Will Tesla Motors Succeed in China - Essay Example

Will Tesla Motors Succeed in china? s affiliation Will Tesla Motors Succeed in china? Brief History of the Automobile Francois Isaac de Rivaz built the first automobile in 1807 powered by an internal combustion engine that ran on fuel gas (a mixture of hydrogen and oxygen) which eventually led to the development of the modern gasoline fueled engine towards the end of the 19th Century. The development of the modern motor vehicle is widely believed to have begun in 1886 with the development of the Benz Patent-Motorwagen by Karl Benz, a German national. Electric powered motor vehicles made a brief appearance at the beginning of the 20th Century but disappeared again only to resurface in recent years with likes of Tesla motors. (Glancey, 2013) The early history of the motor vehicle can be put into several eras based on the means of engine propulsion. Recent eras are however grouped depending on trends in size, utility preference and exterior styling. Early Automobiles Steam-powered wheeled vehicles (17th to 18th Century) The first steam-powered vehicle was developed in 1672 by Ferdinand Verbiest as a gift to the Chinese Emperor. It was however too small to carry around a driver but it still considered as the first steam powered automobile. Large enough steam powered vehicles that were able to carry a driver were developed much later on in the 18th Century (Glancey, 2013). 18th Century Josef Bozek developed an oil-fired steam automobile in 1815. In 1838, Walter Hancock came up with a four-sitter steam phaeton. A Canadian named Henry Seth Taylor tested his four wheeled steam buggy in Quebec in 1867 (Eckermann, 2001). Electric automobiles Anyos Jedilk developed a crude version of an electric car in 1828 by creating a small model car that was powered by a newly developed electric motor. An American named Thomas Davenport installed his direct current electric motor in a model motor vehicle that operated on an electrified track. These Electric cars were hugely popular towards the end of the 19th Century and the beginning of the 20th Century due to their comfort levels, and operational ease. However improvements of the internal combustion engines like the internal electric starter as well as a superior range when compared to the electrical engines greatly eroded their advantage. Mass production of these gasoline powered vehicles by Ford Motor company also greatly reduced their costs coupled with an improved petroleum infrastructure. (Glancey, 2013) Modern Era The modern era here is used to refer to two the previous two decades and their improvements in motor vehicle designs and safety standards. There are key technical and design concepts that set apart antiques from modern motor vehicles. The modern car era has seen increased use of platform sharing, computer-design and standardization. There have been improved developments as seen in the increased adoption of the all and front wheel drive vehicles, the widespread adoption of the diesel engine and various improved modes of fuel injection. A majority of modern passenger vehicles are front wheel drive vehicles with engines that are transversely mounted (Eckerman, 2001). Body styles have also evolved and improved a lot in this modern age. The three main types of bodies that dominate the auto market are the sedan, sport utility vehicle and hatchback. All these body styles were initially aimed at practicality of the car to the users but they have gradually changed into sports wagons, crossover SUV as well as big MPV vans. The modern cars also have much more improved fuel efficiency and increases horse power. Computerized engine management systems have led to a reduction in vehicle engine emissions with the environment in mind. (Eckerman, 2001) The 2008 economic crisis greatly reduced vehicle sales globally with the market shrinking by up to 30% for some vehicle manufacturers like Toyota, Nissan, Ford and Chrysler. Ever since the end of the economic crisis in 2009, China has emerged as the world’s top car manufacturer its production levels surpassing those of the U.S.A, all of Europe as well as Japan. There has also been an increase in the manufacturing of transnational vehicles that share similar platforms as well as re-badging or badge engineering so as to satisfy different consumer segments and markets. (Glancey, 2013) About Tesla Motors Inc. Tesla motors are an American auto company that manufactures electric vehicle power train as well as electric motor vehicles. It was founded by Elon Musk (Chairman & C.E.O), Martin Eberhard, Marc Tarpenning, JB STraubel and Ian Wright. The company’s headquarters is Palto Alto, California. It is a public company and trades on the NASDAQ stock exchange with TSLA being the company’s stock symbol. The company posted profits for the first time in a decade in the first quarter of the year 2013.The annual revenue for the company in 2013 was US$2.013billion with a profit of US$61million.The company gained popularity through the production of Tesla Roadster which was the first sports car that was fully electric. The company’s second production car was the Model S which was a luxury sedan that was fully electric (Marcovici, 2013). The company also produces and sells electric power trains and their components like lithium-ion batteries to other vehicle manufacturers like Toyota and Daimler for their hybrid cars like the Toyota prius. The company has a vision of being an independent motor vehicle manufacturer with the long term aim of making its electric cars much more affordable for the mass market. The company is named after physicist Nikola Tesla who was a renowned electrical engineer. Their flagship model, the Tesla Roadster, has an alternating current motor that is linked to Nikola Tesla’s original design in 1882. The Tesla Roadster is the pioneer production vehicle that makes use of lithium-ion batteries and also broke the record of being the first production electrical vehicle with a travelling range of 320 kilometers per single full battery charge. The company sold around 2,250 of the roadsters globally between 2008 and 2012. The company employed as many as 3,000 full time employees by March 2013. (Tesla Motors, 2012) Tesla’s Corporate Strategy The company’s strategy was to initially enter the motor vehicle market with expensive