1           Introduction and Background Analysis

Tesla was founded in 2003 and is one of the world’s most recognized electric car and clean energy company which has acquired solar city and solar manufacturing tiles for supporting its clean energy operations. As of 2019, Tesla owns 23% of shares in plug in market and 17% in electric battery segment. In 2019, sales of Tesla have increased 50% (Teece, 2018). Tesla has long planned for entering into the Chinese market, as it is considered as one of the largest consumer markets for electric and hybrid cars. As part of this plan, Tesla has opened its Giga factory in China, with total cost of around $5 billion (Valentin, 2019). The factory is expected to produce around 250,000 of units along with battery packs in 2021. It is expected that capacity will double over time (Bhardwaj et al., 2020). The key aim of Tesla is to assure that China becomes largest market for its model 3 cars, even outstripping the US market. This decision of Elon Musk to open production factory in Shanghai has become the agenda of concern for many stakeholders and thus he underlying report is aimed to assess the decision of Tesla to open production facility in China, while analyzing external environmental forces in Chinese market.

2           Challenges faced by Tesla

Tesla has enjoyed image of innovative and efficient car brand since its inception. However, the company has recently been exposed some challenges, which are seemingly catered well by the company to assure its profitability. The key issue faced by company was linked with maintaining a balance between demand and production, which has been referred as ‘production hell’ by Elon Musk (Teece, 2018). Additionally, the competition from luxury brands has become intense as they started to follow the path of electric vehicle production (Teece, 2019). However, it is worth noting that Tesla has still managed to cope with competitive forces and has doubled the level of its sales.

The rising trade tensions between China and US has also become a major issue for Tesla and in consideration of this issue, Tesla has decided to start local production in China (Thomas & Maine, 2019). In relation to these issue, one key issue was related with law suits faced by Elon Musk by the Stock Exchange Commission. However, it is notable that despite of all these issues, Tesla has managed to overcome the issues through adoption of different strategies. One of those strategies is the decision of Tesla to open up a production factory in China.

3           External Environmental Forces affecting Tesla in China

3.1         Political Factors

China is rigorously supporting clean energy vehicles and its eagerness to cut pollution has led to policy formulations which are highly favorable for electric car brands, like Tesla. As China has goal to have 7 million electric vehicles on its roads by the end of 2025 and Tesla can help the nation in realizing this vision (Cooke, 2020). It is expected that political situation of China is likely to have positive effect on standing of Tesla in China. For instance, China has imposed 40% tariffs on automobiles that are to be imported from US (Bhardwaj et al., 2020). Thus, by manufacturing locally in China, Tesla can avoid the high cost of tariffs and thus competition on prices can be avoided. Moreover, China’s policy to remove the foreign ownership caps from automobile companies also benefits Tesla, as Tesla has owned its production unit in China, while managing strict control over the quality and production processes (Forbes, 2018). The ability to maintain ownership rights has also helped Tesla to protect its technologies without the need of sharing revenue with any local partner. Finally, China is offering subsidies to local electric car manufacturers, which has caused a disadvantage to Tesla as it was forced to lower the price of its model 3 cars in China.

3.2         Economic Factors

The economy of China has witnessed an uplift over the past years and China is becoming one of the strongest economies around the world. The enhanced level of income and increasing purchasing power of consumers are considered as positive indicators to assure the success of Tesla in China (Rimmer, 2018). On the other hand, the economic policies such as tariffs and duties imposition has recently witnessed changes, as China has increased 40% tax on imports of cars from China (Cooke, 2020). Such changing economic policies are likely to act as threat for ability of Tesla to successfully operate in China.

3.3         Social Factors

The income level of Chinese consumers has increased substantially over the recent years and they are willing to purchase electric vehicles from prestigious brands, with the purpose of being responsible and green consumers. It is noted that Chinese consumers have purchased around half of the total of 1 million units of electric cars that are sold globally (Prud’homme & von Zedtwitz, 2019).  It is noted that regardless of having comparatively high price for model 3 cars of Tesla, consumers in China are willing to pay more for premium purchase from a foreign brand.

3.4         Technological factors

China is considered as one of technologically advanced nation and local players in automotive sector of China are rapidly catching up with operational advancement and pace of Tesla. It is mentioned by Forbes (2018) that although Tesla is still leading in terms of technology, yet it is expected that in coming years gap of technology will reduce substantially and thus advantage for Tesla will be largely affected in China.

4           Conclusion

Based on the analysis of decision made by Tesla to start production operations in China, it has been assessed that it is mainly a winning situation for Tesla. The policies in China for foreign automobile brands are highly favorable and Tesla is able to enjoy ownership rights in the foreign location. The local production in China helps Tesla to avoid cost of tariffs and makes it easy for company to approach local Chinese consumers.

References

Bhardwaj, S., Pandey, R., Sharma, S., Sejal, S., Iyer, G., Sharma, S., … & Kulkarni, S. (2020). Problems Faced by Automobile Industries: Case Study on Tesla. International journal of Tourism and hospitality in Asia Pasific, 3(2), 78-88.

Cooke, P. (2020). Gigafactory Logistics in Space and Time: Tesla’s fourth gigafactory and its rivals. Sustainability, 12(5), 2044.

Forbes (2018). Tesla will be challenged like never before in China, Retrieved from; https://www.forbes.com/sites/ywang/2018/08/27/tesla-will-be-challenged-like-never-before-in-china-heres-why/#1b27ea8710e1.

Prud’homme, D., & von Zedtwitz, M. (2019). Managing “forced” technology transfer in emerging markets: The case of China. Journal of International Management, 25(3), 100670.

Rimmer, M. (2018). Elon Musk’s open innovation: Tesla, intellectual property, and climate change. In Intellectual Property and Clean Energy (pp. 515-551). Springer, Singapore.

Teece, D. J. (2018). Tesla and the reshaping of the auto industry. Management and Organization Review, 14(3), 501-512.

Teece, D. J. (2019). China and the reshaping of the auto industry: A dynamic capabilities perspective. Management and Organization Review, 15(1), 177-199.

Thomas, V. J., & Maine, E. (2019). Market entry strategies for electric vehicle start-ups in the automotive industry–lessons from tesla motors. Journal of Cleaner Production, 235, 653-663.

Valentin, M. (2019). The Tesla Way: The disruptive strategies and models of Teslism. Kogan Page Publishers.

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