Tesla's Position in the Chinese Market, Lecture notes of Chinese Culture

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Source:https://www.energyservicesexperts.com/2018/12/07/tesla-set-to-start-production-at-chin a-gigafactory-in-h2-2019/ Examination Group: S Group Members: Peter Skjoldager Delfing Nielsen (57896) Tobias Thuesen Pedersen (60535) Supervisor: Ole Bruun Character Count: 97.

Abstract

This project evaluates Tesla’s chances in the Chinese market in order to give a better understanding of foreign firms chances in general. It looks at how barriers to entry in the Chinese EV market is very high, as the Chinese government funnels money into domestic firms and award them contracts. However, Tesla have a significant advantage through proprietary technology. In addition, Tesla have low dependency on its suppliers as they work as original equipment manufacturer. This lower the supplier's bargaining power and ability to squeeze profit out. Beyond the suppliers and the barriers of entry, there is an emphasis on the substitute products and the rivals that present themselves on the Chinese market for Tesla. Here it looks onward, to assess the competitiveness between these firms and goes to show the strength of Tesla and their possible strengthening of their position. The bargaining power of the buyers on the contrary, goes to show Tesla having some effects on the buyers on the Chinese market, as they may choose them due to the high quality of their products, however the buyers present themselves as a strong unit with multiple options to cause Tesla to reconsider their position in the end. At the end a discussion regarding shortcoming of the analysis and other concerns addresses the trade war, which can have devastating effects on Tesla, and how the Chinese is well know to steal intellectual property from foreign firms.

Table of Content

• Abstract
• Table of Content
• Chapter 1 - Introduction
  • 1.1 - Problem Area
  • 1.2 - Problem Formulation
  • 1.3 - Research Question
  • 1.4 - Working Question
• Chapter 2 - Methodology
  • 2.1 - Philosophy
  • 2.2 - Methods
  • 2.3 - Data
  • 2.4 - Structure
  • 2.5 - Limitations
  • 2.6 - Literature Review
• Chapter 3 - Theoretical Framework
  • 3.1 - Choice of Theory
  • 3.2 - Structural Analysis of Industries
• Chapter 4 - Analysis
  • 4.1 - Barriers to Entry
    • 4.1.1 - Economies of Scale
    • 4.1.2 - Product Differentiation
    • 4.1.3 - Capital Requirements
    • 4.1.4 - Switching Costs
    • 4.1.5 - Access to Distribution Channels
    • 4.1.6 - Cost Disadvantages Independent of Scale
    • 4.1.7 - Government Policy
    • 4.1.8 - Sub-conclusion
  • 4.2 - Bargaining Power of Suppliers
    • 4.2.1 Sub-conclusion
  • 4.3 - Substitutes Products and Rivals
    • 4.3.1 Sub-conclusion
  • 4.4 - Bargaining Power of Buyers
    • 4.4.1 Sub-conclusion
• Chapter 5 - Discussion
• Conclusion
• References

Chapter 1 - Introduction

1.1 - Problem Area

One of the most consequential issues of the 21st century is the trajectory of the chinese economy. During the last decade the chinese economy has experienced a massive growth. The gross domestic product went from USD 1.211 trillion in 2000 to USD 12.238 trillion in 2017, with the annual growth skyrocketing in 2007 with 14.2% (The World Bank A&B 2018). One of the key concerns regarding the Chinese economy is its excessive use of state capitalism. The use of state capitalism results in China acting poorly in the global trading system. The Chinese government are funneling money into state owned firms and actively ensuring domestic firms have an advantage, thus putting foreign firms at a significantly disadvantage in the Chinese market. This belief that China is manipulating the market is not just a Western belief, countries in Asia agree. Chinese growth in the first quarter of 2019 may fall to 6%, which will be the lowest in three decades. Despite the increasing demand for reform and limiting the state’s power in the market by governments and businesses around the world, Xi Jinping, the Chinese President is reluctant to do so. On the contrary, since 2013 the Chinese government has tightened its grip (The Economist A 2019). In the United States (US), it is not only President Trump who is unhappy and frustrated about China’s economy. There is bipartisan support for reform and the business establishment agrees. “ China must protect the rights of foreign firms. Within China that means giving foreigners full control of subsidiaries, including over their technological secrets. Beyond its borders it means respecting intellectual property, which will be in China’s interest as its firms grow more sophisticated ” (ibid)

