Tesla's Market Entry Strategy in Germany. Foreign Market Entry and Cross-Cultural Business

Table of Contents

Figures

1. Introduction

2. Market Overview

3. EnvironmentalAnalysis
3.1. PESTLAnalysis
3.2. Theory of National Competitive Advantage of Industries
3.3. The Diamond Model of the German Automotive Industry

4. Major Success Factors and Threats

5. Conclusion

6. Implication

7. Bibliography

8. Appendix
8.1. Passenger car production and passenger car registration
8.2. PESTLAnalysis
8.3. Premium Car Production by Country
8.4. German OEM and Supplier Density

Figures

Figure 1 Revenue ofTesla

Figure 2 Earning before interests and tax

Figure 3 Share of votes for the greens of the European elections in Germany

Figure 4 The Competitive Diamond Model

Figure 5 Diamond Model - The Industrial Cluster of the German Automobile Industry

Figure 6 Passenger car production in million units in Eruope 2017

Figure 7 Passenger car registration in million units in Europe 2017

Figure 8 Premium Car Production by Country in percent

Figure 9 Innovation Expenditure Share oflndustry Turnover

Figure 10 German OEM and Supplier Density I

Figure 11 German OEM and Supplier Density II

1. Introduction

The purpose of this paper is to analyze and evaluate the market entry of Tesla Inc. in Germany. Tesla Inc. (former Tesla Motors Inc.) is a car manufacturer and sells fully electric vehicles, energy storage systems as well as installs, operates and maintains solar and energy storage products (Reuters, n.d.). The company was founded in 2003 by a group of engineers. In 2008 Tesla launched their first electric vehicle to the market (Tesla, n.d.). “Tesla’s mission is to accelerate the world’s transition to sustainable energy”, so the car manufacturer.

So far most of the Tesla vehicles are produced and assembled in the United States at its main Tesla Factory in Fermont, California (Tesla, n.d.). To that Tesla operates other, multiple production and assembly plants, named Gigafactory, such as in Fermont, California (Giga Nevada) and in Buffalo, NewYork (Giga NewYork) (Tesla, n.d.).

Recently, in 2019, Tesla opened its first Gigafactory outside of the American region in Shanghai, China (Giga Shanghai). A strategic step to internationalize the company and to enter the Chinese market. This strategic action can be explained by the fact that China is the largest car market in the world and the government is speeding up the expansion of electric mobility. Furthermore, manufacturing in Shanghai saves Tesla from having to transport its vehicles overseas and avoids import duties incurred in China for cars from the United States (Menn, 2019).

However, the company is not just expanding its manufacturing into China. In November 2019, Tesla revealed to build a European production plant on the outskirts of Berlin in Germany (BBC News, 2019). But this steps also raises the questions, why exactly Germany? The aim of this paper is to give account to the foreign market entry ofTesla Inc. in Germany. This leads to the following research question that guides this paper:

What could be business success factors and threats of Tesla's strategy to enter the German automotive industry market?

Outline of this paper

The first section of this paper includes a brief introduction leading to the purpose and research question (section 1). It is followed by an introduction of the company, including an overview of the market and a comparison of the financial performance (section 2). To answer the research question, respectively identifying foreign market business success factors and threats, different scholars are critically analyzed and discussed.

By drawing up existing models and analysis, such as PESTL Analysis and Diamond Modell. the foreign market environment will be explored in greater detail (section 3). Afterwards, findings are evaluated, assessed and critically discussed (section 4). Finally, the conclusion section (section 5) concludes the main result of this paper along with different implications and suggestions of further research (section 6).

2. MarketOverview

This chapter gives a brief overview about Tesla's business operations as well as key figures of financial performance and situation of the company. Furthermore, the automotive market and its market shares will be examined.

As mentioned above Tesla started its sales first in 2008 with a low volume model the Tesla Roadster. By producing the Tesla Model S in 2012 the revenue increased from $ 112 million in 2009 to $ 3.2 billion in 2014. In 2016 Tesla introduced its first SUV, the Tesla Model.V. One year later the company launched the Model 3, the less costly vehicle in the product range. The Model 3 is the most successful product of Tesla, outselling all direct competitors in the same class combined in units (Tesla, 2019). With the launch of the Model 3 the company reached in total 300.000 deliveries and an expansion of the product mix (Tesla, 2019). Tesla Inc. is now at $ 24.578 million in revenue. More is jet to come with the planned Model T rolling out in 2020, so Tesla in their financial year report 2019. The figure (figure 1) below illustrates the revenue development from 2008:

TSLA - EBIT

The development of the share price stands in contrasts to Tesla’s financial performance. Although Tesla spends most of its value, the share price constantly increased (reviewed on Nasdaq). This can represent that the shareholders strongly belief in Tesla’s vision and business model. Compared to other automobile manufactures Tesla is one of the most capitalized companies in the industry. While holding a total market cap of $139,009 billion (reviewed on Yahoo Finance, 19.04.2020), Tesla is twice as much capitalized then Volkswagen ($66,435 billion),just Toyota holds more capital ($176,481 billion).

