Tesla Final Draft

The Investigation of New Foreign Markets for Tesla Motors, Inc.

The Investigation of New Foreign Markets for Telsa Motors, Inc.

Megan Sosnick

Notre Dame de Namur University

Author Note

Megan S. Sosnick, School of Business Management, Notre Dame de Namur University.

Correspondence concerning this article should be addressed to Megan Sosnick.

Contact: [email protected]

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mailto:[email protected]


Abstract

This paper examines Tesla Motors Inc. (Tesla) and the company’s potential expansion of

distribution and operations to Brazil, Spain and South Korea. Tesla is an industry leader

and innovator that is changing the way consumers think about alternative energy and

automobiles. This paper details contextual information on Tesla, the three countries

current conditions, Tesla’s present market position, and the feasibility of Tesla expanding

internationally.

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Introduction of Business

Tesla is an organization that “designs, develops, manufactures, and sells electric

vehicles and advanced electric vehicle powertrain components”. (Tesla Motors) The

company is based in Palo Alto, California and currently sells a four-door coupe called the

Model S with over 50,000 vehicles sold worldwide. (About Tesla, 2015) Tesla practices a

progressive company owned sales and service model with over 80 stores and galleries

throughout North America, Europe, and Asia. (Telsa Motors) The company continues to

develop and improve their lithium batteries and expand their product offerings.

History of Company and Business Initiatives

Martin Eberhard and Marc Tarpennig founded Tesla in 2003 and invited Elon Musk,

PayPal and SpaceX founder, to join the team in 2004. (Baer, 2014) Nikola Tesla’s

revolutionary work in the late 1880’s inspired the current technology and the company’s

name. The original vehicle the company created was the Tesla Roadster with an engine

developed based on Nikola Tesla’s patented AC induction motor. The Tesla Roadster was

launched in 2008 and has since sold over 2,400 vehicles worldwide. (About Tesla, 2015)

In 2012, Tesla ceased production of the Roadster and began concentrating their

efforts on their new Model S, the world’s first luxury all electric sedan, and building

Supercharger stations throughout the United States and Europe. (Gergerson, 2014) The

Model S comes with three different battery options, which grant options of customization

and performance standards.

Tesla is currently working on and preparing to introduce the Model X, a crossover

vehicle, in 2015. The vehicle features three rows of seating and falcon wing doors, comes

standard with Dual Motor All Wheel Drive, and offers a range of battery and performance

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options (Model X, 2105). This expansion of Tesla’s product line demonstrates the

organization’s emphasis on energy revolution, technology innovation, and design.

Tesla has expanded manufacturing in California, Nevada, and the Netherlands with

the hope of reducing costs of the lithium ion batter packs and manufacturing a mass-

market affordable vehicle. (About Telsa, 2015) The company has also announced the

planned production of the Telsa Model 3 in 2017. The Model 3 will compete against the

Chevrolet Bolt EV and Toyota Prius with an estimated price tag of $35,000. (Kalogianni,

2015)

Vision and Mission

Vision: “Create the most compelling car company of the 21st century by driving the

world’s transition to electric vehicles.” (Tesla Motors Company Overview Summer 2011,

2011)

Mission:

Our goal when we created Tesla a decade ago was the same as it is today: to accelerate the advent of sustainable transport by bringing compelling mass market electric cars to market as soon as possible. If we could have done that with our first product, we would have, but that was simply impossible to achieve for a startup company that had never built a car and that had one technology iteration and no economies of scale. Our first product was going to be expensive no matter what it looked like, so we decided to build a sports car, as that seemed like it had the best chance of being competitive with its gasoline alternatives.I suspected that this could be misinterpreted as Tesla believing that there was a shortage of sports cars for rich people, so I described the three step “master plan” for getting to compelling and affordable electric vehicles in my first blog piece about our company. This was unfortunately almost entirely ignored.In order to get to that end goal, big leaps in technology are required, which naturally invites a high level of scrutiny. That is fair, as new technology should be held to a higher standard than what has come before. However, there should also be some reasonable limit to how high such a standard should be, and we believe that this has been vastly exceeded in recent media coverage (Musk, 2013).

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Foreign Market Decisions

Country 1: Spain

Spain is a key strategic market for Tesla to enter because of its central location and

international relationships. Spain has been member of the European Union since its

formation in 1992 and has maintained strong relationships with other member countries

and Latin America. By entering the Spanish automotive industry, Telsa Motors, Inc., not

only has the opportunity to sell vehicles and bring electric vehicles to the Spanish market,

but possibly the potential to manufacture and export to other countries. As of 2013, Spain’s

domestic market consisted of 47 million consumers with a gross domestic product per

capita in price per share 23,271 €. (Spain-Automotive Industry and Electro Mobility, 2014)

Country 2: Brazil

Tesla has yet to break into the Latin American automotive market. Brazilian total

vehicle sales as of 2013 ranked fourth internationally, positioned behind China, the United

States, and Japan. Vehicle sales in Brazil totaled 3,767,370 units in 2013. Brazil is currently

one of the top four developing economies in the world and has displayed steady economic

growth in the past five years. (Topic: Automotive Industry in Brazil, 2014) Currently there

are no electric vehicles offered in the country and the Brazilian government is looking to

bring foreign automobile manufactures to the country. This creates a great opportunity for

Tesla to be a first mover, develop a new market segment in the country, and build brand

identity.

Country 3: South Korea

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South Korea has experienced a large increase in automotive sales since November of

2014. This rise in automotive sales is directly connected to the Bank of Korea’s recent

reduction in base interest rates. This has affected both domestic and foreign carmakers

positively with a 8.4 percent market increase for the month of November. (Research Team,

2014) This positive market growth seems like the perfect indication for Tesla to enter this

market place.

Globalization and Country

Brazil:

In Brazil, globalization was made truly evident after the global economic crisis of 2008

struck. The country experienced only 2 quarters of financial decline and was one of the first

developing economies to recover internationally (South America: Brazil, 2014). Brazil’s

economy has appealed to foreign investors historically because of high interest rates, but the

increased value in the Brazilian Real deterred capital inflows prior to 2008 (South America:

Brazil, 2014). After the market crash, the Brazilian manufacturing industry continued to export

and compete in the global marketplace. Although there is a high employment rate in Brazil, there

is a prevalent disparity between the upper and lower class (Brazil: Culture, 2014). Globalization

has opened up doors and expanded the Brazilian economy, but it has worsened social

inequalities.

Spain:

Spain’s economy benefits from globalization due to their participation in the European

Union (EU). The country’s membership to the EU has help shape economic and legal policies,

eliminate trade barriers, create international trade relationships, and modernize the country’s

economy. Spain also works to create special relationships with other Hispanic countries and tries

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to create policies to benefit the entire Hispanic community (Europe: Spain, 2014). Spain uses

globalization to its advantage and tries to make foreign investment appealing in order to

minimize the country’s debt. This helps offset the public aid that was dispersed during the 2008

economic crisis and the decline in tax revenue (Europe: Spain, 2014).

South Korea:

South Korea’s population and economy has greatly benefited from globalization because

the country has risen from low-level developing status to a strong, competitive technological

economy in the past 40 years (South Korea: 2015). The South Korean government places a high

priority on the country’s manufacturing, exporting, and receipt of foreign investment. The

government policies have greatly improved the standard of living and employment in the

country, but South Korea must be cautious of the long-term effects a high export economy will

have on its future sustainability (East & Southeast Asia: Korea, South, 2014). Although

unemployment is low, that can instantly change if the amount of exports suddenly dramatically

declines.

The Physical Climate of Country

Brazil:

Brazil is the biggest country in the Southern Hemisphere and the South American

continent. It is comprised of 3,286,488 square miles of land and 21,411 square miles of water

(The Global Road Warrior). Brazil shares a common border with every South American country

excluding Chile and Ecuador. The country boasts plains in the North along with mountains, hills,

grasslands, and a “narrow costal belt” throughout the nation (The Global Road Warrior). 8.45%

of the land is used for farming and able to produce crops, 0.83% of land is used for permanent

crop growth, and the remaining 90.72% of land use is unstated (The Global Road Warrior).

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Brazil’s natural resources include: “bauxite, gold, iron ore, manganese, nickel, phosphates,

platinum, tin, rare earth elements, uranium, petroleum, hydropower, and timber” (The Global

Road Warrior).

Brazil is subject to reoccurring droughts in the North East section of the country, along

with floods and occasional frost in the Southern region. Currently, Brazil is facing a major

problem with deforestation in the Amazon Basin where native plant and animal populations are

diminishing, illegal wildlife trade, large cities including Rio de Janeiro and Sao Paulo suffer

from air and water pollution, improper mining has led to land corrosion and water pollution,

massive oil spills, and wetland deterioration (The Global Road Warrior).