Issues like these are reasons why a lot of foreign firms are reluctant to establish a factory in China, especially highly technological firms. Tesla’s decision to open a factory in China, does raise some concerns. However, the Chinese market has huge potential, as it has grown into the largest market, almost four times the size of the US. In 2018 the sale of electric vehicles in China was 1.26 million, compared to 361.307 in the US (Statista A 2019), offering a significant potential as the Chinese market consisted of 56% of all electric vehicle sales globally in 2018 (EV-Volumes A 2019). The question then becomes if Tesla wants to enter the Chinese market, how would it compete as a foreign firm in China against already established firms and what entry barriers is there.

1.2 - Problem Formulation

The last few years China has become a massive market for electric vehicles, not only in public transportation, but also electric cars. It is a growing market and Tesla’s announcement that it is opening a factory in Shanghai, in order to have easier access to the market, raises some questions. In short, how many restrictions and regulations does Tesla have to obey, what kind of barriers are there and who will they compete against? These questions will help us understand if Tesla will be able to succeed in the Chinese market. More importantly it will give us an overall understanding of what foreign firms needs to be aware of when entering the Chinese market and their competing chances.

1.3 - Research Question

To what extent is it possible for Tesla to successfully enter the Chinese market and compete with Chinese firms?

1.4 - Working Question

Does Tesla have the ability to break the entry barriers of the Chinese market? How much bargaining power does suppliers have over Tesla as they open a factory in China?

Do the substitute products and rivals in China present a significant threat to Tesla, as they seek to establish a firmer grip on the EV market in China? How much bargaining power does buyers have over Tesla in the Chinese market?

Chapter 2 - Methodology

In this chapter, the methodological choices will be outlined and explained to ensure a deeper understanding of the research, and how we are analysing and the criteria set throughout the project. Thus, giving the reader a accurate account of how the research was performed and the purpose of the selected methodology. In addition, there will be reflections on alternative approaches, that could have been used, in order to critically assess our methodology in relation to other types. This will ensure a more valid and accurate research, and a better understanding of the chinese market, in order to evaluate Tesla’s chance of success.

2.1 - Philosophy

The philosophical standpoint of the authors of this research paper, is that of a critical realist viewpoint. The concept or philosophy of critical realism is not so much a specific philosophical position, but rather a gathering of positions that include ontology, causation, structure, persons and forms of explanation. The philosopher who “invented” or came upon the construction of critical realism, Roy Bhaskar, was the initial person to begin the movement of critical realism (Bhaskar, 1975). It is a position of philosophical reflexive stance, which is concerned with entertaining the readers with informed explanations of the social sciences. As for Roy Bhaskar, we receive the initial understanding of the authors position, philosophically. The Critical Realism “theory” has the objective of conducting investigations based on real and internal mechanisms, which will produce certain specific outcomes (Bhaskar, 1975). It is believed in Critical Realism, that causal relationships are insufficient nor necessary to be established, and as such, what critical realists say, is that science should be treated as an ongoing process, where we adapt and improve on the concepts used to understand the studies (Bhaskar, 1975). In addition to this, the realists, as well as Bhaskar, argue that there is an existence of the necessity for ontology. Critical Realism general pursuit is to understand and explain the phenomena found and experienced in the world, and not just the beliefs and experiences in the world itself. As such, Bhaskar argued, that to understand reality, there is a necessity needed in a structure for openness, differences and

stratification (Bhaskar, 1975). Therefore, we can say that the researchers viewpoint, during this particular research paper, is to go in depth with the given data and/or information given and gathered, with a critical view, to initially uncover and understand the meaning of the given documents, and not simply aim to understand the beliefs and understandings of the people whom have constructed the said documents and data in question.