products that mainly target the affluent high-end consumers and then gradually shift focus to the bigger, lower priced markets as the company’s products gained more acceptance and matured. Many technology companies in silicon valley employed this tactic as seen with prices of computers, cell phones which normally begin high but subsequently dropped with ensuing product cycles. The Roadster’s price at its launch stood at US$109,000 the next model, the Model S’ base was priced at US$57,000 the company also plans the model bluestar which is set to be priced at US$30,000. (Marcovici, 2013) The company’s goals are as follows;- To sell its own cars on-line and in company-owned showrooms. To sell more power trains to other motor vehicle manufacturers. To serve as a catalyst in the auto industry that will lead to the widespread adoption of electric vehicles by the conventional consumer. The company’s key focus is on electric propulsion technology with increased ranges of more than 200 miles. The Company C.E.O, Elon Musk scooped the 2010 Automotive Executive of the Year Innovator Award for his role in promoting the steady development of electric vehicles in the global motor vehicle industry. (Dunne, 2011) Business Model The company operates galleries or stores that are normally located in large shopping malls in about 23 U.S. states. Prospective customers do not buy their vehicles on from these galleries but they have to place orders directly from the auto company’s website online. These galleries in the shopping malls merely act as marketing points whereby the general public can learn more about the company and the vehicles it manufactures. These galleries are also mainly located in states that have highly restrictive dealership protection legislation that restrict price discussions, test drives, finances as well as other restrictions. (Billmaier, 2010) This business model of making direct sales to its customers and owning its own service centers and stores is a key departure from the more common dealership models that are more common in the North American automotive market place. As it stands currently, Tesla is the only motor vehicle manufacturer that sells its vehicles directly to consumers a departure from all the other auto makers who utilize car dealerships that are independently owned. About 48 states have legislation limiting or even banning auto makers from directly selling motor vehicles to consumers. Tesla itself does not have dealerships but this has not stopped auto dealers from filling law suits against the company in a bid to stop Tesla from operating in some states. Whilst Texas and Virginia are amongst the staunchest opponents of Tesla, North Carolina and New Hampshire are amongst the states the strongly support the company’s business model. (Marcovici, 2013) Texas at the moment has the harshest legislation that seeks to protect third party dealerships. The laws require all brand new motor vehicles to be bought via third party auto dealerships thus blocking the company from selling its vehicles in the lone star state. In order for a Texas resident to buy their vehicles, the transaction will be handled as an out of state type of transaction. (Tesla Motors, 2012) Thesis Tesla’s Chinese expansion is bound to encounter some hurdles that will make it difficult to be as successful as it would have wished in the first few years in the country. But the Chinese market is known to associate foreign car brands with as being of superior quality than their own domestic cars and with the major economies around the globe shifting to much more greener and efficient energy systems, the Chinese market will soon catch on making the company quite profitable in the long run. Tesla’s Chinese Expansion Plans The company has not hidden its intention of having a go at the Chinese market. The company most recently announced its intentions to open its own dealerships in the country. The company will not have a very easy start in the Chinese market thanks to the country’s uncertain market for overseas electric vehicles. Many market analysts are of the view that the auto company may be entering the Chinese market a bit early since the demand for electric and hybrid cars is not yet strong in the booming economy. This is mainly attributed to the lack of required infrastructures like charging stations which are essential for the normal operation of these kinds of vehicles (Gallagher, 2006). Advantages of Tesla in china The company has several factors that will work towards supporting its expansion bids in China;- The company can boast of a superior technological backing. This is due to the fact that it has been in the electric car manufacture industry for more than a decade. This is a long period when compared with the Chinese domestic electric car industries that have not been in the business for much longer. This will mean that the Tesla motors will have better quality and much more cutting edge technology than their Chinese competitors. The company has a big huge financial muscle that can work to its advantage to supplement the initial years of its entry into the Chinese market. The U.S operation can support the Chinese subsidiary for a considerable amount of time until it can get a strong footing in the Chinese market. The Chinese government has announced plans to invest heavily in the electric car industry through the building of infrastructure that will support the vehicles like charging points, in major big metropolitan areas like Shanghai and Beijing. This will help in boosting the convenience of owning an electric vehicle. This is because the main factor that makes a majority of consumers to shun electric vehicles is the fact that there are not quite as many charging points on the major highway as there are petrol stations. This fact makes it difficult for them to opt for electric cars over much more conventional petrol powered automobiles. The Chinese economy is also expanding at an astonishing rate thus growing the middle class and affluent segments of the population. This means that there is a ready market for Tesla’s premium luxury brands in the Country. This growing of the middle class does not appear to be stopping any time soon as which can only mean that there is a long term market for Tesla’s electric vehicles. The Chinese population and middle class is well