Tesla Investment in China Analysis

Executive Summary

Tesla which was founded 15 years ago in 2003 and was previously known as Tesla Motors is an American company which specializes in electric automotive, storage of energy and the manufacture of solar panels. It is based in Palto Alto, California. Tesla’s revenue in 2017 stood at just over US$ 11.759B. Elon Musk is the current chairman and the largest shareholder owning 20.5% (Wikipedia).

Chinese Cultural and Government Regulations Hindering Tesla

General business atmosphere: According to a research survey that was done by the American Chambers of commerce, an astonishing 75% of the members interviewed said that they felt less welcomed in China (Wu). This in regards to the negative view that China has towards foreign companies as it wants to be an exporter as opposed to an importer. Tesla has not been spared as China is encouraging the use of local vehicles as opposed to importation.

The slow pace of reforms: China has been making reforms at a snail pace. In addition to that, the reforms are focused mainly on cutting red tapes as opposed to opening up the market.

Emphasis on the transfer of technology: Companies trading in China are silently forced to transfer their technologies including intellectual rights. Although the process might seem as being voluntary, it is virtually impossible to trade in China without doing that.

Licensing discrimination: It is very difficult for foreign companies to get the necessary paperwork to trade in China compared to their local counterparts. In most cases, they are forced to apply for one license at a time while the local can get all at once. This extends the time needed to launch a product and companies like Tesla are forced to do it abroad.

Cultural understanding: To do business in China, a firm has to understand the Chinese culture as what is the norm in the USA might be seen as being disrespectful in China. Tesla employees are forced to understand this so as not to create a crisis which is time-consuming. For example, a hierarchy is an important aspect of the Chinese business world and leaders expect obedience without any questions. An employee questioning an authority might be seen as a sign of disrespect.

Role of government: Compared to the united states where businesses have more freedom, the Chinese government keeps an eagle eye on the running of businesses. In addition to that, in China about 76% of the assets are owned by the government thus companies like Tesla will at some point have to negotiate directly with the government when doing business (Kaplan University). It is not easy negotiating with an institution that has all the power.

Chinese Cultural and Government Regulations Aiding Tesla

China government commitment to Reforms: Despite the pace of reforms being undertaken by the Chinese government, the government has on several occasions affirmed its commitment to that. The government has promised to further open the access to the market and create a level playing field. Progress is slow but it is still progress.

Rising economic and political Influence of China: China just like the United States of America is a superpower. This power brings with it a substantial amount of influence that makes investing in the country very profitable. Tesla has benefited from this as firms investing in China have an influence in the world markets.

Demographics: The China average family size one child policies help a lot Tesla in its business. The demographics feet perfectly for Tesla two-sitters and the four-sitters vehicle which are meant for small families.

Public view and government view on pollution: China is one of the most industrialized nations in the world. As much as industrialization has its economic benefits, it also has its environmental challenges. For example, due to pollution, China has faced a lot of international condemnation and tries to reduce this by encouraging companies such as Tesla which invests in eco-friendly technologies. The population as a whole has also seen the environmental degradation and try to live clean. They do this by buying environment-friendly technologies such as the solar panels that are offered by Tesla. To add to that, the Chinese government tends to judge firms on whether what they do is useful and in the best interest of China or not (Wu).

Government Policies and legislation towards corruption: In recent years, the Chinese government has carried out a ruthless campaign against corruption. The penalties for engaging in the vice has also become severe with very high profile individuals being jailed. This has provided Tesla with a more business-friendly environment to work in.

Literacy levels: Over 90% of all the Chinese are literate. This has helped Tesla in acquiring high qualified staff to help in the development of its products.

Tesla Investment in China

In China, Tesla has registered the Tesla Hong Kong subsidiary. The company is located in TML Tower, 3 Hoi Shing Rd, Tsuen Wan, Hong Kong. As Tesla does not yet have a production plant in China, the subsidiary mainly deals with servicing, assembling the vehicles and sales. Some of Tesla’s production in China include the world largest supercharger for electric vehicles, electric vehicles, solar panels and power packs. Over the years, Tesla has profited a lot from the Chinese market. For instance, in 2016 it tripled its sales to over $1 billion in the country. In total Tesla sales, 50% more in China compared to the United States. In addition to that, Tesla accepted $1,78 billion for a 5% stake offer from Tencent Holdings a Chinese technological giant who own Wechat so as to raise more capital.

Tesla is now establishing a research and development company in China called Tesla (Beijing) New Energy R&D Co. Ltd which was registered by Tesla Hong Kong (Lambert). The company is expected to act as a pathway for the building of the production plant.

Tesla has also made plans to start a car manufacturing company in Shangai China to meet the increasing demand and also to increase its market share in China. The move will also reduce the cost of production making the electric cars cheaper which will also increase the demand (Higgins, Moss, and Dou). The factory will be ready and running right around the year  2020 and will focus on making the Model 3 Sedans and the planned crossover Model Y.