2.2 - Methods

We have chosen to use a qualitative method to evaluate the selected segment of the Chinese market, in relation to Tesla’s decision to open a factory in China. The qualitative method chosen is document analysis as it will help us identify, analyse and evaluate key aspects in relation to concepts outlined in Michael E. Porter's framework for analysing competitiveness within a given industry, in the primary data gathered. This will be used to support our causality model, which is built using the theoretical framework. Causality will be used as it shows a snapshot of how the real world works. This will help us infer on the effects of the conditions in the Chinese, to give a more accurate prediction (Goertz and Mahoney 2012: 42). It has been chosen as it will provide us with the necessary information in order to assess and evaluate Tesla’s position in the Chinese market, but also add to the overall evaluation of foreign firms chances. In addition, statistics will be utilized during the analysis to illustrate certain aspects of the industry and its key components. This method has been selected as there are limited information and case-studies investigating equivalent aspects. This will ensure if some data is unavailable in certain areas, we can utilize the theory to argue how certain conditions could affect Tesla’s factory and their entry into the Chinese market. Case Study The research is a idiographic case study as it focuses to explain and infer Tesla’s ability to compete within the Chinese market. However, it can also be used in order to say something about the Chinese market competitiveness in relations to foreign firms. The case will be theory guided through a system of mechanisms supported by a well known theory in order to accurately

assess and infer on Tesla’s chances of success (Levy 2008: 4). This will provide us with a in-depth understanding of the challenges Tesla will face and a more accurate evaluate. Causality Model The causality model used in this research is derived from Michael E. Porter’s framework for analyzing competitiveness within an industry, as it highlights the most vital aspects in relations to successes within the given industry. This allows us to interpret the world according to the model and exclude minor aspects, as everything will have a minimal impact on the chances of success. We have chosen to combine two of the forces, as they are very interconnected. Using causality will allow us to predict on aspects, where there are not enough data, or lacking in it, to give a clear representation of the situation. Thus, the research can still give us an overall evaluation regardless. The model works as an equation, the higher all four aspects are, the higher a chance of success, as the relationship between them is symmetric. Meaning, as X increases, so is the likelihood of Y. It is a complex system consistent of multiple aspects. It is a series of connected aspects that all play a role in the final outcome (Beach and Pedersen 2016: 26, 35). In the research we have chosen to eliminate indirect factors as their impact is unpredictable and minor, in addition to factors that only have a minor impact on the chances of success. Thus, the model that will be used consists of four forces. As mentioned, these are connected to the theoretical framework chosen, which will be explained in details later in the following chapter. Since the model is built on a theory with a large N, it ensures that our model is accurate and can be used to infer. However, it is important to note that this is in general, there can be outliers that does not follow the theory (Goertz and Mahoney 2012: 47).

2.3 - Data

The data used in this research ranges from secondary data such as peer-reviewed articles and books to primary data such as government policy documents and statistics. In addition, statements from Tesla and academics. The research will start with secondary data, in order to identify certain key areas and discussions relevant to our analysis. This has been chosen as it provides a quick and in depth overview of the different key aspects, in relation to our theory. Thus, ensuring a more thorough selecting of aspects and a better outcome of the analysis. The secondary data will be data such as peer-reviewed articles and books written on the Chinese market in general and more specific to our case. However, non-peer-reviewed sources such as articles and statements will be used as well. This will help us select the most relevant primary data for the analysis. In order to avoid any biases when selecting key aspects from the secondary data, multiple articles will be read before the selection. This will ensure that a particular author’s bias is not present in the research carried out in this project. In addition, articles from the Economist and other such sources will be used to highlight the current issues with China’s

economy and how it is relevant to look at Tesla’s case to build a factory in China, in order to supply the Chinese market with their cars, to give an understanding of the broader issues of foreign firms in China. The primary data will be government policy documents and financial statements from individual firms, as they will provide an insight into what regulations, restrictions and obstacles Tesla will face in the Chinese market. Thus highlighting the difference between foreign companies and a Chinese. Statistics will also be utilized as it will give an illustrative aspect to the analysis, in order for the reader to understand the magnitude and implications of key aspects (e.g. growth of the Chinese auto and electric vehicle market, Tesla’s and its competitor’s growth, and Tesla’s current export to China in relation to previous years). The data which will be selected will have to meet a certain standard to ensure validity to our research. The first criteria and the most important one, the data needs to come from an established and reliable source. However, data from the Chinese government can be used with caution, as an extra critical mindset will be used to ensure a reliable analysis. The research would have benefited from an interview with Tesla, as it would have provided valuable information. However, this was not possible.