Brazil’s climate is quite diverse due to the country’s physical size and contains a wet and

dry season. The Amazon Basin maintains an equatorial climate distinguished by its high annual

rainfall, which amounts to 59 inches on average (The Global Road Warrior). This region sustains

a temperature between 80 to 90 degrees Fahrenheit throughout the year. In the Brazilian plateau

there is a more noticeable wet and dry season with mild temperatures due to the altitude ranging

from 2,000 to 3,000 feet. This region is disposed to drought and rainfall is quite unpredictable.

The Eastern Tropical Coast is a region that is wet all-year round where temperatures remain

comfortable. The southern states have a moderate climate. The summer months display tropical

temperature levels, while the winter months are subject to Antarctic air masses that lead to frost

and possible snowfall (The Global Road Warrior). Tesla must take these weather changes into

account and develop a distribution schedule around the different seasons.

Spain:

Spain is situated in the southwestern European region along the Mediterranean Sea,

North Atlantic Ocean, and Bay of Biscay. The country encompasses 192, 874 square miles of

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land and 2,023 square miles of water (Colgan, 2015). Spain shares geographic boarders with

Andorra, France, Gibraltar, Portugal, and Morocco. The country is advantageously situated along

the Strait of Gibraltar. It controls numerous territories in Northern Morocco, which include:

enclaves of Ceuta and Melilla and the islands of Penon de Velez de la Gomera, Penon de

Alhucemas, and Islas Chafarinas (Colgan, 2015). The landscape of Spain is vast, consisting of

flat and separated plateaus surrounded by hills and the Pyrenees Mountains in the north (The

Global Road Warrior). 24.75% of the land is used for farming and able to produce crops, 9.29%

of the land producing permanent crops, and 65.96% of the land use is unreported (The Global

Road Warrior). Spain’s natural resources include: “coal, lignite, iron ore, copper, lead, zinc,

uranium, tungsten, mercury, pyrites, magnesite, fluorspar, gypsum, sepiolite, kaolin, potash,

hydropower, and arable land” (The Global Road Warrior).

Spain is susceptible to sporadic droughts, intermittent flooding, and volcanic eruptions

from the Canary Islands off the northwest coast of Africa. The country is presently faced with

problems concerning raw sewage and oil and gas production run-off contamination in the

Mediterranean Sea, air pollution, “water quality and quantity” countrywide, deforestation, and

desertification (The Global Road Warrior).

Spain’s climate is moderate with warm summers inland and temperate, cloudy summers

down the coast. In the winter temperatures drop inland and the coast remains cloud and cool.

During the winter months, December to February, temperatures are pleasant along the coast and

chilly and snowy inland. The spring, March to May, and fall, September to November, remains

warm. And the summer, June to August, is mostly sunny and hot. Spain has five climatic

regions. The northwest is characterized by its Mediterranean climate of temperatures ranging

from 41 to 54 degrees Fahrenheit in the winter and 57 to 75 degrees Fahrenheit in the summer.

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The southern coastal areas maintain a hot, dry climate and the area sometimes suffers from

leveche, a hot, dry wind from North Africa (The Global Road Warrior). Temperatures range

from 43 to 85 degrees Fahrenheit throughout the year. The southern steppe region does not

receive as much rain as the rest of the country and maintains mild temperatures ranging between

45 and 84 degrees Fahrenheit. The central region endures more extreme temperatures because of

its distance from the water. The area sees temperatures varying between 36 to 90 degrees

Fahrenheit. The northeastern region has a temperate climate and no dry season. Temperatures

range from 39 to 75 degrees Fahrenheit in this area (The Global Road Warrior). Spain’s locatio

nand climate are ideal because delivery and distribution will be quite easy. The country’s

location also presents an option to begin a distribution center for Europe. Tesla is well positioned

because of Spain’s problem with oil and gas production run-off contamination. Electric vehicles

are a solution to reduce this issue and possibly one day eliminate the need for oil and gas

production in the country.

South Korea:

South Korea is located on the Korean peninsula in the “Asian temperate zone” (The

Global Road Warrior). The Sea of Japan, the Korean Straight, and the East China Sea encircle

the southern half of the Korean peninsula. South Korea is made up of 37, 911 square miles of

land and 111 square miles of water (The Global Road Warrior). The country shares a boarder

with North Korea and is strategically located along the Korea Strait. South Korea’s topography is

made up of hills, mountains, and extensive coastal plains in the western and southern parts of the

country (The Global Road Warrior). 14.93% of the land is employed as farmland and yields

crops, 2.06% of the land produces permanent crops, and 83% of the land serves other purposes

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(The Global Road Warrior). South Korea’s natural resources include: “coal, tungsten, graphite,

molybdenum, lead, and hydropower potential” (The Global Road Warrior).

South Korea experiences periodic typhoons with high winds and floods throughout the

country. In the Southwestern region there is “low-level seismic activity” due to the historically

active volcano Halla (The Global Road Warrior).

South Korea’s climate is moderate with greater rainfall in the summer than winter,

experiencing extreme winter weather. Summers in the country begin with a short rain season

called jangma, which climaxes in July with an average rainfall of 14 inches. The season is

typically hot and humid. The winter in South Korea is cold and characterized by 115 days of

frost. The temperature averages at 14 degrees Fahrenheit during this season. Asiastic Monsoon

that draw air from from China and Siberia create these conditons (The Global Road Warrior).

The country sees a clear divide between the northern and southern climates due to the Asiatic

monsoon. The Northern region is typically colder and sees more days of snowfall in the winter.

This area experiences 39 inches of precipation annually between November and April (The

Global Road Warrior). The Southern region is wamer and drier than the North. Between June

and Semptember this area experiences a yearly typhoon with a lot of rain and strong winds along

the southern coast. The average rainfall is typically less than the Northern region with

approximately 30 inches annually (The Global Road Warrior). The country’s exreme winter

weather presents a problem for Tesla, but can be overcome by creating a season distribution

schedule.

Political Climate of Country

Brazil:

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Brazil’s government is officially known as the Federative Republic of Brazil. In 1988,

Brazil adopted the country’s current constitution that eliminated the Brazilian monarchy and

established separate state powers. Currently President Dilma Rousseff oversees the government.

His official titles include the Chief of State and the Head of Government (Brazil: Government,

2015). Three branches exist in this Federal Republic government: Executive, Judicial, and

Legislative. The Executive branch is led by the president and assisted by the vice president in

overseeing a cabinet. The president and vice president are elected by “absolute majority vote

through a two-round system” every four years (Brazil: Government, 2015). The Judicial branch

remains independent from all other government bodies and the president appoints the justices.

Justices are required to retire at the age of 70. The Legislative branch makes up the federal

senate, which is the upper house of two-tier congress. There are 81 members of the federal senate

that are elected by majority vote in multi-member electorates every 4 years. The lower house, the

chamber of deputies, consists of 513 members that “are elected through an open-list proportional

representation system” every eight years (Brazil: Government, 2015) (Brazil Politics-Intro,

2014). Each state in Brazil has an appointed governor and elected assembly member (Brazil

Politics-Intro, 2014).

Multiple coalition parties have held power in Brazil. The most prevalent parties include:

the Party of Brazilian Social Democracy (PSDB), the Communist Party of Brazil (PC), the

Liberal Front Party (PFL), and the Party of the Brazilian Democratic Movement (PMDB). The

PFL is considered to be the country’s conservative party, while the PC holds a radical position in

today’s government (Brazil Politics-Intro, 2014).

All Brazilian residents that meet the requirement of literacy and fall between the ages of

18 to 69 years old are required to vote by the country. Anyone that is between the ages of 16 and

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17, over the age of 69, or literate is not required to vote, but has the ability to participate in the

electoral process (Brazil Politics-Intro, 2014).

The Brazilian government controls many sectors of the country’s economy. The

government maintains a perceived strategic value and creates and overall economic strategy in

sectors such as energy and telecommunications. Over 60 percent of government revenue is

generated in the form of taxes. The government places taxes on individuals, corporations, fuel,

real estate, and other similar areas (Brazil Politics-Intro, 2014).

The country’s foreign relations remain strong and are recognized by international

political, commercial, and financial organizations. Brazil’s foreign policies are based on

multilateralism, “peaceful resolution of disputes”, remaining impartial as political and economic

problems of other countries arise, and the Brazilian Constitution. The constitution declares that

the country is obligated to assist the continent of South America and unite the neighboring

countries before seeking benefits for Brazil independently (Foreign Relations And The Military,

2014).

Although Brazil has strong foreign relations, the country’s operational and legal policies

make it difficult for foreign companies to get off the ground and prosper. The country elicits a

“highly complex and expensive tax and labor environment, burdensome bureaucracy, costly

credit, lingering corruption and deep social imbalances” (James, “Business Basics in Brazil”

2011) The World Banking Group currently ranks Brazil number 120 out of 189 economies when

measuring the ease of doing business (Agueda, M., Almeida, P., & Andrade, O., Doing Business

in Brazil, 2015). This current ranking expresses a 3-position jump from last year.

In order to begin business dealings in Brazil, specifically in São Paulo, an organization

must follow 12 distinct steps. The organization initiates this process by checking the company

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name with Junta Comercial do Estado de São Paulo (JUCESP), registering, and paying fees.

