Tesla’s Innovation Strategy in Chinese Market

Organisations identify the market strategy as a key differentiation tool that makes their brands and products stand out from competing brands. Part of such differentiation tools that organisations seek to develop is innovation, which can be described as a systematic process of developing new ideas into feasible products that resonate well, and profitably with the target consumers. Tesla is one of the leading electrical automotive organisation in the world, and it has recently reinforced its business interests in the Chinese market including through launching a factory in Shanghai, China (Jiang and Lu, 2018). Tesla seeks to penetrate the higher-end luxury market before gradually reaching to the lower-end automotive consumers and emphasising quality in some features consumers seek in automotive products including speed, longevity, and style. However, the Chinese market is already well immersed with electric car-manufacturing companies which make penetrating such a market more difficult. This paper examines how Tesla has used innovation as a strategy to develop a competitive advantage in the Chinese market.

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Innovation

Tesla’s most powerful tool in its insurgency to the Chinese automotive industry is its identity and image as one of the leading electronic energy companies in the world. The second part of the 21st century is characterised by shifts in consumerism that advocates for environmental conservation. Pollution forms a huge debate in the highly industrialised China, and more consumers and organisations are turning to more environment-friendly products. Jiang and Lu, (2018) note that the Chinese market is the largest consumer for electric vehicles (EVs). Tesla gradually changed its business model of outsourcing parts such as the batteries for its cars by creating subsidiary departments that research on energy distribution and departments that produce the lithium-ion batteries Tesla’s electric vehicles use. Furthermore, through such research, Tesla now has fast charging and long enduring batteries which are highly competitive within the electric automotive industry (Liu and Meng, 2017).

As an expanding industry in China, electronic automotive industry favours both smaller companies and multinational companies. Tesla engages more in the process innovation process as it seeks to compete for the wealthier, higher-end consumers. Tesla’s approach to the Chinese market also uses a sustaining innovation policy by infusing Tesla products as a new brand seeking to provide competition for the already existing high-end market for EVs (Collins, 2019). Tesla has also been vocal in encouraging open innovation among EV producing companies to enable facilitation of research and developing products that can competitively compete with petroleum-fueled vehicles (MacDuffie, 2018). The actions Tesla takes include allowing competitors to share Tesla’s technology in developing EV. Open innovation also seeks to aid the organisation to penetrate the highly competitive Chinese market by showing good faith in the efforts to provide environment-friendly products (Harvard Business Review, 2012).

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Figure 1: Innovation Matrix (Tesla applies the sustaining innovation that seeks to increase competitiveness in the EV industry while also enabling collaborative development of stronger, value-adding technology in the EV industry)

The Chinese government offers local manufacturers incentives that enable the companies to seek to produce electric vehicles for mass distribution. Such a high level of production tends to target lower-end consumers but also develops products that may not compete effectively with Tesla’s products in some features such as battery longevity. For one, Tesla’s vehicles use a high-speed charging system that can be installed at homes or multiple stations across China making it more accessible and flexible for the Tesla products consumers. Furthermore, Tesla has heavily marketed its flagship luxury electric car, the Tesla Model 3 which gradually gains market in the growing Chinese market, which has been vital, considering the fluctuating demand for electric vehicles in Tesla’s biggest market, the USA.

Tesla’s service innovation also includes synchronising the manufacturing and distribution channels within the Chinese market. Such actions also called vertical integration include owning the manufacturing distribution and retail processes, therefore, lowering the cost of production which could have been higher when using secondary distributors and retailers. Owning the process has enabled the country to provide pricing highly comparable to the US, unlike other foreign manufacturers whose products tend to cost higher in external markets due to use of third-party distributors and retailers that increases the cost of production, and consequently the pricing of such products. Using more comparable prices in China makes a key step in increasing the market share in the country for Tesla (Liu and Meng, 2017).

Offering sustaining innovation may have little impact on the market as still not many consumers can access them. Tesla’s products may not reach lower-income consumers (dknab1892, 2015). Furthermore, targeting the higher end consumers may increase competitiveness among EV brands hence may not offer high-profit margins. In contrast, the lower-end EV sales are vital in the Chinese market as they have enabled the country’s consumer purchases to exceed the rest of the world’s EV purchases in 2016, suggesting that developing strategies targeting lower-end consumers could be a key competitive tool (Babones, 2018).

Parida et al., (2015) study reveal that at least 90% of Chief Executive Officers in multinational companies believe that innovation is a vital part of their operations. However, a key challenge that faces innovation is that organisations are more likely to prefer optimising the already existing organisational operations and practices. One challenge facing Tesla’s operations is that the company only has just over 3% of the country’s Electric vehicle (EV) sales which strains its overall performance. Other EV producing companies such as BMW have established themselves in various niches in the Chinese market. Similarly, other smaller companies such as Nio, Jiangling Motors and FAW have established a niche in the lower-end market niches.

Conclusion

Tesla, as an EV manufacturer identified the Chinese market a key market in reaching the desired consumers for its products. While the Chinese market boosts the largest electric automotive consumer in the world, it is also highly competitive, and for a foreign-based company, innovation is a key differentiation factor in enabling it to compete favourably. For Tesla, its innovation policies for the Chinese market involves incorporating research and operations to minimise costs, and seeking to reach for the higher-end luxury market before reaching to the lower-end, consumers and emphasising quality in some features consumers seek in automotive products including speed, longevity, and style.

 

References

Babones, S., 2018. Why Geely may be Tesla’s main China challenger in the near future.

dknab1892 (2015). Open Innovation at Tesla – Time for a Change? – Technology and Operations Management. [online] Rctom.hbs.org. Available at: https://rctom.hbs.org/submission/open-innovation-at-tesla-time-for-a-change/ [Accessed 13 May 2019].

Collins, J. (2019). Tesla’s Problems In China Highlight Its Biggest Threat: Negative Working Capital. [online] Forbes.com. Available at: https://www.forbes.com/sites/jimcollins/2019/03/05/teslas-problems-in-china-highlight-its-biggest-threat-negative-working-capital/#17445c952b3c [Accessed 13 May 2019].

Harvard Business Review (2012). Disruptive Innovation Explained. [online] Harvard Business Review. Available at: https://www.youtube.com/watch?v=qDrMAzCHFUU [Accessed 13 May 2019].

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