2.4 - Structure

The structure of this project is chosen to give the reader a better overview of the project and ensure a more in-depth understanding of the research. We have made it easy to find the different aspects of the analysis as well as methodology. Chapter 1 will introduce the problem area, problem formulation, research questions and working questions. The chapter will outline why this specific topic is relevant and what its importance is. Ensuring that the reader understands the relevance and importance of the problem is crucial in order to understand our analysis and choice of theory. This is why the introduction gives an account of the growth of China and its economy, more specifically the auto industry, and Tesla’s

export to China and its growth. In addition, it formulates the problem short and concret to ensure a clear and explicit understand of the research. Chapter 2 will outline the methodology used to carry out the research. It will be outlined in subsections to ensure a easy overview. In addition, each choice made during the research will be outlined as well as some alternative approaches. This will show that we have knowledge of the different approaches and have critically selected ours. Chapter 3 will introduce and outline the theory and the key concepts from it, as it is important to have an in-depth understanding of it before reading the analysis. It will also highlight why this theory have been chosen, compared to other theories within the same field, and introduce the author of the theory selected. Chapter 4 is the analysis. It consists of subsections that have been identified from the theory. This has been chosen in order to structure the research and allow for a better overview of the different areas included in the analysis. At the end of each section there will be a sub-conclusion to sum up the analysis from the current section. This will provide the reader with an easy access to a summary of each section, instead of reading an entire section. Chapter 5 will discuss the findings in the analysis and to what extend Tesla’s decision to open a factory in China is a good choice. It will use the different aspects of the analysis in order to highlight shortcomings within the analysis and provide a theoretical discussion to them. This will provide the reader with a theoretical understanding of the area, thus still contributing to the conclusion and highlight aspects that was not in the analysis. Chapter 6 will conclude the research. It will sum up all the findings in the analysis and the discussion in order to give a valid and accurate assessment of Tesla’s decision to open a factory in China and their chances of success. In addition, the findings will be used to evaluate foreign firms chances in general in the Chinese market.

At the end of the project, there will be a list of all the sources used. It will be grouped in the different kind of sources - articles, books, PDFs, and websites - and alphabetical order. This will provide a better overview of the different sources.

2.5 - Limitations

In the situation of our research paper, revolving around Tesla and their interest as well as their operation to construct a factory in Shanghai, more specifically their Free Trade Zone, there are several limitations, which has shaped our project. When speaking of limitations, it pertains to any sort of restriction that has limited or constrained the project in any way. In this particular case there exist three significant project constraints. These three are schedule, scope and cost. The first mentioned of the limitations, the scope, involves our goals and tasks which define the boundaries of our research. More particularly, the research as well as the working questions have forced us to be within certain boundaries, researching specific areas within China, including their governmental and local policies, mainly focusing on their trade policies. In addition to this, we are focused on Tesla, where we are mainly aimed at their Chinese section, however trying to look at their policies, investments, statistics, competition and their marketing strategies. As a result, this has limited our research in the way that we do not research or attempt to understand the entire vehicle industry, nor are we attempting to pry open and investigate the entirety of the Chinese governmental system or Teslas entire operation. We are simply aimed at a fraction of what operates within these boundaries, mainly Tesla and their specific operation in Shanghai, coupled with the Chinese governmental policies revolving around trade. As a result we have chosen to exclude certain analytical tools, such as the SWOT analysis, which would of given us the opportunity to understand the strength, weaknesses, opportunities and threats of all the companies involved. This has in the end resulted in the narrowing of the research, to specific parts of Tesla, the Shanghai Free Trade Zone and the Chinese government. The second limitation found in this research pertains to the schedule. Scheduling has been a significant factor for the researchers, as the research itself has been granted with a four month time limit before it had to be delivered. This has automatically constrained the research, as within such a timeframe,