(World Bank, Doing Business 2015: Going Beyond Efficiency, 2014).

During the process the “Article of Constitution and represented Articles of Association of

the Company and CNPJ” certificate documentation must be presented to the state tax

organization, who imposes taxes on the circulation of goods and services in the country. The

standard tax rate is 17 percent, but in São Paulo, Minas Gerais and Paraná the standard rate is 18

percent and in Rio de Janeiro the tax rate is 19 percent. The tax rate varies on the movement of

inter-state goods and the rate is determined on the final destination’s rate. In late 2013, the

Resolution 13/2012 was enacted and variable rates on inter-state goods were changed to the

single rate of 4 percent (Brazil: VAT essentials, 2014).

Organizations must “apply and obtain digital certification for the use of e-invoice”,

receive an operations permit, register all employees, and enroll in the Patronal Union and

Employees Union (World Bank, Doing Business 2015: Going Beyond Efficiency, 2014). The

Ministry of Finance in Brazil issues this certificate. There are two types of digital certificates: e-

CPF and E-CNPJ. e-CPF enables individuals the opportunity to electronically communicate with

the Brazilian Federal Revenue. The permits allow organizations to partake in commercial,

industrial, and institutional, and service activities in Brazil. Registration with the Employees

Union is required by labor law and protects employees’ rights. Every city and state has its own

unions to represent activities executed by the different companies in its region.

Spain:

Spain’s government is officially known as the Kingdom of Spain and is a parliamentary

monarchy. The country maintains a civil law system with regional adaptations. The current

constitution was last approved October 31, 1978 by the legislature, signed by the King on

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December 27, 1978, and most recently amended in 2013 (Europe: Spain, 2014). The constitution

focuses on fundamental rights and civic liberties, responsibilities of the citizens, social and

economic procedure, and the configuration of the limited monarchy and parliament (Spain:

Government, 2015).

Spain’s government is made up of the three branches: the executive, judicial, and

legislative branch. The monarch and prime minister oversee the executive branch. The Monarch,

also known as the chief of state, is granted power through familial lineage, is the commander-in-

chief of the Spanish armed forces, and recommends a presidential candidate. The current chief of

state is King Felipe VI and he was put in power on June 19, 2014 (Europe: Spain, 2014). The

prime minister is the president of Spanish government and directs domestic and foreign policy,

civil and military administration, and assists the king in matters of national defense. The prime

minister is elected by parliament and has no designated length of service (Spain: Government,

2015). The last elections were held November 20, 2011 and the next elections will take place in

November of 2015. Currently the prime minister is Mariano Rajoy and he was placed in office

on December 20, 2011.

The judicial branch houses the Tribunal Supremeo, the Supreme Court of Spain. It is

made up of the court president and the Civil Room, the Penal Room, the Administrative Room,

the Social Room, and the Military room. Each room has its own president and a specified

number of magistrates. The judicial branch also includes the Tribunal Constitucional de Espana,

the Constituional Court, and it is made up of 12 judges. The monarch appoints the Supreme

Court judges from a list of candidates that the General Council of the Judicial Power put forward

(Europe: Spain, 2014). Members of the judicial branch are in charge of managing grievances

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about offenses against government ministers, assembly of senators and representatives,

parliament members, judges, and the President (Spain: Government, 2015).

The legislative branch is made up of two legislative bodies: the Las Cortes Generales and

the Congreso de los Diputados. Las Cortes Generales, also referred to as the National Assembly,

is comprised of the senate. As of 2015, it maintains 265 total seats, 208 members that are

“elected by popular vote”, and 57 appointed individuals that serve 4 year terms (Europe: Spain,

2014). The Congreso de los Diputados, the Congress of Deputies, sustains 350 total seats.

Spain’s 50 electoral provinces are required to fill a minimum of 2 seats each, the North African

territories of Ceuta and Melilla fill 1 seat each, and the remaining 248 members are elected to 4

year terms by popular vote (Europe: Spain, 2014). These legislative bodies are responsible for

passing laws and amending the Constitution (Spain: Government, 2015).

In Spanish politics, there have consistently been 3 leading political parties: the Centre

Democratic Union (UCD), the Spanish Socialists (PSOE), and the Popular Party (PP) (Spain-

Politics, government, and taxation, 2015) The PSOE has historically been involved with Unión

General de Trabajadores (UGT), a notable Spanish trade union, but has more recently begun

distancing itself from the UGT in support of “European economic integration” (Spain- Politics,

government, and taxation, 2015). The PSOE has worked to decrease inflation and has been a

strong advocate for a capitalist market economy, but lost governing power in 1996 to the PP.

Once the PP gained control, the PP continued to deregulate and worked towards the objective of

privatization of nationalized enterprises. The PP’s economic expansion plans are constrained by

inflexible labor laws and limiting legislation on intellectual property rights (Spain- Politics,

government, and taxation, 2015).

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Spain places a stresses the importance of foreign relations and specifically the country’s

connection to the rest of the Hispanic world. The country participates in economic and technical

partnership programs with Latin America and other countries in the European Union (Spain:

Government, 2015). The World Banking Group currently rates Spain as 33 out of 189 economies

when measuring the ease of doing business in the country (Aguirre & Torre, Doing Business in

Spain, 2015). This is a 1 spot drop from the previous year.

In order to begin business operations in Spain, an organization must take six specific

actions. The process begins with obtaining a certification negative de la denominación social, a

certification of uniqueness of proposed company name, from the Mercantile Register (World

Bank, Doing Business 2015: Going Beyond Efficiency, 2014). The process also includes

opening a company bank account, filing and notarizing documents, obtaining operations permits,

and informing the city regulators the date that business operations begin. Each community in

Spain has its own documentation, but some communities request “work injury and safety

documentation” (World Bank, Doing Business 2015: Going Beyond Efficiency, 2014).

South Korea:

South Korea’s government is officially known as the Republic of Korea and operates a

mixed legal system that combines “European civil law, Anglo-American law, and Chinese

classical thought” (East & Southeast Asia: Korea, South, 2014). The country’s current

constitution was established on July 17, 1948 and most recently amended in 2013. The

constitution advocates individual rights, lasting and calculated growth rates, fair distribution of

wealth, and deterrence of exploitation of economic power (South Korea: Government, 2015).

The Republic of South Korea is comprised of three branches: executive, judicial, and

legislative. The chief of state and prime minister run the executive branch. The current chief of

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state is President Park Geun-hye and he was elected on February 25, 2013. Presidential elections

are held every five years and the next election will take place in 2017 (East & Southeast Asia:

Korea, South, 2014). The chief of state appoints the prime minster with the National Assembly’s

consent along with Supreme Court justices and is responsible for the policy and decision-making

(South Korea: Government, 2015).

The judicial branch is made up of the Supreme Court of South Korea and the

Constitutional Court. The Supreme Court is an independent entity and is not restricted by the

government. A chief justice and 13 justices make up the Supreme Court leadership. The justices

are appointed by the president with the National Assembly’s consent. The chief justice and 13

justices serve a 6 year term and only the chief justice cannot be re-appointed (East & Southeast

Asia: Korea, South, 2014). A court head and 8 justices oversee the Constitutional Court. 3

justices are appointed “by the President, 3 by the National Assembly, and 3 by the Supereme

Court chief justice” (East & Southeast Asia: Korea, South, 2014). The court head fulfills the

position until the mandatory retirement age of 70 and the justices serve 6 year renewable terms

until the mandatory retirement age of 65 (East & Southeast Asia: Korea, South, 2014).

The legislative branch is run by the Gukhoe, South Korea’s National Assembly. The

National Assembly has a total of 300 seats. “246 members are elected in single-seat

constituencies” and 54 members are “elected by proportional representation” (East & Southeast

Asia: Korea, South, 2014). All National Assembly members serve 4 year terms. The National

Assembly has the ability to impeach the president, approves appointments by the president, and

is responsible to design legislation (South Korea: Government, 2015).

The Republic of Korea strives to enhance its economic achievements in order to take a

larger role regionally and internationally. The South Korean government places a great

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importance on economic concerns and is one of the founding members of the Asia-Pacific

Economic Cooperation (APEC). The country upholds political relationships with over 170

countries. The Untied States and Korea signed the Mutual Defense Treaty in 1953 and have

worked closely since (South Korea: Government, 2015)

The World Banking Group currently rates South Korea as 5 out of 189 economies when

measuring the ease of doing business in the country (Ahn & Bean, Doing Business in Korea,

Rep., 2015). In order to start a business in South Korea, an organization must complete three

steps. The process includes developing a company seal, registering the business name with Start-

Biz. This takes approximately 1 day to complete and can be done at an agency known as the

agency Start-Biz, paying a corporate registration tax and incorporation fee, and paying fees to

pay fees to the public health insurance program, national pension fund, employment insurance,

and industrial accident compensation insurance (World Bank, Doing Business 2015: Going

Beyond Efficiency, 2014).

