buyers within the

electric vehicle market alone, and that is without taking into account the gasoline market. In

addition to the electric vehicle market, there is also substitute products outside, and when looking

at China we can identify the largest competitors or substitute products through the given data.

This data shows that Volkswagen, General Motors, SAIC, Geely International, Dongfeng

Automobile, Baoding Great Wall Motors, Changan Automobiles, Beijing Hyundai Motors and

Honda Automobiles are the largest manufacturers within China (Statista (B)). One final factor to

consider besides the different automobile industries for substitute products, is the public

transportation which is also considered a threat. As a result of this, when looking back on the

available substitutes for Tesla’s electric vehicles which will be available in China, we look at

37


Porter’s Five Forces, where we understand that the low switching costs, availability of

substitutes and performance of said substitutes are of significant importance. As a result of this,

the low switching cost enables a high level of competitiveness, which enables substitute products

such as public transportation to attract customers, especially in large cities in China. This

substitute is increasingly competitive, as in many cities, there are limits to the amount of vehicles

allowed on the road certain days, and due to pollution the Chinese government have issued

regulations for the vehicle industries and what is allowed on the road (The Indian Express,

2017). As such, public transportation is in a strong position with trains and busses, especially in

some cities where they have been converted to electricity. Especially seeing as some cities have

fully embraced electric transportation both public and private (The Guardian, 2018). In addition

to the public transportation there are substitute products available, which would be the electric

vehicle industry and the regular gasoline industry, which grants a considerable amount of

substitutes, however electric vehicles are increasingly more important in China due to their

regulations and their pollution issue, meaning that electric vehicles will continue to become a

larger part of the Chinese market. This of course narrows down the possibilities for substitutes in

China, with the government initiatives, meaning an increasing amount of people will want to

consider electric vehicles over gasoline vehicles, which in turn means that the amount of

substitute products is narrowed down. This shows that, if we look back on the table above, we

can see that there are 10 heavy hitters on the global market currently listed, with BYD and Tesla

being the top contenders. Eventually, this goes to show that due to low switching costs, there is a

high possibility of population wishing to switch to products as it is easy to do so, and in addition

the substitute availability and performance would be considered moderate due to the low level of

competitiveness from a large quantity of manufacturers. Especially considering that the largest

amount of substitutes coming from electric vehicle manufacturers have a lower level of

performance than Tesla, with the exception of BYD, causing Tesla to be in a decent position

when entering the Chinese market. Of course, with reference returning to the construction of the

gigafactory in Shanghai Free Trade Zone, this would grant Tesla a stronger position on the

electric vehicle market in China with easier access and less barriers protecting the Chinese

manufacturers, granting them a stronger position as a competitor.

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Now that we have a thorough understanding of the substitute products and available substitutes

in general, with an intricate understanding of the position that Tesla currently has before the

construction of the factory, we move on to understand who their rivals on the Chinese market

are, and how significant the threat currently is, and how it may change after the finishing of the

factory.

In the wake of the electric vehicle revolution initially led by Tesla, BYD and Nissan, there is an

increasing rivalry amongst the manufacturers. This is signified by the increased focus from

global actors such as General Motors, Bayerische Motoren Werke, Volkswagen, Porsche, Jaguar

and Mercedes-Benz, whom have dedicated considerable resources to the development of mass

market electric vehicles (The Economist (B), 2019). This is outside of the current BYD, Nissan

and Tesla whom are competing with one another for the shares of the market. Now, if we delve

further into the electric vehicle market, we can not only identify the companies who produce and

sell the most amount of electric vehicles but also the type of vehicles, which can be seen in the

table below.

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Table for 4.3.2: Models Sold.

Retrieved: (ZSW (A), 2019) - See bibliography

From the above table we can identify, that Tesla has the most sold car model as of 2018, the

Model 3, followed by the BAIC EC-series and Nissan Leaf, where the Nissan Leaf sold more

than 80,000 vehicles. However Tesla also has the Model S, which sold for almost 50,000

accumulating it together with the Model S, we see that Tesla over all with these two models, sold

almost 200,000 electric vehicles in 2018. Additionally, there is heavy competition from

Chevrolet, Toyota, BYD, Renault, BAIC, BYD and BMW whom all manufactured and sold

between 20,000 to 50,000 electric vehicles in 2018. As such we can determine with the above

table, that there has been an increase in competition among the electric vehicle companies of

Tesla, Nissan, BAIC and BYD, combined with the entrants from BMW, Mitsubishi, Chevrolet,