the researchers can only do and research so much in a given timeframe. Additionally, the schedule has constrained the time given, as it spans from a period where it intertwines itself with both examinations and lectures required to further understand the research itself, or simply it has importance for the researchers due to their educational limits and aspirations. As a result of this, the time constraints that has shown itself to us, has limited us due to us having to attend lectures granting us new tools for our research, not to mention the limit to how much a single individual can gather of data and process within the specific time period. Of course, this does not go to mention, that the researchers have to manage the time given in a way that allows them to not only fulfill the requirements of the research but to at the least grant a satisfactory research paper with knowledge of a new subject. As such, we as researchers may say that, the time allowed to construct and process such a significant research has been limited by time and the events within that time, to the point given, that the time left within these four months has been shortened. However, if we had the free reigns and the tools before the beginning of said research, the project may have been given more time in the sense that less lectures or examinations and such would have constricted the time given. Of course, us, the researchers have to manage the time given to us, which is done through project management, by setting goals, deadlines and using the time together, working on several days to create a satisfactory result. The final limitation found is the cost, which can also refer to resources. In the case of this research paper, this is the amount of research and data that can be processed within the time limit, as well as the limit of resources available, may it be on the world wide web, in a library, articles or even news papers or interviews. All these aforementioned data points have a limit of the amount that can be found within a specific field. As such, this research paper has been limited as to what we have been able to conjure up from the given available data, in the attempt to develop and complete the paper. Additionally, we as researchers have a limited amount of assets, financially speaking, as such we have been limited, unable to go to China to gather data first hand, from their governmental policies or even go directly to Tesla in United States or China to conduct research and/or interviews. As such the culminated limitations goes to show that both the limited time as well as the resources to spend in such time, has resulted in us as a researcher, have to focus on certain areas within the paper.

2.6 - Literature Review

There are plenty of research of the Chinese EV industry and policies surrounding it. However, when it comes to Tesla, there are very limited information. Thus, most literature will be regarding the industry environment of the Chinese EV industry and some on Tesla. Hao (et al. 2014) have researched the policies regarding subsidies for the consumer and how this will affect the future sale of EVs in China. The Chinese government have significantly increased its subsidies from 2005-2012 (ibid: 722-4). They have increased the subsidies and the scope of them significantly. However, they are currently trying to scale them back as the industry is booming and trying to phase them out entirely (ibid: 724). In addition, all projects have been awarded to Chinese EV manufacturers. In addition, there have been an increase in government control on the issuing of license plates, which is needed to drive. Some cities are auctioning them of, others are awarding them to random individuals, just like a lottery. This does present a dilemma for producers as it makes it harder to obtain a license plate and being able to drive a new vehicle (Hao et al. 2011: 1017-9). On another note, there are some research showing that exporting from Europe, is a reliable practice as China is becoming more political and economical stable. In addition, more Chinese firms have started to invest in Europe as well (Lin and Liu 2018). This includes a more competitive price from Europe, in comparison to the US. Furthermore, China have an increased preference for compact EV SUVs and relatively cheap high end cars, which are usually not produced by Chinese firms (ibid: 8). When we are talking about the rapidly development of the EV industry, one of the vital components are the original equipment manufacturer, as they are the backbone of the industry (Rong et al 2017: 234). As a result, the Chinese government have encouraged joint ventures between domestic and foreign firms to increase the development of R&D in domestic firms.

However, policies surrounding these joint ventures have been rather unfavorable for foreign firms (ibid: 238). In terms of Tesla, when we are talking R&D and joint ventures, they are one of the frontier. They are considered one of the backbones, as they are considered a original equipment manufacture and have had multiple joint venture with other firms. However, none of them Chinese as a result of unfavorable terms (Edward et al. 2015). Tesla is a firm that have heavily invested in R&D and export some of their in-house produced parts to multiple other firms around the globe. This includes joint ventures with well known car manufacturers globally (ibid and Cheong 2016: 1-3). China is already Tesla’s number two sales destination, even though there was a 15% import tax on their cars. The opening of the new factory in Shanghai, does produce an opportunity for Tesla to avoid the new heavy 25% import tariff and any further complications, as a result of the Trump-China tariff war (Industry Newswatch 2018). Jiang and Lu (2018) suggest that Tesla is not necessarily a competitor to Chinese EV firms as their cars advertise to different consumer groups. In addition, they do not believe Tesla wants to dominate the EV industry as such, but wanna share in its potential (ibid: 494-5).