But still compared to other automotive companies Tesla is lacking behind in terms of market share. While Toyota holds around 10% of the market share and Volkswagen nearly 8% in the automotive market (Wagner, 2020a), Tesla just holds roughly 1,3% in the U.S. (Wagner, 2020b) and in Europe around 0,54% (Schmidt, 2019).

In terms of the electric vehicle (EV) market, which includes advanced gas electric hybrids, plug-in hybrids and battery electric vehicles (Mintzer, 2009), the EV market is expected to account for half of global sales over the next seven years. By 2025 EV sales across the world are set to increase ten-fold (Beale, 2018). Mostly as a result of Chinas policies to boost EV sales and as a part of the strategy to be major in the EV industry, so Beale (2018). While China leads the market, the European market gets more attractive in fact of aggressive CO2 policies and emission standards of the European Union (Hertzke, Müller, Schaufuss, Schenk, & Wu, 2019).

Because the European EV market gets more attractive towards the future, still the question arises, why Tesla selected to enter the German market, a highly competitive market (GTAI, 2018) , with its next production plant.

Especially within the fact that the EV market is set to grow, German car manufactures are shifting their portfolio toward EV's (Shields, 2019). According to a report from a German auto­industry trade group, BMW, Daimler and Volkswagen will spend around $ 45 billion on EV in the next three years (VDA, 2018). Volkswagen, one of the largest manufactures worldwide, significantly raised electric car production forecast for 2025 (Adomat & Groß, 2019).

As German car manufactures are set to take the lead in the EV race, this paper analyses what could be business success factors and threats of Tesla to enter the German automotive industry market, to clarify why Tesla had chosen Germany as right location to set up their next Gigafactory. Therefore, well-known situation- and market analysis models are been used in the following chapters.

3. EnvironmentalAnalysis

Many strategic management literature states that a right fit is the key to organizational performance (e.g. Parker & van Witteloostuijn, 2010; Porter & Siggelkow, 2008; Sikkelkow, 2002). Van de Born et. al. (2013) defines a right fit when the internal features of an organization align well with the characteristics of the organization’s external environment.

Regarding Farmer & Richman (1964) consists an external environment of a company of political, economic, socio-cultural, technologic, ecologic, legal factors that directly or indirectly affect the operations of the company. For developing sustainable competitive advantages, identifying opportunities respectively business success factors as well as threats, an environmental analysis is crucial (Yüksel, 2012).

The environmental model examined in this study is the PESTL (Political, Economic, Socio­cultural, Technological, and Legal)¹ analysis. The model has been introduced by Farmer & Richman in 1964. The PESTL analysis is a standard tool in the strategic management field and does not reflect any specific theory, it is much more a useful type of checklist framework (van de Born et. al., 2013). The PESTL allows an identification of the environment within the company operates (Yüksel, 2012) and offers a checklist of potential opportunities and threats (van de Born et. al., 2013). Therefore, in the following a PESTL analysis of the German automotive market is conducted.

3.1. PESTL Analysis

Political and Legal

Although perhaps the construction of the Gigafactory is aimed at the European market, every country in the European Union has own political - and legal systems and rules. That is why an evaluation of the political and legal system of Germany is crucial. Political and legal threats and opportunities result from changes of government rules and political situations (van de Born, et al., 2013).

On the political side, there is a trend that voters are increasingly voting for die Grünen (eng.: the greens), a party with focus on ecological, economic, and social sustainability (see figure 3).

Abbildung in dieser Leseprobe nicht enthalten

Figure 3 Share ofvotesfor the greens ofthe European elections in Germany (ownfigure based on Suhr, 2019)

Among other things, the party demands that all new cars should be emission-free by 2030 (gruene, n.d.). This demand results from the diesel scandal and the discussion about nitrogen dioxide limits in cities. While the political situation seems stable, the German parliament is shifting energy policies to meet its renewable energies and pollution goals (Lupp, et al., 2014). As a result, the German parliament introduced complete diesel driving bans and punished German car makers who manipulated emission values with high fines. Meeting emission values requirements of the EU-Commission is becoming more and more difficult for the German automotive industry, as the target values are being reduced more and more (Fasse & Menzel, 2019) . In addition, the federal government and automotive industry subsidize the purchase of electric vehicles with premium payments (Kemfert, 2016).

