Analysis for Tesla's Expansion into Russia

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21st Feb 2019 International Business Reference this

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List of abbreviations:

  • MEDC’s – More Economically Developed Countries
  • NIC – Newly Industrialized Country
  • RUB – Ruble
  • PPP* – Public-Private Partnership
  • GDP – Gross Domestic Product
  • PPP – Purchasing Power Parity
  • FDI – Foreign Direct Investment
  • OECD – Organisation for Economic Co-operation and Development
  • EV – Electric Vehicle
  • WTO – World Trade Organization
  • IMF – International Monetary Fund
  • BRICS – emerging national economies: Brazil, Russia, India, China and South Africa.

Letter of Recomendation to the CEO

To:

Elon Musk

CEO of Tesla, Inc

Report on Russian Federation as a potential new market for Tesla, Inc.

There is no doubt that eco-friendly vehicles will dominate a global car market in the future. Telsa already officially presented in most MEDC countries and now is a time to think about Transition economies (including NICs).

The electric car market in Russia is still quite small but thanks to stabilising economy and sensible government policies there is a good potential to expand it. The ability to set up our dealership chain relatively quickly must be a consideration. Lack of charging facilities could be seen as a potential to insert and expand original “Tesla Supercharger” chain across the country and could lead to PPP* agreement between the government and business where Tesla could take part not only in the creation of those facilities but also in the further operations of it.

As our research shows, Russia has a huge domestic market which has a potential to expand and get more wealthy, what means potentially a big client base.

There are many state support programs such as: (First Car, Family Car, Private Business, and public city electric transport) with financing of 17.4bn RUB, subsidies given to Russian credit organisations for the reimbursement of a shortfall

in income from credits granted by Russian credit organisations in 2015–2016 to individuals for the purchase of cars (7.0bn RUB) and other similar programs. (PwC, 2017)

Conditions for investment right now are perfect if Tesla wants to have a dominant position in that market in upcoming years.

However, its important to consider all the risks and to understand that factors such as movements in the exchange rate of the ruble, access to auto loans, interest rates, amount and effectiveness of government support and expansion of transport infrastructure will predetermine demand more than anything else.

Introduction

This report will advise CEO of Tesla Inc on whether to expand their official stores into the Russian market.

Currently, Tesla has its official stores in 28 countries including most of a western Europe, UAE, China, Taiwan, Australia and other and some other  MEDC countries. (Tesla, 2017) The aim of this report is to understand and conclude how perspective Russian market can be for the expansion of Tesla. By using PEST, Porter’s 5 Forces model analysis and SWOT we were able to outline advantages and disadvantages of investing in the Russian market with a more in-depth analysis on the relevance of bargaining power of buyers, rivalry among existing companies, political and economic factors.

PEST Analysis

Russia is the biggest country in the world in terms of area (CIA, 2017a) and 9th in terms of population with over 142 million people living there. (CIA, 2017b) Despite all of its huge economic potential, in recent years Russia has suffered an economic recession due to sanctions which were implemented by the US government on March 6, 2014 after an annexation of Crimea by Russian military forces. (U.S. Department of state, 2017) However recently situation in Russian started to improve and now there is a positive trend in its economic growth which is expected to be at the level of 1.8% in 2019. (The World Bank, 2017)

(P)olitical Factors:

Russian was the largest country to emerge from collapsed Soviet Union in December 1991 (CIA, 2017c) and went through the 90s with two Chechen Wars from 11th of September 1994 to May of 2000 but even so, the active phase of the war was over there still was a high level of tension in the region and Russian “counter-terrorism operation” officially finished only in April 2009. (Al Jazeera media network, 2014) However, since then there were no major conflicts within a country and regions such a Chechnya seen much of an economic growth and government stability mainly due to massive cash injections from Russia’s federal government which were aimed at stabilizing  recently unstable territory. (Financial Times, 2015)

The Russian Federation today stands as one of the most powerful and influential  states in the world and  and it keeps diplomatic relations with 191 countries and has 144 embassies around the world.(ICD – academy for cultural diplomacy, 2014) Government type is known as “Semi-presidential federation” which is also called a “managed democracy” due to a high level of Government intervention. (CIA, 2017d)

Corruption Perceptions Index research from 2016 suggests that there is still a very high level of corruption in Russia with the score of 29/100 what ranks it 131st out of 176 countries studied.(Transparency International, 2016)

(E)conomic factors:

Russia is 6th country in the world in terms of GDP and PPP which is an indicator of a strong economy and prospective market. (World Bank, 2017). It’s economy mainly dependent on natural resources such as oil and gas as they make up a huge part of Russian federal budget revenue. For example, in 2016 this figure was equivalent to 36% which were made up of mineral extraction taxes and export customs duties on crude oil and gas. (The U.S. Energy Information Administration, 2017)

There is a positive trend in Russian economy today after a couple of years of recession which was caused by western sanctions and drop of oil prices. (World Bank 2017) Inflation significantly went down from 15.5% in 2015 to 7.1% in 2016 and is projected to reach the target level of 4% in 2018 and monetary policy is fairly balanced with the current inflation rate. These improvements lead to a better economic environment in general which caused a positive chain effect in a banking sector and improved terms of trade. (World Bank, 2017) An illustrative example of improving Economic environment in Russia is the fact that in 2015 the number of FDI project grew by 61% in comparison with a previous two years. (“Invest in Russia” Russian investment agency, 2016)

(S)ocial factors:

Russian society went through a huge transformation after a collapse of a Soviet regime and has turned from autocratic structure society to more democratic one. There are nearly 200 national ethnic groups represented in Russia’s 2010 census which makes it one of the most multicultural societies in the world. (Cia, 2017e)

Income inequality remains one of the big problems in Russian society. Gini index of Russia in 2015 was  37.7 which is much better than 46.1 back in 1996, however it is still very high in comparison with most western MEDC countries. (The World Bank, 2017).