The Economic Climate of Country

Brazil:

Brazil’s growing middle class and sophisticated and expansive agricultural, mining,

manufacturing, and service sectors distinguish the country’s economy. The country has worked

to improve macroeconomic stability, increase foreign reserves, and cutback the country’s debt

profile through “shifting its debt burdens toward real denominated and domestically held

instruments” since 2003 (South America: Brazil, 2014). Brazil demonstrated strong economic

growth in 2007 and 2008, but like many other countries was offset by the global financial crisis

of 2008. The country experienced 2 quarters of financial recession due to the lack of demand for

commodity-based exports. Brazil’s economy recovered rapidly and was one of the initial

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developing markets to do so. In 2010, gross domestic product (GDP) rose to 7.5%, illustrating

“the highest growth rate in the past 25 years” (South America: Brazil, 2014). As of 2013, the

country’s purchasing power parity GDP was $2.416 trillion with a real growth rate GDP of 2.3%.

Currently, unemployment is at a considerable low, last recorded by the Central Intelligence

Agency in 2013 at 5.7%, and Brazil’s established high level of income inequality has

significantly lessened. Traditionally, Brazil’s economy has been extremely appealing to foreign

investors because of consistently high interest rates. The Brazilian Real, the country’s currency,

has risen in value over the past several years due to capital inflows. The appreciation of the

Brazilian Real has reduced the country’s manufacturing appeal and caused the government to

intervene by raising taxes on foreign capital inflows (South America: Brazil, 2014). Currently

the Index of Economic Freedom ranks Brazil as number 118 freest of all world economies with

an economic freedom score of 56.6 (Brazil, 2015). The country’s sluggish economic freedom

development is due to deteriorating regulatory efficiency, but this has been covered by the

country’s strong economic growth (Brazil, 2015).

Spain:

During the global economic crisis of 2008, Spain greatly suffered and did not recover

quickly. GDP decreased by 3.7% in 2009 and this decline persisted until 2013. Domestic

consumption and investment were upset by the country’s “credit contraction in the private sector,

fiscal austerity, and high unemployment” (Europe: Spain, 2014). In 2007, unemployment was

approximately 8% and it rose to over 23% in 2013. This stressed the Spanish government’s

budget because tax revenues declined and social benefits increased. In 2009, Spain’s budget

deficit climaxed at 11.4% of GDP and was reduced to 7% of GDP by 2013. From 2010 to 2013,

public debt rose from 60.1% of GDP to 93.4% of GDP. Foreign investor interests in Spain have

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been reinvigorated by “rising labor productivity, moderating labor costs, and lower inflation”

(Europe: Spain, 2014). The government has taken these provisions to lure foreign investment

back to Spain in order to reduce government borrowing costs. The Spanish government has also

made a strong effort to support investors, help stressed banks, construction organizations, and the

real estate sector by implementing a European Union funded reorganization and recapitalization

program in December of 2013 (Europe: Spain, 2014). Today Spain’s economic freedom is

ranked as 49 worldwide with a score of 67.6 according to the 2015 Index of Economic Freedom

(Spain, 2015). The government respects the law and encourages export growth through open

trade and investments (Spain, 2015). Although the country encourages exports, there is still a

large opportunity for Tesla. Tesla can begin by importing vehicles to the country to gain market

share a build brand identity. Once the organization has developed a customer following, it can

develop a manufacturing facility and begin to export vehicles to other European countries.

South Korea:

The South Korean economy has exhibited noteworthy growth in the past 40 years while

becoming a high-tech industrialized nation. South Korea’s GDP per capita in the 1960’s rivaled

third world countries in Asia and Africa. Today, it stands as one of the world’s greater

economies, with a recorded GDP per capita of $33,200 in 2013. South Korea is ranked the 29th

freest economy in the world with a score of 71.5 according to the 2015 Index of Economic

Freedom (South Korea, 2015). The country’s economic freedom is limited by corruption and “a

low level of labor freedom” (South Korea, 2015). In 1997 and 1998, the Asian financial crisis

revealed that the country favored high debt-to-equity ratios and short-term foreign borrowing,

which combined have the potential to dramatically weaken the country’s developing economy.

After the economic crisis, South Korea implemented economic reforms such as placing a higher

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focus on exports and foreign investment. In March of 2012, the US-Korea Free Trade Agreement

was endorsed and put into effect. The South Korean economy, along with the United States,

China, and the Eurozone, experienced slow growth between 2012 and 2013. The unemployment

rate has remained at 3.2% from 2012 to 2013. Long term challenges for the South Korean

economy center on a “rapidly aging population, inflexible labor market, dominance of large

conglomerates, and heavy reliance on exports, which comprise about half of GDP” (East &

Southeast Asia: Korea, South, 2014). The U.S.-Korea Free Trade Agreement that was signed in

March 2012 and has created new opportunities for United States exporters (Korea, 2014). The

trade agreement works to Tesla’s advantage and creates a great to break into the automobile

industry in South Korea.

The Cultural Climate of Country

Brazil:

Brazil has a vast, diverse culture due to the country’s European settlement and African

slave trade. European settlers highly influenced Brazilian culture with their foreign ideas and

social views (Brazil Culture, 2014). Today, Brazil’s population is approximately 202,656,788

people with an estimated population growth rate of 0.8% (South America: Brazil, 2014). The life

expectancy rate for the total population is 73.28 years (South America: Brazil, 2014). 47.4% of

the Brazilian population is white, 43.1% is mulatto, 7.6% is black, 1.1% Asian, and 0.4% is

indigenous (South America: Brazil, 2014) Portuguese is the official language of the country and

most widely used. Some less prevalent languages include: Spanish, German, Italian, Japanese,

and English. 90.4% of the Brazilian population is literate, meaning that individuals 15 years or

older can read or write (South America: Brazil, 2014). Approximately 64.6% of the population is

22


Roman Catholic, 22.2% is Protestant, and 8% identify with no religion (South America: Brazil,

2014).

Brazilian culture emphasizes the importance of family values and composition. Families

are typically large and are makeup individuals’ support systems. Brazil defines class by wealth

and the color of people’s skin. The upper and lower class rarely interact with each other in

Brazil. The people in Brazil are affectionate and physical, often standing 1 to 2 feet apart from

others. When meeting someone in Brazil it is customary for men to shake hands and women to

kiss each other’s cheeks, beginning from left to right. It is important to arrive early, over-dress

rather than under-dress, bring a small gift to the host or hostess, and avoid giving gifts that are

black or purple because they are considered grieving colors in Brazil (Brazil Culture: 2014).

In business, it is common for the parties involved to take time to get to know one another

before entering any long-term deals. The people of Brazil prefer to work with individuals, rather

than corporations. They place a high emphasis on trust and building relationships. In the

corporate world, it is required for men and women to dress formally and women are expected to

have manicures (Brazil Culture: 2014). In the work place, Brazilians maintain a group-oriented

culture centered on personal relationships. Brazilians spend a lot of time building relationships,

talking, and do not rush in to agreements, unlike many Western cultures (Williamson, Brazil:

The Business Experience, 2015). Brazilian culture is quite formalized when it comes to

addressing someone. It is inappropriate to address a business counterpart by their first name

unless the individual grants permission to do so. Eye contact is extremely important because it

communicates genuineness (Williamson, Brazil: The Business Experience, 2015). Brazil’s

culture presents a great opportunity for Tesla and its use of company owned galleries. Customers

will be able to build relationships with Tesla representatives and learn about the vehicles before

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making their purchases. The Tesla galleries promote a no purchasing sales environment because

no sales are done on the premise. All vehicle orders and purchases are conducted through the

company’s online platform.

Spain:

Spain’s population is a mix of Mediterranean and Nordic backgrounds. These societies

invaded the Iberian Peninsula and today there is a large mix of Iberians, Celts, Basques,

Phoenicians, Greeks, Carthaginians, Sephardic Jews, and Moors (Colgan, 2015). The current

population is estimated to be 47,737,941 people with a total population life expectancy of 81.47

years old. The official language of Spain is Castilian Spanish and it is spoken by 74% of the

country. 24% of the country speaks languages that are closely related to Castilian and the

remaining 2% speak the Basque language (Colgan, 2015). 97.7% of the Spanish population is

literate and on average Spanish citizens attend school for 17 years. The Roman Catholic religion

is the most dominate in Spain with 94% of the population identifying with the religion (Colgan,

2015).