Chapter 3 - Theoretical Framework

Evaluating a potential scenario, such as Tesla’s potential position in the Chinese market, requires a solid theory that can guide and hypothesize if data is unavailable. This is one of the reasons we have chosen to utilize Michael E. Porter’s theory on structural analysis of industries. It will provide us with the necessary concepts to identify and evaluate key factors in a hypothetical scenario and an in-depth analysis of Tesla’s chances in the Chinese market. In deciding what theory to use, an important aspect was the hypothetical part and the factory is not build. This required us to utilize a theory that would analyze certain aspects of the market. A theory such as SWOT, assumes that the firm is already present, evaluates its current position, and does not take into account government policies and entry barriers. It is a simple evaluation of the company. A theory that could have been utilized is PESTEL (political, economic, social, legal, environmental, technological). Both looks at the competitive standing of a company in the market. However, in the end, we decided to utilize Porter’s five forces as we believe it will highlight the different key aspects in our case.

3.1 - Choice of Theory

The theory used in this research is initially from 1980. However, it has been developed and improved since then. The core concepts have not been altered since. In a article in the Harvard Business Review from 2008, Porter uses the exact same framework to explain how they can help shape strategies to successfully compete within an industry (Porter 2008). The core concepts (the five forces) have not changed, despite being developed in 1980. In addition, his framework has been considered to be one of the 20th century most influential works. Michael E. Porter Porter is an American known for his theories on economy and business strategy. He attended Princeton for his undergrad in mechanical engineering, Harvard Business School for his graduate in Business Administration and a PhD in Business Economics. He graduated top of his class

every time. Already in college he started working with his competitive forces. He have published 18 books including numerous articles. In addition, he is one of the founders of Monitor Deloitte in 1983. It is a consulting firm that specializes in providing corporate and business unit strategy, demand analytics, organization and leadership, economic development and security, marketing, pricing and profitability to governments and businesses. He has published a total of 24 books and articles. Most of these works are research within competitiveness strategy, however, he have also published research within US political competitiveness, domestic health care, and global health care. His stance is very liberal as his later works shows an clear notion that businesses need to create societal value, and not only profit (Denning 2012).

3.2 - Structural Analysis of Industries

In this section the theory will be explained in a structured way, introducing and explaining the concepts individually, to ensure an in-depth understanding of the overall theory. Barriers to Entry There are six crucial sources when talking about barriers to entry. Each describes a specific aspect that plays a major role in determining whether a business will be profitable in a given market. The first is economies of scale and refers to the unit cost of production in terms of cost disadvantages or advantages. In simple terms, it is the “ unit cost of a product as the absolute volume per period increases ” (Porter 1980: 7). Smaller companies that only focus on one market will usually be at a disadvantage compared to firms that have joint costs. An example of this is air passengers services: A plane can only accommodate a limited amount of people, and the remaining space can be used for a different purpose, freighting. This would produce a cost advantage as the expensive cost of flying is shared among the two products. There are more than one way to achieve a cost advantage such as shared operations or functions, thus producing a

product that can be used for multiple purposes (e.g. small electric engines for fans, cooling systems). This is also known as a multibusiness firm as it produces one product with multiple usages. The last aspect is the intangible assets, meaning the sharing of brand names or know-how (ibid: 8-9). One or all of the above mentioned methods can be used to create economies of scale and produce a cost advantage in a market. The second is product differentiation and refers to the advertising, customer service, and product differences. This is connected to brand identity and customer loyalty, and results in entrants needing to spend heavily in order to overcome existing loyalties to rival brands. The process of building customer loyalty takes time and a huge amount of capital, but once it is established, it provides the firm with an advantage (ibid: 9). The importance of this aspect when entering a market, depends heavily on the nature of it. The third is capital requirements and refers to the capital needed in order to compete. This is usually associated with unrecoverable up-front advertisements, research and development, but also the capital for production facilities, inventory and start-up losses (ibid: 9-10). The fourth is switching cost and refers to the one time cost for the buyer, from switching from one supplier to another. This includes the training of new employees, cost of new equipment, cost and time associated with testing and qualifying a new sources (ibid: 10). The fourth is access to distribution channels and refers to the entrant’s need to secure distribution of its products. If there already is an established distribution channel among existing firms, the entrant needs to persuade the channel to accept its products through various methods such as price breaks and cooperative advertisements. This effort will reduce the entrant’s profitability (ibid: 10).

