Tesla in China
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Case Code: ECON076 Case Length: 16 Pages Period: 2018-2019 Pub Date: 2020 Teaching Note: Available |
Price: Rs.500 Organization : Tesla, Inc. Industry : Automotive Countries : United States Themes: International Business, Macroeconomic Environment, International Operations, Strategy Implementation |
Abstract Case Intro 1 Excerpts
Introduction
Just when it was looking as if Tesla, Inc. (Tesla) had finally cracked the Chinese market, the automaker found itself a victim of the unrelenting trade tensions between the US and China. Tesla had entered China in 2013, at a time when the demand for electric vehicles (EVs) in the country was soaring as a result of the government's plans to entirely phase out internal combustion engines. China soon became the second biggest market for Tesla, but this was before its deliveries in the country were hurt by China’s imposing import duty on American-made cars in retaliation to US tariffs on Chinese goods. The automaker reported a shrinking share in China sales in 2018 and 2019, as the US and China kept imposing tit-for tat-tariffs.
Tesla’s highly visible CEO, Elon Musk (Musk), and its China chief, Tom Zhu (Zhu), had the onerous task of navigating the company back to growth in these tough times. Musk described China as a "wild card" in the company's future. In July 2018, Tesla committed to starting a manufacturing plant in Shanghai which would eventually manufacture 500,000 cars a year. China too needed Tesla to realize its dream of global dominance in EVs, as annual EV sales in the country were expected to reach nearly 5.5 million units by 2025.
As Sino-US trade tensions escalated, investors' concerns over Tesla's future and its ability to turn a profit sent Tesla's stock plunging. In May 2019, when China levied 25% tariffs on American imports in response to the US government’s 25% tariff on Chinese imports, Tesla share price fell sharply by as much as 6.3%. The frequent changes in tariffs, exchange rates, and other economic factors forced Tesla to revise its prices in China multiple times, leaving prospective customers in a quandary.
In August 2019, US President Donald Trump ordered American companies to immediately start seeking alternatives to doing business in China, while China threatened to impose tariffs as high as 50% on US automakers. Analysts expected the prices of Tesla vehicles to increase further in December 2019 if China's decision to impose tariffs on US-made cars remained effective. A Morgan Stanley analyst predicted the "highly volatile trade situation could slash Tesla's expected car sales in China in half and lead to restrictions on its products by either country's government." With no possibilities of ending trade hostilities in sight, analysts wondered whether Musk would be able to achieve Tesla's profitability goals by boosting sales in China. Going ahead, what could Musk and Zhu do to realize their dream of becoming a dominant player in China? What should they do to take the company forward amidst the unrelenting Sino-US trade tensions?
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