Spain maintains two separate business cultures, but overall the country is considered a

“conservative business society that values old customs and traditions” (Main, 2015). The

business world is made up of small to medium sized, upper class, family owned firms and global,

contemporary corporations. The workweek in Spain is different than most cultures because

businesses often close for several hours between 2 in the afternoon and 5 in the afternoon for

what is referred to as a “siesta”. No matter the type of organization, the Spanish people favor

doing business with individuals they already know and they stress the importance of

relationships. Spanish culture moves much slower than Western societies, so it is extremely

important to build adequate time into a business strategy plans (Main, 2015). Greetings in Spain

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vary from person to person so it is customary for the visitor to follow the Spaniard’s lead

because some will use a handshake, kiss, or hug. It is typical to exchange business cards during

introductions and foreigners should have printed Spanish translations on the backside of their

business card. When presenting the business card, the foreigner must hand it to the Spaniard

Spanish side up. When receiving someone’s business card in Spain, it is considered proper to

examine it, comment, and then put it away (Main, 2015). Spain’s slow paced business culture

may be problematic in the beginning of setting up operations in the country, but Tesla will easily

overcome it once it builds the proper relationships with community members. Tesla will need to

work to gain credibility and a build its brand identity to win over the Spanish consumers.

South Korea:

South Korea’s population is predominantly Korean with a Chinese minority of about

20,000 people. South Korea’s current population is approximately 49,039,986 people. The

average life expectancy in South Korea is 79.8 years old (East & Southeast Asia: Korea, South,

2014). Korean is the official language of the country, but the population is extremely well

educated in English. 31.6% of the population is Christian, 24.2% is Buddhist, and the remaining

44% do not identify with a religion (East & Southeast Asia: Korea, South, 2014).

South Korean culture highly values family. Family wellbeing and prosperity are placed

before the needs of the individual. The actions of one family member reflect the image of an

entire family to the public. The notion of kibun plays a central role in South Korean culture as

well. There is no direct translation for the Korean word in English, but it is similar to “pride,

face, mood, feelings, or state of mind” (South Korea - Language, Culture, Customs and

Etiquette, 2014). Individuals must know how to interpret other people’s kibun so they do not

upset it. South Korean culture strives for social harmony and the kibun is a central concept to this

25


aspiration. “In business, a manager’s kibun is damaged if his subordinates do not show proper

respect” and “a subordinate’s kibun is damaged if his manager criticizes him in public” (South

Korea - Language, Culture, Customs and Etiquette, 2014).

In South Korea, there is a strong emphasis on greeting protocol, gift giving, and business

etiquette. When greeting an individual is critical to bow first and then shake hands. The person of

lower social standing must bow to the person of higher standing and say “man-na-su pan-gop-

sumnida”, which means pleased to meet you (South Korea - Language, Culture, Customs and

Etiquette, 2014). Gift giving is of great importance in South Korean culture. Gifts articulate how

one feels about relationships and must be wrapped attractively. The number 4 is considered

unlucky, while the number 7 is said to be lucky; therefore, gifts should not be given in multiples

of 4. The colors yellow and red are royal colors and should be used to wrap gifts. It is important

to offer a gift with two hands and to not immediately open a gift when receiving one (South

Korea - Language, Culture, Customs and Etiquette, 2014).

South Koreans desire doing business with individuals they know, but they are open to

third party introductions. The first business meeting is often used to build trust. In South Korea,

strong worth ethic is valued, along with punctuality and meeting tight deadlines. A 6-day

workweek, Monday through Saturday, is performed in South Korea currently, but some offices

are moving to a 5-day schedule (Cotham, 2015). Many citizens take summer vacations in July

and August. The business world in South Korea is dominated by men and when dealing with

foreigner businesswomen, South Korean men prefer women to “adopt a refined and modest

demeanor, and use quite tones of voice” (Cotham, 2015). When conducting business, it is

expected to wear conservative dark colored suits and little to no jewelry. Exchanging business

cards is widespread throughout the country. To present and receive a business card one must use

26


both hands, examine it, and refrain from writing on it (Cotham, 2015). South Korea’s gift giving

culture will benefit Tesla’s business when first entering the market because the company can

strategically give its vehicles to influential community members to demonstrate good faith and

generate hype among consumers.

Tesla’s Value Chain:

Tesla Motors, Inc.’s controls their value chain by conducting the majority of operations

internally. This creates a competitive advantage for the company because it enhances their core

competencies through its constant innovation, expertise, and high product quality. When the

company first began production in the early phases of the organization, it ran into outsourcing

difficulties and decided to take control and full responsibility of manufacturing. Every feature of

the production and assembly process is completed in the company’s Northern California

warehouse. Tesla Motors, Inc.’s unconventional value chain sets the organization apart from its

competition and limits external access to their innovative processes (Fleming, “Tesla Motors Inc.

A Comprehensive Strategical Evaluation”, 2014).

Tesla Motors, Inc.’s inbound logistics include many components and are all completed at

a single manufacturing plant where the in-house production takes place. At the factory in

Fremont, California, Tesla Motors, Inc. is responsible for all activities from design to tooling.

This process is kept confidential and specific details about the process are unknown to the public.

Multi-functional robots are responsible for all product assembly. The company manages a “Just

In Time” inventory strategy and management system, meaning that customers must place an

order for a car to be produced. This creates high demand, exclusivity, and helps control costs.

Lastly, Tesla Motors, Inc. conducts product testing to ensure the safety and superiority of their

automobiles.

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Another primary value chain activity is operations. Tesla Motors, Inc.’s operation are

kept quite confidential, but it is known that the organization is responsible for all aspects from

design to tooling and they process a highly innovative assembly line process that utilizes multi-

functional robots.

Outbound logistics include the final manufacturing steps and product delivery.

Transportation and labor costs are minimized because all of the manufacturing takes place in one

location. When possible, Tesla ships multiple vehicles together to their final destination in order

to minimize transpiration costs. Tesla also maintains its own website and showrooms in 18

countries.

Tesla Motors, Inc.’s marketing and sales activities utilize their customers as their main

source of promotion, along with their emphasis on clean energy and some celebrity promotion.

The company is also a leader in successful integration of big data analytics to further their

success and brand image. Sales are exclusively performed through the company’s online

platform. Although Tesla Motors, Inc. has showrooms around the world to promote their cars;

they do not complete any financial transactions in these locations. This allows Tesla Motors, Inc.

that ability to control the customer experience and distinguish themselves from their competitors.

The company’s last primary activity, service, sets the organization apart from all industry

competitors. Tesla Motors, Inc. implements a unique service approach through their mobile

applications and direct communication technologies to enable quick response times and quality

assistance for their customers. The company also continues to build new supercharging stations,

improve their product warranty terms, and maintains a buy back guarantee for the first three

years of ownership of any vehicle.

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Tesla Motors, Inc. support activities are led by its general administration, which includes

a strong leadership team and a flat or horizontal infrastructure. The leadership team is led by the

company’s chief executive officer (CEO) and co-founder Elon Musk. Musk is responsible for

providing the organization with strategy, objectives, goals, and vision. JB Straubel is the

company’s chief technology officer and co-founder. He has been responsible for the technical

and engineering design of the vehicles, along with evaluating new technology, systems testing,

and technical interface with vendors. Peter Carlson is the Vice President of Supply Chain and is

responsible for overseeing and creating Tesla Motors, Inc.’s unique value chain (About Tesla,

2015).

Human resource management at Tesla Motors, Inc. is successful due to the company’s

close relationships between management and employees, small team environment that promotes

efficiency and excellence, and employees are incentivized with competitive pay and stock

options.

Technology development is a founding stake for the organization. Tesla Motors, Inc. is

an industry leader in the development and innovation of technology. This is demonstrated

through the company’s state-of-the-art development, manufacturing and customer management

processes. All employees work in “small, agile, creative teams” to approach problem solving and

maintain an active role in the progression of the company (Fleming, “Tesla Motors Inc. A

Comprehensive Strategical Evaluation”, 2014). This is a common Silicon Valley approach where

members of the organization’s opinions are valued and taken into consideration before company

decisions are made. The organization leads its industry in research and development and

continues to reinvest finances back into the company to reduce costs, continue excellence in

product design, and obtain more patents.

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Tesla Motors, Inc. procurement activities differentiate the organization as well. The

company has forged unprecedented strategic alliances with technological and automotive

suppliers and manufacturers in order to achieve economies of scale. Tesla supplies Toyota and

Daimler with batteries for their electric vehicles for example. Tesla’s suppliers are all

strategically located as well. They have influenced companies such as Futuris to set up a factory

in Newark, California to be closer to the Fremont, California manufacturing and production

plant.

The global luxury goods market has experienced a steady increase over the past few

years and it is believed that this will be sustained in the upcoming years. Bain and Company, a

management consulting firm, reported in October of 2014 that the global luxury market was on

track to generate 223 billion €, approximately$241,146,625,000. (Pinkney, “Bain & Company's

2014 annual global luxury study proclaims the rise of the consumer as luxury markets settle in

for lower, but more sustainable long-term growth”, 2014). Claudia d’Arpizio, a Bain and

Company consultant, reports, “For next year, we expect growth similar to 2014, the luxury goods

market has entered a weaker growth cycle but it is more sustainable on the long term”

(Wendlandt, “Global luxury goods sales growth to stabilize in 2015: Bain”, 2014).