Toyota and Renault, starting all the way back in 2014 for some of them (ZSW (A), 2019). An

important note before continuing to determine the rivals within the Chinese market for Tesla, we

can see through the Global EV registration, that in 2018, China had a total of 1,256,000

registered electric vehicles compared to USA whom was in second place with 361,310 registered

vehicles, with every other country having less than a 100,000 registered electric vehicles (ZSW

(A), 2019). This determines China as the largest electric vehicle market, by far, as of 2018. As a

result of all this development from current competitors and future competitors entering the

40


market, and especially in the Chinese market, we draw back to Porter’s Five Forces, with the

definition on rivals (See chapter 3). Rivalry among existing competitors boil down to them

utilizing tactics, including price competition, advertisement both to increase sales and to rack

down on competitors. Generally rivalry exists when a competitor or business enters a market and

experiences pressure or finds opportunities to improve their position while taking advantage of

their competition. As a result of the definition on rivals, it is a rather broad term which makes it

difficult to determine who the rivals of Tesla are, however when referring back to the table above

as well as the information that BYD and BAIC registered a total of 376,590 electric vehicles

compared to Teslas 233,760 electric vehicles globally, and in the situation of BYD and BAIC

being mainly on the Chinese market, it goes to show that they control a large portion of the

market (ZSW (A), 2019). As a result of this the biggest competitors or rivals that Tesla would

face on the Chinese market would be BYD, Nissan, SAIC and BAIC if we solely look on their

market share of the Chinese market (ZSW (A), 2019). This translates into a form of high

aggressiveness from the different companies as they wish to maintain their control or expand it

upon the market, as well as the competitiveness of the current rivals on the Chinese market have

a firm position which makes it easier for buyers to switch between products, especially seeing

that BYD, SAIC and BAIC produce more electric vehicles than Tesla on the market and for

more considerable prices, allowing for what we call low switching costs, making competition

that much more fierce. Additionally, there is a small number of companies on the Chinese

market whom control the largest portions of the electric vehicle market, which means that in

some ways the competition will be limited within how it affects Tesla, especially seeing how

they are constructing a gigafactory in Shanghai which will circumvent the tariffs and other

barriers making them far more competitive on the market.


As previously mentioned in this section, the rivalry and amount of substitute products have

caused an intensive competition. Of course, we would argue that Tesla is the most recognizable

brand among the electric vehicle industries giants, however with major automobile companies

announcing their plans to focus on electric vehicles such as BMW, Volkswagen, Nissan and

41


Mercedes-Benz, where BMW and Nissan have already released their vehicles onto the market.

Additionally, in China it is especially important to note the existence of BAIC, SAIC and BYD,

as giant electric vehicle and battery producers, which subsequently increases the level of

competitiveness. As such, we come to the conclusion, that the situation within China and

Shanghai is moderately intense, while it will definitely increase in intensity over the coming

period of time.

4.4 - Bargaining Power of Buyers

The bargaining power of the buyers are defined in the Porter's Five Forces (Chapter 3), as it

refers to the pressure that the consumers exert on businesses to get them to provide quality

products to reasonable or lower prices than first anticipated. The importance behind defining the

bargaining power of the buyers in China and in Shanghai, is due to its effects on the competitive

environment for the seller and because it influences the abilities of the of sellers to achieve

profitability. It is important to note, that Michael Porter wrote the book Competitive Strategy,

with an emphasis on practitioners of business, such as managers whom seek to improve the

performance of their businesses, and aim to forecast business success or failure (Porter, M.,

1980, introduction). Additionally, the book Competitive Strategy, and mainly the section

concerning bargaining power of buyers, was originally aimed at groups of buyers such as

governments, organizations, and generally all types of groups that may be interested in the

product which the company is selling (Porter, M., 1980. Pp. 24-27). On the contrary, we

understand that this is not the only possibility behind buyers, but as seen we are mainly focused

on the general public in Shanghai and China, to look at their bargaining power, to determine the

impact that they may have upon Tesla, now that they are constructing a factory which should be

producing electric vehicles by the end of 2019. Now moving forward we need to understand

what the determining factors behind the power that the buyers hold in the market.

