The somewhat unconventional internationalization strategy behind the world’s most valuable carmaker
Based on market capitalization, Tesla is by far the most valuable car company on earth. While Tesla still sells significantly less cars than its more established rivals, the more than six-fold increase in stock price in 2020 shows that investors have very high hopes for the future of the American electrical car company.
It can certainly be debated if the market cap of over 800 billion USD (as of January 2021) is a fair valuation or a bubble about to burst, but even the most ardent critics must agree that Tesla demonstrated impressive growth since it was founded in 2003.
To understand how we got here, one specific aspect of the company’s growth that we will take a closer look at is its internationalization strategy.
But first, so that we all start from the same page, a short introduction to the company and its history:
Tesla Inc, founded in 2003 in the US, focuses on producing electric cars, battery packs and, through the acquisition of the company SolarCity, solar panels. It was originally founded by Martin Eberhard and Marc Tarpenning, although today Ian Wright, Elon Musk and J.B. Straubel are also considered co-founders. Elon Musk is also the current CEO, first main investor, and main shareholder of Tesla with a stake of 21.7% as of December 2018.
The product strategy of Tesla is similar to many technology companies. They entered the market at a high price point with a low number of units produced and a product aimed at wealthy early adopters. In their case it was the Tesla Roadster, a fully electric sports car.
Over time, as research and development progresses, subsequent models are becoming cheaper and cheaper, while the company can increasingly benefit from economies of scale. The end goal is to provide affordable electric vehicles to the mass market.
Another characteristic of Tesla that is important to understand before delving into their internationalization strategy is their focus on vertical integration. While automotive companies typically outsource around 80% of their components to suppliers, Tesla is 80% vertically integrated. This combined with the fact that almost their entire production process happens in the same factory means that Tesla can benefit immensely from cost reductions and implement innovations much more quickly and effectively.
Tesla first expanded into international markets in 2009, one year after the launch of their first car, by opening a showroom in London in June 2009 and a store in Munich in September 2009. Today, Tesla has stores and galleries in 32 countries, as well as service centers in 35 countries.
Tesla employs a strategy of direct selling. All stores and service centers worldwide are directly owned by the company, which stands in stark contrast to the traditional franchise dealership model automotive companies normally use. The company states that they follow this approach to have a better service coverage, to inform customers better about the cars, and because existing franchise dealers have a conflict of interest between selling gasoline-powered and electric cars.
On an international level, the strategy of Tesla is a transnational one. This means they are present in a number of different countries and benefit from Tesla’s global structure but can adapt the product and sales approach to local requirements.
Tesla cars were originally only produced in their factory in Fremont, California. As previously mentioned, to achieve a high level of vertical integration and cost savings, almost all steps of the production process are located there.
At the end of 2012 Tesla opened its European distribution center in Tilburg in the Netherlands, where final assembly and distribution of vehicles for the European market takes place. However, production would still fully stay in the United States for a few years.
In 2016 Tesla started production of their powerpacks at Tesla Giga Nevada (Gigafactory 1). The next production plant, Tesla Giga New York (Gigafactory 2), started producing solar panels for their subsidiary SolarCity in 2017.
The first step into production in foreign countries happened in 2019, when Tesla started production at Tesla Giga Shanghai (Gigafactory 3). While for now only final assembly is done at the factory in Shanghai, by 2021 full production of cars will begin, especially for the growing Chinese market.
In order to better cover the European market, a fourth Gigafactory, Tesla Gigafactory Berlin-Brandenburg is currently being constructed in Grünheide, Germany. Production should start in late 2021. This way, Tesla is continuing its approach of retaining almost complete control over the production process, by having designated, fully owned factories in the two markets they currently have the strongest presence in (aside from the US), Europe and China.
In addition to the US, Europe and China Tesla is currently present in the Middle East.
In 2017, CEO Elon Musk announced that they would be expanding into the region, starting with Dubai in the United Arab Emirates. The reasoning behind this was that the UAE, despite its wealth coming mostly from oil, has announced it will heavily invest into green technologies in the next years.
Tesla’s international expansion is a fascinating business case, as seldomly a company manages to retain as much control over their operations and vertical integration while internationalizing effectively.
Through their transnational strategy, setting up stores and service centers in many countries and selling cars directly, as well as starting production in their different focus regions, Tesla has built itself into a global player in the automotive industry.
Their vertical integration has also allowed them to innovate quickly and weather crises effectively and will most likely continue to do so in the future.
Sources:
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LaMonica, M. (2009). Tesla Motors founders: Now there are five. [online] CNET. Available at: https://www.cnet.com/news/tesla-motors-founders-now-there-are-five/
Musk, E. (2006). The Secret Tesla Motors Master Plan (just between you and me). [online] Tesla. Available at: https://www.tesla.com/blog/secret-tesla-motors-master-plan-just-between-you-and-me?redirect=no
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