In 2014, the largest growth was observed in North and South America, where sales

increased by 6 percent, and in Japan, where sales improved by 10 percent. Tourist spending, with

the exclusion of Japan, China, and South America currently drives the majority of global

markets. Although, Chinese customers make up the fastest growing consumer segment of the

luxury market they perform the majority of their purchases abroad (Pinkney, “Bain & Company's

2014 annual global luxury study proclaims the rise of the consumer as luxury markets settle in

for lower, but more sustainable long-term growth”, 2014).

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Bain and Company has found that European growth increased 2 percent even with

economic and political issues. In the Americas, there were minor slow-downs due to harsh

weather in the United States and Brazilian currency devaluation, but Canada and Mexico

continued to present positive operations. China’s luxury spending displayed its first negative

trend in 2014, with a negative one percent growth because of constraints on luxury spending and

spending patterns. Even though China is experiencing a slowdown, South Korea has become a

“trend setter and influencer for fashion and luxury (Pinkney, “Bain & Company's 2014 annual

global luxury study proclaims the rise of the consumer as luxury markets settle in for lower, but

more sustainable long-term growth”, 2014). The Eurozone, which includes Italy, France,

Germany, and Spain, is made up of 4 of the top 10 world luxury markets. The region is still

recovering from the recession and has to implement strict fiscal policies to correct its financial

situation. Spain is the ninth largest luxury market and its growth was predicted to be modest in

2014 due to the country’s lengthy recovery from the recession. The economy continues to be

fragile due to declining bank lending, but the country’s export sector has improved and bond

yields are at low levels (“Global Powers of Luxury Goods 2014”, 2014).

Brazil is considered to be an emerging market and its economic growth has recently

slowed due to inflation, currency devaluation, social strife, and business distrust. The long-term

outlook is much more positive for the country’s economy than its current state. The country’s

substantial growth in energy production, intensified foreign interest in the manufacturing sector,

and increased volume of service exports suggests a bright future for this emerging economy

(“Global Powers of Luxury Goods 2014”, 2014).

Brazil is the fifth largest country in the world, in physical size and by population, and has

the sixth largest economy. Between 2003 and 2011 approximately 39.5 million Brazilians rose to

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middle class standing. As of 2011, light vehicle sales in Brazil were 3.4 million units and it is

expected that they will increase to 5.7 million units by 2016. As of 2010 the Fiat Group,

Volkswagen Group, General Motors, Ford Motor, Renault, and PSA Group held the majority of

automobile production in Brazil (Tavares, “Brazil in the Automotive World”).

Currently, Brazil’s economy is at a standstill. Most industry are maintaining business, but

not seeing great growth. This is evident in the automobile industry, but not appearing in the

luxury car sector. In fact, in 2014 luxury car sales increased by 18 percent even though Brazilian

automobile sales were down 7 percent (Cabral, “Brazil’s luxury car sales stay steady as overall

auto market stalls”, 2015). This growth in the luxury car market can be attributed to the fact that

these sales are “less dependent on macroeconomic conditions, because people that buy these cars

tend to be a lot less price sensitive, and they are less susceptible to credit conditions… you have

a sizable proportion of the population with a significant income or wealth” (Cabral, “Brazil’s

luxury car sales stay steady as overall auto market stalls”, 2015). Luxury cars represent a mere 2

percent of the Brazilian car market, but there has been increasing interest from luxury car

manufacturers such as Audi, Mercedes-Benz, and Land Rover to open plants in Brazil to

infiltrate the underpenetrated market in Brazil (Cabral, “Brazil’s luxury car sales stay steady as

overall auto market stalls”, 2015).

As of March 2015, South Korean new vehicle sales increased a total of 9 percent from

the previous year. There was a notable increase imported brand sales, which reached “an all-time

high for this segment”(“New-vehicle sales in South Korea gain 9% y/y in March; Q1 sales up

5.3% y/y”, 2015). Imported vehicle sales have increased because of the newly instituted free-

trade agreement with the United States, Europe, and Australia. Sales are also credited to

aggressive marketing and promotions. Total imported vehicle sales increased to 22,280 units

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(“New-vehicle sales in South Korea gain 9% y/y in March; Q1 sales up 5.3% y/y”, 2015).

Domestic automobile brands reported mild-to-significant sale growth rates. Hyundai remains the

largest-selling automaker with a market share of 39 percent and sales volume of 57, 965 units

(“New-vehicle sales in South Korea gain 9% y/y in March; Q1 sales up 5.3% y/y”, 2015).

Spain has seen growth in its automotive industry sales for 19 consecutive months

(Reuters, “Spain new car sales rise 40.5% in March: Anfac.”, 2015). As of March 2015, the

Spanish Association of Car Manufacturers reported that a total of 112,792 new car passenger

cars were sold, representing a 41.1 percent increase from March 2014 (Research Team in Spain,

“Spain Light Vehicles Sales Summary. March 2015”, 2015). The Volkswagen Group sold the

most units in March with a total of 9,319. SEAT, the Spanish automaker, followed behind with

8,831 new vehicle sales and Ford Motors trailed with 8,593 units (Reuters, “Spain new car sales

rise 40.5% in March: Anfac.”, 2015).

This industry growth is attributed to Spain’s two car subsidy programs. One subsidy

program helps purchasers obtain “new and more efficient cars, with individual payouts of $1,370

payments matched by auto dealers” and has been extended multiple times (Palacios, “Spain

Renews Scrappage Program, Adds EV Subsidies”, 2014). The second subsidy program urges

Spanish consumers to purchase electric vehicles with a minimum 145-mile range. The maximum

aid a consumer receives from this is $8,900. Spain is the only European country that offers

subsidies for the purchase of either electric or internal-combustion engine vehicles (Palacios,

“Spain Renews Scrappage Program, Adds EV Subsidies”, 2014).

Globally, the luxury car market has grown 10 percent from 2013 to 2014. Bain notes this

expansion in the international luxury car market is “driven by emerging markets, where luxury

vehicles are still seen as a symbol of status and a social enabler. The high degree of

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personalization for vehicles and even after-sales services is helping to double or in some cases

triple the basic price tag” (Pinkney, “Bain & Company's 2014 annual global luxury study

proclaims the rise of the consumer as luxury markets settle in for lower, but more sustainable

long-term growth”, 2014).

Tesla shipped its first eight vehicles to customers in China on Tuesday, April 22, 2014. In

China, the vehicle is priced at $121,000, compared to the $81,000 price in the United States. This

price difference accounts for import taxes and the cost of shipping. Tesla’s pricing positions the

organization to join China’s luxury car market, which makes up 10 percent of the country’s

automobile industry. Tesla set its target sales for 2014 at 5,000 vehicles in China, but only

exported approximately 3,500 (Young, “Tesla Tries to Jump-Start China Sales”, 2014). The

organization plans to have approximately 100 service centers in China by the end of 2015 in

order to grow the company’s Chinese presence and create accessibility (Waters, “Tesla plans

massive China expansion”, 2014).

To combat challenges in China, Tesla plan to address “range anxiety” by building a

network of charging stations with the help of the state owned enterprise Sinopec (Trefis Team,

“Tesla Expands Into China But Should Only Be A Small Player In The Luxury Segment”, 2015).

Tesla is also exploring relationships with state-owned power monopolies State Grid and

Southern Grid to operate charging stations. The stations will also have solar panels so there is an

option of working with utility companies or running them independently (McDonald, “Tesla

delivers first cars in China, plans expansion”, 2014). The company also plans to use service

technicians to provide customers with secure electric wiring at personal homes and workplaces.

Currently, Tesla does not have plans of moving its production to China for a minimum of

3 to 4 years (Trefis Team, “Tesla Expands Into China But Should Only Be A Small Player In

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The Luxury Segment”, 2015). Elon Musk hopes to continue to produce vehicles in the countries

where they are sold, but knows that this may take time to develop the necessary infrastructure

and partnerships (McDonald, “Tesla delivers first cars in China, plans expansion”, 2014). The

Shanghai government recently announced that all Model S Tesla drivers are entitled to free

license plates to encourage the purchase of the vehicles. In China, drivers must acquire license

plate through a public auction and it typically costs $10,000 to $15,000 per license plate (Trefis

Team, “Tesla Earnings Review: Profits Decline But Tesla Still On Track To Meet Full-Year

Targets”, 2014). This is the Chinese governments way of encouraging the purchase of electrical

vehicles because the car is already expensive due to taxes and exchange rates.

Tesla should continue its value chain for the time being in order to continue its brand

identity, control of products, and technological competitive advantage. The company should

continue to expand internationally as it has done in China because it is important to penetrate

each market tactfully and prepared. Tesla should deal in each country’s currency and adjust

pricing to include the exchange rate and taxes. This ensures a consistent brand image and unifies

the company’s strategy and marketing plan. It will be important for Tesla to continue to place its

vehicles in the hands of local first-adopters and trendsetters to increase local awareness of the

brand and generate excitement through word of mouth.