To begin we see that if buyers are more concentrated than sellers, essentially meaning if there are

many sellers but few buyers, then the buyer power is considerably high. Additionally, the

switching costs, meaning if the cost of switching from one product to the other is low, then the

42


bargaining power of the buyers are high. Another factor, may be if the buyers are capable of

backtracking and end up being capable of producing the product themselves then the bargaining

power of customers are high as well. One of the most important factors is the consumers being

price sensitive and well-educated concerning the product, meaning that they understand the

product well enough to get a high amount of power. Additionally, substitute products on the

market gives a high power level to the buyers as well as if they buy large volumes of

standardized products which may be the case in the electric vehicle and vehicle industry.

Now to look into Tesla and its situation with the level of power that the buyers have in China and

Shanghai, then we look at the amount of sellers and substitute products in general. In doing so,

we can refer back to our previous sector concerning the rivals and substitute products part of our

analysis, where we identify the said substitute products and rivals of the industry. On the list of

models produced and sold (Table 4.3.2.), there are 9 separate models that come from 9 different

companies, including Tesla. This goes to show that within just the electric vehicle industry, and

without counting the general vehicle industry there exist a substantial amount of substitute

products and subsequently sellers. As a result of this, we can say from this particular point of

view, that the buyers should have a high level of power, however we should also consider that in

Shanghai and China there may be a high possibility for a substantial amount of buyers as well,

which may mitigate the power level on this particular point. Additionally, we have to consider

the switching costs, meaning the price for switching from Tesla to another product or the other

way around, which is quite simple in the sense that you purchase a new vehicle. The current

starting price for a Model 3 Tesla is 72,000 US dollars in China, while to comparison the Nissan

Leaf or as it may be called in China, Nissan Sylphy has a pricing range of 25,850 US dollars

(Reuters, 2019. & Phys, 2018). As a result of this we would argue that the switching costs are

low, since the price for substitute products currently are substantially lower than Teslas’ own

vehicles, however it may change to some extent in the future with the gigafactory. The people

being capable of identifying and producing Teslas’ vehicles themselves is highly unlikely, due to

the automation of the manufacturing process and the highly skilled level of intelligence required

to understand and work the intricacies of the electric vehicles and the additional content and

43


technology advertised and used by Tesla. To identify peoples price sensitivity you have to

understand the education of the Chinese people and Shanghai where the gigafactory is being

constructed, where in general we understand that this is an importance, what is more important is

that people educate themselves on the products they are currently assessing if they wish to buy.

In such a case, most if not all people, generally go out and educate themselves about products

and what they can gain with the different vehicles in this case, and what features accompany

them. So to end this, the people would in our case be considerably educated on the matter, in the

sense described above. We previously touched on the substitute products, however in our

conclusion of this, we would argue that there is a considerably high volume of possible products,

coming from not only the electric vehicle industry but also the general vehicle industry, giving

the buyers a lot of power, as they have many options.


As a result of the above analysis coming from the bargaining of power of the buyers, from

Porter’s Five Forces, we would conclude that the bargaining power of buyers in the electric

vehicle industry is significantly high. There seem to be no cost for customers to switch away

from Tesla’s vehicles to something more interesting for them, like the Nissan Leaf. This

substantially increases the buyers bargaining power. With the significant amount of established

and new automobile companies entering the fray as shown above, by the amount of types of

electric vehicles, customers may notice that Tesla’s prices are considerably higher than their

competitors. If buyers decide on alternate products, they subsequently utilize their bargaining

power to make Tesla reconsider their prices. And finally, due to the range of substitute products

and services available outside of Tesla and the extent of product differentiation, buyers have a lot

of possibilities, making it even tougher for Tesla to compete. As a result of this sub-conclusion

we may argue, that the bargaining power of buyers are significant.

44


Chapter 5 - Discussion

In the analysis we have looked at each factor and analyzed and assessed how Tesla will compete

and if it will succeed in the Chinese market. However, things that will have considerable impact

on the sale of EVs is the subsidies policies. The Chinese government have during the last decade

increased the amount and scope of the EV subsidies. However, during recent years, they are

trying to phase them out. This does raise some concern and uncertainty as new subsidies might

be enforced, or in a worst case scenario, there will not be any subsidies at all. This uncertainty is

not specifically a problem for Tesla, but for all EV manufacturers in China. Then comes the

question of how regulation will change. Currently Shanghai allows foreign companies to build

and produce, without entering into a joint venture with a Chinese company. In addition, no

foreign company have ever been awarded projects and grants from the government. This does

provide a disadvantage for Tesla, however, it might change in the coming years, especially as

China is slowly opening its economy.

