TESLA: INTERNATIONALIZATION FROM SINGAPORE TO CHINA

“Tesla” is one of the most innovative and futuristic tech companies worldwide. It was founded in 2003 by Elon Musk with a mission “to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible.” It’s not enough to be an innovative company to compete in today’s global market. There are many deciding factors that have corporations succeed or fail especially when entering a new market in a new country. This paper analyzes Tesla’s failure in penetrating Singapore’s EV (Electric Vehicle) market. Then I explore whether Tesla entering the Chinese EV market is a good the internationalization strategy. By doing economic, political and cultural research and understanding the entrepreneurial and innovative traits of Musk, I conclude that moving into China is a good idea although a risky move for Tesla. This paper also uses relevant International Business concepts as a base to do a deeper analysis and have a better understanding of how International Business managers could think when making decisions.

In order to get a better understanding and analyze Tesla’s difficult transition into Singapore’s EV market, its necessary to do a a brief summary of the main problems this company overcame in its host country, United States.

Problem 1: Unappealing Design and Poor Performance

Before Tesla, there had been many other car manufacturing companies manufacturing Electric Vehicles (EVs). The main two problems these companies faced were that they lacked elevated design and performance. Cars such as the Amerigon Reva or Zap Xebra were electric but rather unappealing. “Most electric cars were designed by and for people who fundamentally don’t think we should drive”, says Martin Eberhard Co-founder of Tesla Motors in the companies official blog. Eberhard also makes a clear statement, “We at Tesla Motors love cars. We love to drive; we appreciate beautiful and fun cars. And Tesla cars are built for people who love to drive.” He also mentions that car optimization at Tesla is not targeted at low cost, but rather at performance, aesthetics and sex appeal. With this in mind, we can clearly understand that Tesla’s first model, the“Roadster” would target the affluent market segment. This entry strategy is referred to “go down the market.”

Problem 2: Short Battery Life

Another problem that EV manufacturers run into is that the batteries often offer short driving distances. In a non-globalized economy, Tesla would most likely not be the well-known company it is today. The company used globalization of production and took advantage of other companies that where the best in the world in their particular activity, such as Panasonic to accelerate the learning curve and the development process. This is how they came up with the lithium-ion rechargeable battery that other companies like General Motors had not been able to develop. Unlike other car companies, Tesla created partnerships with competitors like Toyota to bring efficiency and speed up research and development.

Akio Toyoda President of Toyota says, “Through this partnership, by working together with a venture business such as Tesla, Toyota would like to learn from the challenging spirit, quick decision-making, and flexibility that Tesla has.” and Musk is quoted as saying “Toyota is a company founded on innovation, quality, and commitment to sustainable mobility. It is an honor and a powerful endorsement of our technology that Toyota would choose to invest in and partner with Tesla”. International business managers could learn a lot and gain from this spirit of synergy and cooperation.

Problem 3: Lack of Acceptance

A third problem encountered was the credit crisis in 2008 and a general lack of acceptance of the Electric Car concept by US consumers. There was a decline of sales in vehicles not just for Tesla but for major corporations like General Motors, Ford, Toyota, Nissan and Honda. The question was: “How can we shift the market’s perception of EV’s and get sales?”

Additionally, Musk did not like the traditional dealership-based franchise model since he believed that sales people would be conflicted selling electric vehicle and gasoline cars at the same time. There would be a conflict of interest because at some point Tesla’s electric vehicle could undermine other gasoline cars. Musk hired George Blankenship, VP of design and store development at Apple and he came up with the idea of “Showrooms” similar to Apple’s innovative and very successful retail stores. Tesla started putting showrooms in malls with high foot-traffic and visibility. They would not sell cars at a physical dealership, rather have the customer make an online order. This model was genius and innovative because it took care of the US law that didn’t permit car manufacturers to sell their own cars in stores and bypass the dealership-based franchise model.

