Tesla Motor’s Failure in Chinese Market

RMIT International University Vietnam

BUSM 3311 – International Business

Assignment 1

TESLA MOTOR’S FAILURE IN CHINESE MARKET

Executive summary

Tesla was established in 2003, this company are known as pioneer for leading the trend of electric car and it was created by a team of engineers who are always on the move towards an environmentally friendly electric automaker (Tesla 2017). In 2008, this company started with the advanced battery-powered car named Roadster, then Model S was launched in 2013 which have seen as the first step in the most luxurious electric sedan in the world. Next, Model X is known the fastest and safest electric car of all time and the last product of this company is Model 3 includes low price and high volume of sales in 2017. Starting with the goal of expanding the consumer market as well as promoting its products widely, this American company has directed its products to China in 2014. Following Drake 2015, they have opened their own stores and services for the product, as well as actively deploying transformer stations for electric vehicles to attract attention of Chinese customer.

However, the entry into this new market was not easy when the company sold only 3,500 vehicles in its first year of launch in the Chinese market, and was ranked behind the line of domestic electric cars such as BYD and BAIC and the sales continued to decline in early 2015, while China has the biggest automotive market in the world where sold 22 million cars in 2013 as a massive economic with 1.35 billion people (Kirsten 2015).

This research shows some key reason for the failures of Tesla in Chinese Market that is differences in culture of business. In fact,  most Chinese people buy cars without any rules, including fuel-efficient and eco-friendly vehicles. They prefer showing wealth or race for trendy rather than a green environment and this is a completely opposite thought to the American people. Because of this movement, the development of Tesla will not be longer, if there are more beautiful cars, more expensive and luxury appear on the market. Another reason for Tesla's international strategic development constraints is that  they choosing wrong modes of entry to get into Chinese auto market as exporting. They did not accept the sharing of their experience and technology with other foreign joint ventures, so they opted for self-export and non-joint ventures with any other company. They have encountered many difficulties in exporting as well as paying too much for tax.

Introduction

Tesla flourishes in the United States when sales increased sharply from 2,500 to 10,030 between September 2014 and the first quarter of 2015. Hence, this seems to have received a lot of positive feedback from domestic customers in the U.S about these “green and clean” products line and the company's market value was $ 31.3 billion in May 2015 (Amy 2016).

Unfortunately, Tesla's intentions and their international strategies have failed when they encroached on the world's largest auto market, namely China where is full of differences and there are many difficulties for foreign companies wanting to sell their products. This report will identify some reasons that have delayed the development of Tesla in Chinese market and points out some recommendations for their path of success in this harsh market.

Analysis & Application

According to Kirsten 2015, Tesla took the right steps when they chose China to sell the product, where has the largest auto market in the world and it has the largest percentage of the world's population, and now numbers up to 1.41 billion people (Worldometers 2017). This means opening opportunity, a new market for Tesla to grow as well as expand their system. However, the reality was not as expected when they started selling the first products and the challenges have hit the company. According to Jose 2017, the two best-selling models of Tesla are Model X and Model X occupying only 2% for each of the total shares traded on the Chinese market. Therefore, this is not as good as the development in America and there are two reasons that will be discussed why Tesla has difficulty in expanding and promoting its brand in China.

1. The differences in personal preferences between cultures

According to Ana (2015), the Chinese market lacks a foothold for the “green” car products. She still presented that electric cars always growing in the US market, as everyone is aware of the environmental protection of fossil fuel energy. Following statistics from Nanalyze, more than 540,000 electric cars was being circulated on US streets by 2016, and Tesla providing 28.9% of the total. Therefore, this success also shows that American people are always supportive of Tesla's development and that they also show deep concern about the environment as well as environmental resources. However, it is quite opposite in China when people spending money on the products of this brand because it shows the high-class in society, rich upstream as well as chasing the trend around the world for high-technology or even “look cool”, not aware of the natural environment (Ana 2015). Additionally, the total number of electric cars in the world's most populous country is only half that of the total number of electric cars in the United States as 282,700 (Michelle 2017). Moreover, Chinese people may have many ways to express their wealth such as high-end brands, real estate or expensive sports cars. It is precisely because of this that the development of Tesla’s products will not be able to develop or survive for a long time to come (Ana 2015). Although they have tried to reach the Chinese market, they have failed to apply the business culture of each other as one.

1. Choosing wrong mode of entry as exporting

There are 7 modes of entry to help the company easily get into international market: exporting, licensing, joint venture, contract, franchising, turnkey project and contract manufacturing ( cited in International Business review 2017). According to Fred 2016, China has strict protection in allowing foreign companies to establish companies in the territory. Therefore, companies that want to establish company in the China’s land must accept contracts to become partners or share their skills and technology with another company in the country. The Chinese government will charge a tax of 25% on each imported vehicle to China, plus a 17% VAT tax, which is a total of 42%, so that is big challenge for tesla when they approach this market (Fred 2016). Moreover, he still stated that the transportation fee for each vehicle from California to China is 3,600/vehicles. Hence, Tesla's chief executive, Elon Musk, planned to set up a factory in the Chinese market and must accept a new brand name under the Chinese government's permission. Nonetheless, he did not really want to share his technology as well as his knowledge with another company, so the company continues to accept high-tax car exports. According to Xiu and Rachel in 2014, Tesla missed appointments and contract delays with many orders when they encountered many complex customs problems at the border. Because of these reasons, it is difficult for Tesla organization to make money from the Chinese market. Moreover, it is difficult to compare with domestic electric car manufacturers such as BYD and BAIC , with the tax rate is 0%.