With the future of Tesla currently in the making, when it comes to Shanghai and China in

particular, the infrastructure that Tesla requires is one significant factor which is left out of the

Porter’s Five Forces. However, it is a concern that is in fact quite far down on Tesla’s list of

troubles they have to come up with a solution for. This is actually due to another company, the

NIO car company, who announced earlier this year, that their charging stations will not only be

available to their own electric vehicles, but to every electric vehicle on the Chinese market,

including Tesla (Teslarati, 2019). This as a result, means that Tesla will enter the market with a

more firm position as previously thought, now that they are not required to expand and create

their own charging infrastructure, now that they have cooperation with NIO. Of course this is but

a single factor, that one must take into consideration when looking at Tesla’s position on the

Chinese market and the future of it.

45


It does not take a educated individual to determine that EVs are the future and an increasing

number of automakers are investing in launching their own EV. The market is quickly and

drastically changing. It is a volatile situation. It requires that Tesla can keep up with R&D. In

addition, as more automakers are launching their own EVs, the market share per brand is

decreasing significantly. The question then becomes, how to compete? Through cooperation,

friendly competition, or survival of the fittest. But even more importantly, will the profitability

be squeezed out of the industry.

The analysis have showed us how good a chance Tesla will have in the Chinese market.

However, there are factors that could have been enlightful when talking about the Chinese

market, and that is infrastructure as mentioned above. This is because infrastructure in China

heavily depends on where in the country you are. Cities might have the necessary charging

stations, compared to the country sites. This makes it undesirable to own a EV if the individual

lives in a remote area. Another factor that could have been helpful is the advancement in

technology, as the EV industry thrives on it, and it is connected to an overall performance of a

EV, most importantly battery life. Lastly, sociology would have helped understand and evaluate

if Tesla are a prefered choice compared to the Chinese BYD, or if customers will avoid Tesla.

This would have provided us with an overall understanding of the sentiment and help us asses

Tesla’s chances of success.

A factor that can completely change Tesla’s chances in the Chinese market, is how the trade war

between the US and China will continue. If the trade war becomes more extreme and starts to

significantly hurt the Chinese economy, it could have a huge impact on Tesla. Especially as there

have been major talks about Tesla’s decision to open a factory there. An additional concern is the

theft of intellectual property, which the Chinese is known for. If their technology were to be

stolen it would put them at a significant disadvantage, as their technology is significantly better

than the Chinese, as mentioned in the analysis.

46


Conclusion

There are many concerns when it comes to foreign firms in the Chinese market. In the case of

Tesla, they have the necessary conditions to successfully break the entry barriers, as they have a

significant advantage from proprietary technology, which they are selling to multiple

auto-manufacturers. In addition, they are not dependent on their suppliers, as they have very

limited bargaining power. The issues with Tesla entering the Chinese market, through the

construction of their new factory in Shanghai, has shown, that with the growing interest from

giants in the vehicle industry such as BMW, Volkswagen and Mercedes-Benz entering the

market in the near future, coupled with the current competition from Nissan, BYD, BAIC and

SAIC, there exist a rather intense competition on the Chinese market, which will only grow over

the coming years. As such from the rivalries and substitute products, it is shown that the

competition is moderate to considerably intense, which is why it is one of the main obstacles for

Tesla to handle. The bargaining power of buyers on the other hand is one that holds significant

issues. This is due to the simple fact that there are no switching costs for the buyers, while the

amount of competitiveness between substitute products and rivals to Tesla also gives the buyers

more power. Additionally in choosing other products they force Tesla to reconsider their position

on the market.

Thus, we can evaluate that Tesla have a very high chance of success in the Chinese market.

However, there are still concerns, which is reflected in the discussion. If the trade war takes a

turn for the worse, it will provide Tesla with some obstacles. In addition, the theft of intellectual

property is a huge concern as it is one of Tesla’s advantages.

This provides us with a understanding, which we can use to evaluate foreign firms in China. We

can conclude that in general, foreign firms will have a problem competing with a Chinese firm in

China. This is a result of the government funneling money into domestic firms. However, if a

firm has a technological advantage and proprietary technology, which the Chinese does not have,

47


it can provide a significant advantage, as illustrated through the case of Tesla. In addition,

working as a original equipment manufacturer and a high vertical integration, lowers the

bargaining power of suppliers and a firm's dependency on others.

48


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https://ir.tesla.com/static-files/b2218d34-fbee-4f1f-ac95-050eb29dd42f

Documents

Tesla’s Position in the Chinese Market - RUC.dk