There where more problems that Tesla had to overcome throughout it’s initial phases of growth. All companies face challenges along their journey, but the few examples given above showcase a very innovative style of problem solving by Tesla. It is interesting to notice how Tesla is not following anyone’s lead. They are actually creating their own path. In my opinion companies that spearhead an industry have the highest risk of failing because they are walking in the dark. At the same time if these innovators can stay afloat and make the right decisions in critical moments, these kind of disruptive companies have the highest opportunity of making profits and impacting the industry they are in.

With knowledge of the problems that Tesla dealt with in its home country and an understanding of how it solves problems, we have a strong foundation to analyze and express a conclusion of Tesla’s weak performance in Singapore.

Tesla in Singapore – Lessons Learned

Tesla’s official website mentions Singapore as the “Garden City” given it’s commitment to be a clean and environmentally conscious nation. Musks company determined Singapore was a good market given their commitment to the environment, their economic wealth and for being the fourth highest country with a GDP (Gross Domestic Product) in 2009. With this in mind, Tesla decided to enter Singapore and in 2010 they were offering the “Roadster” in their first store. The second reason why this decision was made was that the government of Singapore would offer tax incentives to EV companies through an agency called TIDES (Transport Technology Innovation and Development Scheme). The roadster’s cost without the tax break was $500,000 SG (Singapore Dll). By becoming part of TIDES, the price for the Roadster would come down to $250,000 SG. Unfortunately Tesla did not obtain this tax break because of unmet technical requirements in their EV. In my opinion it is ironic that the “Garden City” would be too clean for Tesla’s 100% electric vehicle. As a result, the company did not sell any cars in Singapore.

The car companies that got the tax breaks where Daimler Chrysler, Mitsubishi, Nissan and Renault. Although at first glance it looks like Tesla did not meet the technical requirements, there is a question that arises: “Was there any kind of corruption or bribery in the decision making process of the EV company winners?” International Business Managers have to deal with corruption and bribery commonly found in society as well as the corporate world. An example of this is the case of Walmart bribing officials in Mexico to extend the commercial-free zone to benefit from placing a store in high-traffic areas.

We could speculate that Musk decided to bribe Singapore officials with a promise or a payment that would lead to Tesla receiving a tax break. On one hand, this would have shifted how things unfolded in this new city. Most likely, Tesla would have sold cars and established a big presence in the Garden City. On the other hand, we need to look at the risks of doing that. We could look at the negative press that Tesla would have likely received in its home country. Would consumers be turned of by buying a high-end EV from a company that utilizes bribery and “corruption” to succeed in international countries? How much of an impact would that have?

For example, Nike in 1997 was discovered to have unethical yet legal practices in Vietnam. The NY Times stated, “The inspection report offers an unusually detailed look into conditions at one of Nike’s plants at a time when the world’s largest athletic shoe company is facing criticism from human rights and labor groups that it treats workers poorly even as it lavishes millions of dollars on star athletes to endorse its products.” At some point Nike’s products had become synonymous with slave wages, forced overtime and arbitrary abuse and this did negatively impact sales. However, Nike put money into it’s corporate reputation and expanded its corporate responsibility team to 70 people. I would argue that the biggest problem Tesla would have faced if they had taken the same route as Nike is a significant blow to its reputation which would have negatively impacted sales.

Another good question to raise is how a company can compete globally and conduct business in totalitarian countries where corruption and bribery are rampant and part of day-to-day business practices. This is an important question to keep in mind particularly as I touch upon China later.

Elon Musk’s Personality and Decision-Making Style

The next section in this paper is about understanding Elon Musk’s personality and decision making style. An understanding of the mind and traits of the Tesla Co-founder and CEO will provide a possible explanation of why Tesla failed in Singapore and a look at their chances of successfully penetrating Chinese market. Given the Singaporean experience and the high level of risk doing business in China, failure is a distinct possibility.

According the documentary “How I became the Real Iron Man” published by Bloomberg in 2014, Elon Musk tends to put his money where his mouth is. His stance is that he has a better way of doing things and is willing to risk everything. With Tesla only having enough cash in the bank to keep the lights on for one more week, Musk sold his company Paypal to Ebay and used the proceeds to keep Tesla alive.