Tesla competes not only against advanced gas electric hybrids, plug-in hybrids, and other

battery electric vehicles (BEV’s) makers, but also the 150 year old internal combustion vehicle

auto industry. The BEV market is driven by four key factors: technological advances,

infrastructure improvements, public policy, and energy economics (Mangram, “The globalization

of Tesla Motors: a strategic marketing plan analysis”, 2012). Technological advances are the

foundation for the progression of the BEV industry because battery range, batter cost, and

35


vehicle performance are current factors that are preventing mass consumer adaptation. Lithium-

ion batteries account for up to 50 percent of the total vehicle cost and gaining economies of scale

will hopefully reduce this high cost significantly in the near future. BEV’s surpass gasoline

powered vehicles performance due to its high torque ratio capabilities. BEV’s are also “six times

as efficient and produce less than one-tenth the pollution than the most efficient gasoline

powered vehicle” (Mangram, “The globalization of Tesla Motors: a strategic marketing plan”,

2012). The vehicles are mechanically simpler because they are only made up of one moving part

and they need little service due to regenerative braking and software updates.

Infrastructure improvements and developments are essential to the success of BEV’s.

Sooner than later, the supercharging station infrastructure must attain a similar presence to gas

stations so BEV owners have ease of access to rapid charging. Other options for public charging

is in parking garages, outside commercial establishments, or battery swapping services like they

have done in Israel (Mangram, “The globalization of Tesla Motors: a strategic marketing plan”,

2012).

Public policy also plays a large role in BEV adaptation. The transportation sector

accounts for 57 percent of greenhouse gas emissions, 70 percent of this number is from

petroleum utilization. Due to this appalling statistic, governments worldwide have begun

encouraging BEV adaptation through government subsidies for producers and consumers,

consumer price incentives, tax credits, and research and development sponsorship (Mangram,

“The globalization of Tesla Motors: a strategic marketing plan”, 2012).

Energy economics of the BEV industry compares the price of electricity versus the price

of gasoline at any given point in time. Both energy and gasoline are subject to change, but “crude

oil price volatility serves to undermine investment in alternative energy source” (Mangram, “The

36


globalization of Tesla Motors: a strategic marketing plan”, 2012). Gasoline prices are tied to

international oil prices, while electricity prices are weakly related to oil prices. Electricity prices

are linked with natural gas and coal prices in most countries.

The competitive rivalry is moderate in the automotive industry due to the small number

of large organizations that dominate the industry. Historically, it has been extremely difficult for

organizations to enter the industry due to the large firms’ power, but recently due to the effects of

the 2008 recession there has been more opportunities for younger and smaller firms to compete.

Tesla has been able to exploit this opportunity and create a name for itself in the automotive

industry.

Traditionally the automobiles have been sold by dealerships that are separate entities

from the vehicle manufacturers. The dealerships have a dependent relationship with the

manufacturers. This enables the manufacturers to set pricing and leads to low buyer power. In

the automobile industry there are a small number of large firms that control the market, leaving

the buyers with limited purchasing choices. Tesla has deviated from the traditional manufacturer-

dealer franchise model and eliminated the dealership reliance on the manufacturer. The

organization manufacturers its own vehicles and sells directly to consumers through its website.

Supplier power is moderate in the automotive industry because the components are considered

commodities. There is a slight dependence on suppliers for materials, but due to the low

differentiation of inputs there is a decrease in supplier power. Some organizations have even cut

their supply chains down and begun producing components in-house to further decease this

dependency. Tesla sources materials from multiple vendors and requires very differentiated, high

cost materials; such as those are inputs for the lithium-ion batteries. Tesla has decreased its value

and supply chain through manufacturing and selling its own vehicles, but the company has a

37


higher dependency on suppliers than other firms for materials currently because of its use of

specialized parts and materials (Fleming, “Tesla Motors Inc. A Comprehensive Strategical

Evaluation”, 2014).

The threat of new entrants in the automotive industry is low because there are high entry

barriers. Companies must build a brand name and strong reputation, invest in expensive research

and development, cultivate a unique value proposition for consumer to differentiate their

product, and develop economies of scale. Tesla has been able to overcome this high entry barrier

because of its financial backing from the company’s CEO Elon Musk. Musk has emphasized the

importance of research and development and has personally supported the company financially

when it needed cash flow to continue developing the organization.

The threat of substitutes is moderate to the automotive industry. Consumers most likely

substitute is public transportation. This option is more feasible for consumers in urban areas

because light rail, bus, and subway systems are better-established and more common means of

transportation. The resale of used vehicles is also a threat to car manufacturers and dealers

(Fleming, “Tesla Motors Inc. A Comprehensive Strategical Evaluation”, 2014). This threat is

largely dependent on economic circumstances and consumers’ disposition, but can have a

significant effect on the industry. Another threat to the automotive industry is manufacturers

eliminating franchise dealerships and setting up their own dealerships or showrooms. This threat

is less significant due to the high switching costs for manufacturers.

Tesla has multiple strengths that position to the company for continuing, lasting success

and distinguishes the company from its competitors. Tesla’s physical and technological assets

lay the foundation for the organization. The organization possesses factories, supercharging

stations, and a wealth of well protected intellectual property. Tesla’s unmatched research and

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development program also separates it from the competition. The vehicles have proven to be a

realistic alternative to traditional internal combustion gasoline powered vehicles. Tesla not only

produces its own automobiles, but it also makes components for other car manufacturers that are

just entering the BEV industry. This creates another revenue stream for Tesla, but also helps

maintain its technological competitive advantage over its competition. Tesla has also forged

many strategic relationships with these other automobile manufactures such as Toyota and

Mercedes-Benz and some suppliers like Panasonic. Tesla’s organizational culture led by CEO

Elon Musk is also a strength because it promotes efficiency, innovation, flexibility, and

adaptability.

Tesla has chosen to implement what many people refer to as the “Apple approach” by

entering the automobile industry at the top with the goal to mass-produce a more affordable BEV

in the future (Mangram, “The globalization of Tesla Motors: a strategic marketing plan”, 2012).

This has had a negative effect on profitability because Tesla incurs high production costs due to

the low production volumes and product customization. Tesla has also been unable to turn a

profit to date because of its strong commitment to funding extensive research and development

to manufacturer a ready-made vehicle in the near future. Another weakness for Tesla is that they

currently only have one manufacturing site. Although this promotes operational efficiency, it

creates high shipping costs.

There are a number of opportunities for Tesla because of environmental concerns,

technological advances, growing economy, and big data analysis. Governments are creating

stringent environmental regulatory laws that pressure automobile manufacturers to produce more

environmentally responsible vehicles. Tesla already surpasses many of the current regulations

and continues to improve its green technology, while producing a luxurious, high performance

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vehicle. Further technological advancements in battery power, charging capacity, and recharging

rates are making BEV’s a realistic, attractive option for consumers. Consumers are becoming

more and more interested in moving away from the transportation industry’s reliance on the oil

and gas. This creates the opportunity for Tesla to institute itself as the battery-recharging source

through its growing network of supercharging stations. All BEV owners, even those that own

vehicles other than Tesla’s, can purchase charging subscriptions to use the supercharging

services. As seen in global trends, the economy is recovering and even in places where growth

has calmed, luxury markets are continually expanding (Fleming, “Tesla Motors Inc. A

Comprehensive Strategical Evaluation”, 2014). Tesla has benefited from this growth and will

continue to in the future. Lastly, Tesla has the opportunity to apply big data analytics to better

serve consumer needs and monitor preference changes in order to stay ahead of competition.

Tesla has recently proven its commitment to attending to customer feedback through its

continuous updates through the company blog on the Tesla website where there is an open

community forum and the new mobile device application to lessen “range anxiety” and track

battery charge.

Tesla’s largest threat comes from its competition and the oil and gas industry. Due to

Tesla’s relatively small size, larger organizations and the other manufacturers that they supply

components to right now may out maneuver Tesla. Larger organizations have economies of

scale, larger distribution channels, and brand loyalty. Tesla faces an uphill battle with the oil and

gas industry because the company is revolutionizing the energy sector and lessening the world’s

reliance on oil and gas (Fleming, “Tesla Motors Inc. A Comprehensive Strategical Evaluation”,

2014). Tesla has already experienced pushback from car dealerships because it has changed the

traditional supply chain and implemented a direct sales strategy. Although Tesla benefits from

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being the first mover, the company needs to be prepared for more legal battles because it is

drastically altering the automotive industry’s longstanding infrastructure. Challenges such as the

one Apple is currently facing with Samsung may soon become Tesla’s reality. The company may

find itself in long legal battles arguing about which company is infringing on the other’s

intellectual property.

The foundation of Tesla’s core competencies lies in its extensive research and

development program. The organization has dominated the BEV market with its advanced

technology and intellectual property. The company continues to plowback revenue into research

in development in order to continue updating and transforming the electric vehicle industry. The

company is focused on building a lasting infrastructure to make alternative energy powered

machinery feasible. Tesla’s use of multidimensional robots in the production process is another

core competency because it promotes productivity and accuracy. The company’s use of a direct-

sales method has redefined the automotive industry and questioned historical practices. Tesla’s

sales model allows the company to offer highly customized products, maximize value to the

customers, and preserve brand influence.