Russian society has some strengths and weaknesses against OECD countries, however, in recent years there was a significant progress in bringing up a quality of live standards. The table below represents a comparison of average scores of OECDs and partner countries in some key social aspects.

(T)echnological Factors:

Russia is a country with a rich history of scientific and technological traditions.

The 1990s crisis caused by the collapse of the Soviet regime led to the significant reduction of the government support for science and technology.  Many Russian scientists went to the United States or Europe in the so-called “brain-drain” migration.

In the 2000s, on the wave of a new economic boom, the situation has started to improve, and the government launched a campaign which was aimed at innovation and modernisation. Current priorities for the Russias technological/scientific development include things such as energy efficiency, IT, nuclear energy and pharmaceuticals. (Sputnik, 2009) (Time, 2011)

Also, due to western sanctions, Russia started to focus on replacement of foreign technologies and raw materials by domestic ones. This has worked as a push factor towards more develompment and reserch in some key sectors such as IT and energy.

In September 2017 Russian President Vladimir Putin reminded of that strategy in meeting with Russian technology producers where he said that, in some spheres, state institutions could not work with companies running foreign software because that represented a risk for national cyber-security. (CNBC, 2017)

Porters Five Forces Analysis

Market defenition:

Our analysis focuses on the new passenger cars market in Russia, particularly on electric/hybrid segment. Passenger cars are defined as vehicles with at least four wheels, used for the transportation of passengers from point A to point B, and consisting maximum of eight seats not including driver’s seat. The Russian car market in 2016 decreased by 11% but it is expected to come back to moderate growth from the end of 2017 due to a positive trend in the Russian economy. (Automotive statistics ltd, 2017a)

Competition in the industry: 

The electric car market in Russia is relatively small in comparison with many MEDC countries, however, it is predicted to grow. There are 1,100 electric cars in Russia but most of them presented

only by a few dominant models: Nissan Leaf 508 units, Mitsubishi i-MiEV 271 units and Tesla Model-S 181 units. (Automotive statistics ltd, 2017b)

As we can see there is a high concentration ratio in the Electric car market in Russia as 89% of the cars are from top three firms in the market and Tesla already one of this three companies with a market share of 19% which is still quite a high number considering the fact that they don’t have their official dealership in Russia yet.

Potential of new entrants:

The decree which allows standard petrol stations to operate charges for electric cars was signed in autumn 2015 and took force on November 1, 2016. Russian charging infrastructure is expanding. PJSC “Russian Grids” already operates 130 charging stations across Russia and by the end of December 2017 this number expected to rise up to 2017 and up to 1000 by the end of 2018.(Eurasia network, 2017)

As there is a constant growth in a number of charging stations in Russia it could stimulate demand for electric cars and make them even more attractive therefore attract new entrants into the market.

There are not many potential companies who could offer an electric car of a similar quality as Tesla right now, however, there are many hybrid options out there which are potential rivals and could easily enter the market as entry barriers are getting lower and lower with more Government incentives being introduced and new charging stations being built.

Also, there are some big companies who are already looking into expanding into Russian market as well, such as Renault-Nissan coalition which is now the leader of the global EV market. (Eurasia network, 2017) (Bertel Schmitt, 2017) 

Power of suppliers:

In our report, we are looking for a potential expansion of Tesla dealership centres and not manufacturing sites. Therefore the power of suppliers is not important as cars and all needed materials for its maintenance will be imported by existing supply routes like in many other cases where Tesla operates.

Power of customers:

When considering an expansion into a Russian market, Tesla should have a clear understanding of what are the trends in consumer incomes, availability of car loans and perspectives of consumer confidence.

Within nine months of 2017, there were 66 Telsa cars sold in Russia which represents a 92% rise in comparison to previous year. (Russian automotive news, 2017a)  Demand is likely to rise further and Tesla’s potential client base could increase enormously due to an amendment to the tax code which is discussed in State Duma right now. The idea proposed is to exempt transport tax for electric vehicles from 2018 onwards. (Russian automotive news, 2017b)

Bargaining power of buyers would be low, as Tesla in Russia would be considered as “high-end” product particularly due to a low average income in Russia (37500RUB=650USD) comparing to most western countries. (Trading economics, 2017) Also, Tesla is one of the most advanced electro cars in the global market, therefore there are not many potential substitutions to it in that market segment what makes it quite a unique product and allows Telsa to have some power over its existing and potential client base in nearest future.

Threat of substitutes:

The main substitutes for electric cars, of course, would be considered standard petrol vehicles or a market of used cars. Especially used car segment seems to be the most promising one in upcoming years due to the average length of car ownership declining thanks to the recovery from the recent economic crisis. (Invest in Russia, 2017a)

Some may consider public transport such as trains, buses, public bicycles or even planes as an alternative to electric/petrol cars. However Michael E. Porter‟s definition of a substitute is: “A substitute performs the same or a similar function as an industry‟s product by a different means”. (Porter, 2008)  Therefore we can say that most of those won’t be considered as substitutes because they are unable to fulfil such key passenger car features such as representing social status, providing comfort, immediate availability, independence of destination choice and flexible route change, what makes their substituting force pretty low. Nevertheless, a used car segment is more or less capable of performing most of the functions listed above.

SWOT Analysis

To conclude PEST and Porter’s Five Forces research we will use a SWOT analysis:

(Invest in Russia , 2017b)

Content:

  • Porter M. (2008). The Five Competitive Forces That Shape Strategy. HarvardBusinessReview, January 2008, pp. 2-18.

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