“He’s goal was to create a company that could change the world”, says Max Chafkin one of the journalist in the documentary.

His vision as an entrepreneur is to create a company that will have a profound effect. At 30 years old he had sold Paypal and had a net worth of 180 million dollars.

In June 2002 he founded Spacex, investing almost $100 million, an incredibly risky move given that no one else was putting money into this project. Chafkin says, “He’s basically the Henry Ford of Space” because he’s streamlining and doing commercially viable rockets.

At 32 years he came up with a new idea. He wanted to end earth’s addiction to fossil fuels and created a company called Solar City, a company that essentially leases solar panels to consumers with no money down and at the end of the lease, Solar City retains the solar panels.

In April 2004 Musk helped found Tesla with $6.3 million of his own money. This was the first car startup in decades.

In 2008 there was a deep financial crisis, Musk would say to his engineers “I’m available 24/7 to solve issues. Call me 3am on Sunday. I don’t care”

It was a life or death scenario and Musk chose to put the last amount of personal money he had to keep Tesla alive.

In summary, Elon Musk is the kind of entrepreneur that would risk everything to either win or lose it all. I don’t know a lot of people that have this kind of stand for their beliefs. Musk has a magnificent vision of what he wants to create and massive confidence in himself. It’s hard to argue with that kind of stance, despite the risk involved. It is a trait of the innovator that has over time created so many advancements in technology in our world. This begs the question, “Is it necessary to have these kinds of traits to have success or could an entrepreneur be more conservative and still achieve the same kind of results?”

Was it the right time to enter the Chinese market?

In August of 2013 Tesla starting to take pre-orders in China without knowing the specific price of the new Model S. In the spring of 2014, the first cars were delivered. How come there were immediate pre-orders by the Chinese and not by the inhabitants of Singapore?

This fourth section of the paper is focused on analyzing the choice to go into China after the dramatic failure in Singapore. By comparing similarities and differences in both Asian countries, it is logical to derive the opinion that China is a more viable market compared to Singapore given the conditions and circumstances Tesla faced at the time. According to the book International Business – Competing in the Global Marketplace “The overall attractiveness of a country as a market or investment site depends on balancing the likely long-term benefits of doing business in that country against the likely costs and risks.” In addition to comparing both countries, I will analyze the political, economic and legal systems in China to see if the likely long-term benefits are more attractive than the likely costs and risks.

Why was China so attractive and why did Musk look at penetrating the chinese market? China has the largest population in the world with more than 1.4 billion people and it’s the second largest economy. On top of that, their newly approved Five-Year Plan (2016-2020) forcefully address and highlights the development of services and measures to address environmental imbalances, setting targets to reduce pollution and increase energy efficiency making China the world’s largest EV market.

In late 1978, China moved away from a centrally planned socialist system to one that was more market driven, meaning production activities are privately owned. They have different SEZ’s (Special Economic Zones) that include geographical spaces where special policies and measures support economic growth. China’s communist party doesn’t have the same kind of control as in the past many things are privatized and not fully owned by the government.

The Business Anti-Corruption Portal says, “Companies are likely to experience bribery, political interference or facilitation payments when acquiring public services and dealing with the judicial system. The common practice of guanxi is a custom for building connections and relationships based on gifts, banqueting, or small favors.” This is a red flag for Tesla Motors. It might be a disadvantage against local competitors that already know their territory and have connections like Shenzhen’s BYD a company that has 30% of EV market share in China.

Another major important factor for any business going into any market, but specially into China, is its culture and the market. A lot of companies have gone into China and the culture shock is so big that they have to come out of China. The case of Best Buy in China illustrates this perfectly. The Chinese will not pay for Best Buy’s overly-expensive products unless they are a well known brand like Apple. Another major problem in China is the major piracy, reducing demand for electronic products at competitive market prices. Third, the Chinese don’t want to shop at huge mega-stores. These seemingly easily understandable cultural issues lead to failure for for many foreign countries who attempt to do business in China.