Tesla uses a focused differentiation strategy that has shaken up an existing industry

through its innovative technology and sales model, charging infrastructure, and product design

and performance. It has made BEV vehicles most importantly practical, but also trendy, fun, and

highly sought after. Tesla’s commitment to research and development also sets the organization

apart from its competition. This program is legally well protected, which creates a sizable

obstacle for Tesla’s competition. Tesla’s strategic objectives have set the path for the

organization and its future. Tesla seeks to not only make its vehicles a reality for mass

consumption, but all electric vehicles. The organization wants to reduce international reliance on

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petroleum-based transportation and reduce the carbon footprint. For the time being, Tesla should

continue its expansion as it has done in China throughout Europe, Asia, and South America. In

Spain, South Korea, and Brazil there has been slow penetration and adaptation of the electrical

vehicle market. This gives Tesla the upper hand, but also presents the challenge of creating the

necessary infrastructure to make it a reality. Tesla has had the advantage of being the first mover

and promoting a strong social message that consumers have bought into thus far. The

organization needs to continue to exploit market trends and implement big data analytics to

increase its understanding of consumers.

There are a large amount of opportunities for Tesla worldwide. It has revolutionized the

automobile industry, made electric vehicles feasible, and continues to improve its existing

technology. While expanding internationally, Tesla will have to consider a few obstacles and

map out how to overcome them. Tesla’s largest challenge worldwide is developing the necessary

infrastructure. This includes supercharging stations, showrooms, and centers of operations. The

supercharging stations are one of the largest concerns because without an adequate number of

stations in strategic locations, the product remains impractical for many consumers and the

company will have difficulty acquiring market share. Currently, there are 419 superstations with

2,305 individual superchargers throughout the Asia-Pacific, Europe, and the United States

(“Supercharger”, 2015). Through the supercharger network expansion, Tesla has the opportunity

to implement the use of solar panels to power vehicles so there is even less reliance on the oil

and gas industry. The organization can also offer charging subscriptions to non-Tesla electric

vehicle owners. Tesla must also consider how to preserve its company culture abroad and how to

maintain it through its hiring process. Tesla needs to sustain its brand identity, while taking into

account each country’s cultural values and practices.

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Gap Analysis:

Tesla faces a problem with usage, product line, distribution, and competitive gaps due to

the small size of the organization and its short history. These problems will not persist and soon

become irrelevant once Tesla develops its international presence and gains economies of scale.

Tesla has done a great job of increasing awareness of the importance of electrical vehicles and

what the organization stands for. As the company expands internationally, it must continue to do

so and create the necessary infrastructure to fight the usage gap. Customers will continue to be

hesitant to purchase the vehicles if they are unsure if the product is practical due to an

insufficient number of accessible charging stations and long recharging times.

Currently, Tesla suffers from a product line gap because of the high price of the vehicle

and the battery performance. Although, Tesla has decreased the price from the original Tesla

Roadster 1.0, the vehicle is still too expensive for mass consumption. In order to decrease the

price, Tesla must continue to reduce the cost of the battery and increase economies of scale.

Consumers are also concerned about the battery performance and want to see an increase in

range between charges.

Tesla must address its distribution gap. Due to its one production facility, the company is

limited in the number of vehicles it can manufacture. Consumers are subject to a 6-month

waiting list, which is not appealing to some individuals but to others it creates exclusivity. The

company can address this issue by opening more facilities in the United States or opening

facilities in the countries where it sells vehicles. This will increase production and delivery rates

and decrease the amount of time consumers must wait to receive their vehicles. If Tesla chose to

open more manufacturing facilities it would prevent situation like the one in China, where

customers were disappointed that their orders were delayed and not fulfilled on time. Currently

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Tesla does not have any showrooms in South America. Brazil presents the perfect opportunity

because its electrical vehicle industry is non-existent and it is the largest country by population

and physical mass in South America. It also has a growing economy, especially its luxury market

sector. Tesla could greatly benefit from expansion into Brazil and continue its first mover

approach. If Tesla waits to enter the Brazilian market, it will miss out on a great opportunity.

Luxury competitors like BMW and Mercedes-Benz will have the perfect opportunity to build

their electric vehicle segments and brand identity.

Tesla also has a competitive gap because of its high price point. Electric and other

alternative energy vehicles are more accessible for mass consumption due to their lower price

points and brand recognition. Tesla’s technology and high quality surpasses its competitors, but

the price point is an issue for many consumers. Tesla will be able to overcome this once it

begins production on the Tesla III. Until then, this competitive gap will persist.

Although Tesla must overcome these gaps, it has great opportunities to expand into

Brazil, South Korea, and Spain. All three countries have demonstrated positive economic growth

recently, increased demand for either luxury or imported goods, and have governments that are

willing to assist in bringing in car manufactures and electric vehicles.

Global Marketing:

Tesla has chosen to implement a standardized marketing plan promoting a worldwide

brand throughout the United States, Europe, and Asia. This means that the product offerings are

the same in every country and the organization maintains centralized control. This approach is

advantageous to organizations because it is more cost effective, the activities are coordinated,

allows for faster product development, there is more financial control, and companies gain

market access quickly because there is no need to tailor the product and marketing for each

44


country. Standardization works best when there are only small differences between countries

because the consumers have a greater chance of identifying with the promotional and branding

messages. This approach works for Tesla currently because they are only trying to target the

high-end market. A worldwide brand will help Tesla become a international competitor like

Apple Inc. Consumers who purchase these products not only embody a national identity, but a

worldly disposition. These consumers feel apart of a greater community. Once Tesla begins

production and distribution on the Tesla III, the company may consider a differentiated

marketing program.

A differentiated marketing program customizes the product for each market and

decentralizes decision-making. This method exemplifies the entrepreneurial spirit because

innovation comes from local research and development, products are highly customized to

specific markets, and there is high quality due to backward integration. Organizations utilize this

approach to take advantage of product differentiation, local responsiveness, to minimize political

and exchange rate risk. This approach is much more costly than the standardized approach

because of the customization, research and development is not market driven, and the time to

market is slower because the organization must introduce the product individually to each

market. Once Tesla gains market share and economies of share, this approach may be more

beneficial than the standardized marketing program, but the company must consider if they want

a global or national image. Will Tesla continue to be the Apple Inc. of the automotive industry or

change its strategy to customize baseline products for each country?

Tesla utilizes a standard pricing strategy because the organization wants to promote

fairness and change the way consumers think of alternative energy sources and transportation.

The Tesla Motors team remarked: “We care about fairness, and we care about transparency. We

45


care about advancing the cause of electric cars in China. And we care about doing the right thing

for our customers – no matter where they live” (Tesla Motors Team, “A Fair Price”, 2014).

Tesla must consider export price escalation and fluctuation in currency when pricing its vehicle

abroad. Export price escalation occurs due to distribution channels. When exporting, companies

often need an intermediary to help transport and sell products in foreign markets. The

intermediary’s fee can change periodically, so this is something to be aware of. Tariffs and

transport costs are also a concern and these costs are also often passed on to consumers (Daniels

& Radebaugh, p. 668).

Tesla’s product price structure includes selling the vehicle at the United States base price,

shipping and handling, customs duties and taxes, Value-Added Tax (VAT), and exchange rate

charges when selling abroad. As of October 2014, the Tesla Model S sold in China for 734 China

Yuan Renminbi (CNY) at 6.05 exchange rate, approximately $121,370. The cost break down is

$81,070 vehicle base price, $3,600 shipping and handling, $19,000 customs duties and taxes, and

$17,700 VAT (Tesla Motors Team, “A Fair Price”, 2014)”. The high price tag due to exchange

rates, taxes, and shipping may discourage consumers, but Tesla tries to focus on the after market

savings benefits and social responsibility to combat this. Tesla also deviates from the traditional

automobile industry sales model because it does not negotiate prices. The vehicle is listed and

sold at the price indicated by the online platform. This is something that is unheard of in the car

industry and extremely revolutionary.

In the United States, Tesla performs its own manufacturing and shipping. This allows the

company to maintain full control of the manufacturing process, leverage its distribution strategy

as a competitive advantage, and provide an added value to the customer. International

distribution is more difficult because Tesla does not have overseas manufacturing facilities

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currently and must rely on third party sources for shipping and transporting its vehicles from the

United States. When choosing a company to provide transportation for its vehicles, Tesla must

look at the company’s financial strength, reputation, dependability, trustworthiness, and

equipment. Tesla has shipped its vehicles to Europe and China using cargo-shipping containers

and has used freight rail transportation to transport vehicles across the United States. Once Tesla

gains more market share and begins shipping more vehicles at once, the organization may

consider instituting a global self-handling distribution strategy. Self-handling is best for

companies that sell high priced and technologically advanced products (Daniels & Radebaugh, p.

678). This distribution strategy not only secures control, but also exhibits exclusivity and added

customer value.

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