On the other hand, increasing federal taxes and fees of new car purchases greatly increase the cost of driving (Buehler, Pucher, Gerike, & Götschi, 2016). Another point to bear in mind are workers councils and unions who traditionally wield significant power in Germany (Bellon, 2017). Companies with more than 200 employees are legally required to elect an employee representative, in charge of handling labor concerns. The workers council has decision rights that can effectively limit managements directive power. In addition, the law also requires that the workers council must be heard on relevant issues, any failure results in invalidity (Horst, 2004). These rights apply to all decisions of special interest to the employees.

Economic

In Germany the impact of the economy is assessed to be high (van de Born, et al., 2013). With relatively low wages and unit labor cost, Germany is a really competitive economy (Dustmann, Fitzenberger, Schönberg, & Spitz-Oener, 2014). With a GDP growth of 1.5% annual (Worldbank, n.d.) and a recent inflation rate with 1.71% (Plecher, 2019) the German economy seems healthy. While the unemployment rate is constantly decreasing from 5.6% in 2012 to current 3.2% in February 2020 (Koptyug, 2020). The European Central Bank has currently negative interest rates around -0.4% (The Economist, 2019). This way the central bank penalizes financial institutions for holding on to cash in hope of prompting them to boost lending money to spur growth amid signs of a looming slowdown. This is a benefit to businesses, as it encourages to purchase to a low cost of borrowing (Reuters, 2019; Seabury, 2020) . Finally, the country is an open economy and free market has been a basic principle of German economic policy (Horst, 2004).

Sociocultural

Studies suggest a decline or a stagnation in car ownership in countries, such as Germany, due to sociocultural changes (Millard-Ball & Schipper, 2011; Kuhnimhof et al., 2012; Goodwin & van Dender, 2013). Germany is on the forefront encouraging walking, cycling, and public transport, while discouraging car use, especially in city centers (Buehler, et al., 2016). While trying to subsidize the use of the car, enormous changes in lifestyle can also be seen. A trend of ethical consumerism result into a green purchasing behavior (Wiederhold & Martinez, 2018). This lifestyle change can be seen especially in climate protests such as Fridaysfor Future. A Study shows that 71% of Germanys youth, aged 15 to 26, rate environmental destruction and pollution as their top fear (Albert, Hurrelmann, & Quenzel Kantar, 2019).

Even EV's are questioned in terms of its environmental friendliness in terms of the battery production and the source of electricity (Ellsmoor, 2019)

Technological

Mechanical engineering is one of the fundaments of the German industry. But with an increasing pressure of foreign competitors competing with lower prices, international interdependencies and the fourth industrial revolution, the industry gets under pressure more than ever (McKinsey & Company, 2014). Most important future industry trends have to be identified out of technological changes. Fully autonomous vehicles are predicted to disrupt and transform the auto industry (McKinsey & Company, 2016). The consulting company suggests that an increasing connectivity in cars will enable autonomous driving, therefore a fast internet network is crucial (McKinsey & Company, 2016). On the other hand, through continuous improvements in battery technology and lower battery costs, EV's will gain more market share through an increasing consumer acceptance, so McKinsey & Company (2016). According to the association of the German automotive industry (VDA), the German automotive industry increasingly invests more than € 45 billion in research and development (R&D) for digitalization and alternative drive systems (VDA, 2018). In the upcoming years German car manufactures are planning to putt more then 150 electric-powered models on the market (VDA, 2017).

After the identification of major changes in the German automotive market and industry (see table 1, appendix), the question still arises why Tesla had chosen a highly competitive market who is set to take the lead in terms ofEV's.

3.2. Theory ofNational Competitive Advantage oflndustries

“Why arefirms based in aparticular nation able to create and sustain advantages against the world’s best competitors in a particularfield? Why do some nations succeed, and othersfail in international competition?” This issue addresses Michael Porter in The Competitive Advantage of Nations. He created a model that outlines that competitive advantage is a dynamic process and is created and sustained through localization (Mahmood, 1998). This means the more intense the competition in a local industry the greater the innovative capacity and productivity of firms (Clarkson, Fink, & Kraus, 2007).

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¹ Since environmental factors are examined in most points, the E for ecological is left out, therefore a PESTL will be conducted.