There is no doubt why China is so attractive to any EV company. It has long-run monetary benefits due to it’s huge market size. China’s population is far bigger than Singapore’s, a country with a population of only 5 million people. According to the Index of Economic Freedom, China’s economic freedom in 2012 was around 51 percent. The image below compares both economic freedom status.

I would like to introduce a relevant concept: “first movers advantage.” The advantages that get early entrants into a market. This alone is a great reason for Tesla to enter the wild China at that time. By investing early in China’s EV market, Tesla can build brand loyalty and gain experience in that country’s business practices. These would pay back substantially if Tesla succeeded to do sales and compete in the market. In contrast, entering late would lack the brand recognition and experience and could have other competitors become more powerful in the EV industry.

Elon Musk’s way of thinking and risk tolerance in going into China

As proved earlier in this paper, Musk has a high risk tolerance. Most business leaders would not use their personal money to fund 3 different companies in industries where there is no one else leading the way. Elon Musk is a “Disruptor.” Forbes says, “Disruption takes a left turn by literally uprooting and changing how we think, behave, do business, learn and go about our day-to-day.” Spacex, Solar City and Tesla are all disruptors in its industries.

The decision to go into China after understanding Elon Musk’s rational is a no-brainer. Michel Dune who runs independent advisory Dunne Automotive in Hong Kong says that Elon Musk would reach Mars before cracking China. China’s strong cultural shock, communist system and high levels of corruption and bribery make me think of China as an active war zone where at any moment you can get killed and game over. However for Musk, things don’t occur that way. He sees China as a big opportunity to make an impact on consumable energy consumption.

From a managerial perspective, this risky move could be costly if things don’t go as planned (highly likely), but on the bright side, making a name in a country like China and gaining market share would catapult Tesla to a world leader and powerhouse in the EV industry.

How could Tesla prevent a repeat of the Singapore experience in China?

My first suggestion is that Tesla must not depend on tax break like TIDES to go into the Chinese market if they don’t want to have the same problem as in Singapore.

My second suggestion is that Tesla should go into the Chinese market with the Model S, but not with the the Roadster. The sports car would need to be priced at a level too expensive for the Chinese population, especially without a tax break by the government.

What should the company’s entry strategy consist of?

The entry strategy into China would consist of educating consumers about Tesla’s brand by putting showrooms in Special Economic Zones just like in the USA and do a “go down market strategy” but with a less expensive car like the Model S. It’s still going to be for the high end market but it won’t have to be only for millionaires.

When Chinese hear Model S by Tesla and they ed a well known still considered a product like an any Apple item, given that Chinese won’t spend much money on something unless its luxurious.

Conclusion

In conclusion, Tesla learned a valuable lesson in Singapore. At the time they entered Singapore’s market, the only Tesla model that existed was the Roadster. Given the similar economic conditions between Singapore and the United States, it seemed like a good idea to try out a new market. Singaporean tariffs and taxes made the price of the Roadster an undesirable, expensive toy, even for the wealthy.

Entering China was a hard decision, but it was well worth the risk. Since 2012, Tesla had enjoyed stability with a dramatic increase in demand for its products and seen its revenues increase from $148.6 million to $385.7 million in its home country. The demand for its cars was so high that 2,650 units of the Model S were delivered in 2012 with a total of 15,000 reservations.

Given the incredible economic expansion of China, Telsa’s choice to move into China was a risk worth taking. It would not have been a wise move if China’s market and economy weren’t booming and sales in the US weren’t booming. The Chinese EV market was hot. The smaller, cheaper Tesla model was selling well in the US. Moving into a hot, high-demand market with a well-priced product is always a good move. Contrasting that with the fact that Tesla went into Singapore’s smaller market with limited demand for expensive cars and it’s clear that moving into China is a good move. As many people say, business is about timing. This case study demonstrates that it was not the right time for Tesla to enter Singapore with the product that it had at the time, the Roadster. The timing is right, however, to enter the Chinese market with a cheaper product coupled with very high demand.

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