placed to make the Tesla automotive and brand name trendy. This is because the Chinese middle class mainly purchase vehicles as a means of showing off their wealth as well as status in society and are not mainly driven by the practicality of the vehicle. This is because there is no incentive to for buying practical vehicles in Cities with largely cheap and efficient subway systems that have a reputation for chronic traffic congestion. With the fast increasing levels disposable incomes in China, Tesla’s price may not be much of an obstacle to the well to do middle class Chinese consumers. The car can be viewed as a piece of exotic foreign luxury item that highlights one’s status in society. This might help drive up sales of the company’s more expensive motor vehicles. (Dunne, 2011) Disadvantages that may hamper Tesla’s Chinese expansion There are several key disadvantages that may hamper the company’s Chinese expansion plans;- The Chinese government is in the process of implementing policies that aim at giving tax breaks to electric car manufacturers operating in the Country. These policies are however aimed at promoting domestic electric car industries like BYD. This will make it very difficult for the Tesla to penetrate the Chinese market and compete with these domestic brands owing to the differences in the final prices of the two vehicles after the taxes and tax breaks have been factored in. The Chinese government is really pushing through policies that favor both domestic innovation and production for both state owned and private companies in China. Tesla’s key Chinese competitor, BYD has been provided with low-interest loans. Geely is also a Chinese automaker that has set its goals at producing new electric cars and has for a long time been considering Fisker, an American Electric car company. This would give the company a huge advantage over Tesla. Geely would be able to access the much needed superior technology that has been developed by Tesla’s key competitor over years. This coupled with the favorable tax environment provided by the national and city governments would create a very difficult environment for Tesla to operate in China. (Dunne, 2011) The company also faces a major hurdle in trying to mass produce the vehicles due to its limited capacity. This means that it may fail to meet the growing demand for electric cars in the Chinese market. The failure to mass produce the vehicles also means that the company will not be able to take advantage of the economies of scale that a company enjoys when producing in bulk which drive the products’ prices down. Solutions to Tesla Tesla mat employ several solutions in whilst trying to be successful in China;- The company may employ several strategies to sidestep this tax breaks rule. Tesla may opt to produce joint-venture electric cars with China’s domestic companies. A good example can be drawn from General Motors’ joint venture the Springo electric vehicle mode. The company enjoyed several tax breaks to the tune of US$9,500 from the national government as well as US$6,500 from the Shanghai city government. It should however be noted that Tesla places a very high emphasis on branding which may make the company wary at considering such a joint venture approach due to the risk it might expose its brand to due to poor quality service or components supplied by the joint partner. (Anderson & Anderson, 2010) The company may also concentrate on marketing their vehicles on the platform of quality and superior technology when compared to their domestic competitors. This will enable Tesla to lock in the high end car market in China initially as it tries to set a footing in the large Chinese market. This reputation of superior quality will also come in handy when the company moves on into the mass market with cheaper cars since the reputation will precede the actual vehicles making the consumers to be much more willing to spend a little more than they spend for the motor vehicles manufactured by Tesla’s domestic competitors. Tesla will have to find a way to increase its production capacity in China so as to take advantage of the economies of scale thus driving down the relative cost of producing the auto vehicle leading to cheaper prices for its consumers. The vehicle’s most expensive component is the Lithium-ion batteries. To drive this cost down, the company will have to invest in technology that can recycle the used power packs to be used in other models which will not only be good for the environment but also lead to cheaper power packs and by extension the company’s vehicles. The company may also opt to make China the headquarters for its Asian operations thus serving the most populous region in the globe with some of the fastest growing economies. Conclusion Tesla’s futuristic approach in the production of electric vehicles is quite plausible .The company is playing a very integral part in developing green energy solution in the auto industry which can only be beneficial for the Chinese population and government. Widespread adoption of these vehicles will be the stepping stone for the company’s efforts at being a global company and pioneer in the electric vehicle industry. References Marcovici, M. (2013). The Tesla Motors way: How to build a car manufacturer from scratch. Norderstedt: Books on Demand. Tesla motors. (2012). S.l.: Book On Demand Ltd. Dunne, M. J. (2011). American wheels, Chinese roads: The story of General Motors in China. Singapore: John Wiley & Sons (Asia. Peace Child International. (2009). Climate change and the post-carbon future. London: Evans. De, K. C. A. (2010). Fundamentals of global strategy: A business model approach. New York, N.Y.] (222 East 46th Street, New York, NY 10017: Business Expert Press. Billmaier, J. (2010). Jolt!: The impending dominance of the electric car and why America must take charge. Charleston, S.C: Advantage. Anderson, C. D., & Anderson, J. (2010). Electric and Hybrid Cars: A History. Jefferson: McFarland & Co., Publishers. Gallagher, K. S. (2006). China shifts gears: Automakers, oil, pollution, and development. Cambridge, Mass. [u.a.: MIT Press. Glancey, J. (2013). The car: A history of the automobile. Eckermann, E. (2001). World history of the automobile. Warrendale, Pa: Society of Automotive Engineers. 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