The fifth is cost disadvantages independent of scale and refers to the advantages not replicable by potential entrants. This includes proprietary product technology, favorable access to raw materials, favorable location, government subsidies, and experience (ibid: 11-12). The sixth is government policy and refers to the most important entry barrier. It is policies set by the government to limit or restrict industries. In addition to having control over licensing requirements, access to raw materials, and regulations in industries (ibid:13). Bargaining Power of Suppliers Suppliers have bargaining power over firms in the sense that they can threaten to raise prices or reduce the quality of the goods purchased. If a supplier is powerful enough, it is possible to squeeze the profitability out of an industry. The characteristics of a powerful supplier is few dominant companies and a concentrated industry, there are no substitute products, the industry is not an important customer, the product is crucial in the buyers output, products are differentiated, and they pose a threat in terms of forward integration (ibid: 27-28). Substitutes Products Substitute products or firms that bring a new product to market, which will compete with existing products, will eventually cause the existing products to be limited with potential returns, as it places a ceiling on the prices, firms in the industry can profitably charge. Additionally, they also reduce the bonanza (sudden increase in profits) an industry can reap in boom times. When looking at what a substitute product may be, it is important to understand that it is a matter of searching for products that can perform the same function or service as the product delivered by your own company (ibid: 23) In the case of Tesla these may be other car, motor cyclist and other transportation manufacturers. More specifically other electric vehicle manufacturers. Generally, the impact shown by substitute products can be summarized through the industry’s overall elasticity of demand.

Rivalry Among Existing Firms Rivals as a definition is a broad term, as it encompasses all sorts of competition. Generally the rivalry among existing competitors boil down to them utilizing tactics such as price competition. Additionally, using advertisement, not only to show their own product but at times rack down upon their competition (ibid: 17). An example of competition between two existing competitors can be the rivalry between Coca Cola and Pepsi, as they have made numerous advertisements to not only get themselves onto markets but to also show that they are better than the other (https://www.youtube.com/watch?v=DijFob8vxgI). In rivalries it does not only pertain to advertisement, but it also shows that rivalries in general, occur whenever a competitor or a new business on the market, experiences the pressure or finds the opportunities to improve their position or to take some sort of advantage against their competition. In addition, to companies actions, it also causes their competitors to retaliate in different types of ways of simply counter the move that the company is doing (ibid: 17). These sort of retaliations or moves that companies may do, depends on the origin of the firm and what comprises it. An example of such events maybe when law firms attempt to poach the competitions’ clients, causing the opposition to retaliate either by filing lawsuits, attempting to keep their clients, or to retaliate through the attempt to take the other firms clients in return. In addition, issues can occur in that business, through separate businesses. What I mean is, that if a company is being sued by a law firm such as a prison, then the companies who constructed the firm or provides the workers for the prison may have issues with these lawsuits, as it would give them a negative reputation. Essentially, when looking at existing rivalries between companies there are many intricate ways of seeing them, and we will be looking at equally balanced competitors, industry growth, high fixed and storage costs, lack of differentiation and switching costs, capacity augmented in large increments and diverse competitors. Numerous or equally balanced competitors When it comes to the competition between balanced competitors or when there are numerous companies, these competitors generally have the habit of attempting to make moves and decisions that will in some way impact their competition, and do so without being noticed. Of

course, in a situation where the companies are somewhat equally balanced in terms of resources and manpower, it may cause some severe instabilities, if a single company gains a distinct advantage above the rest of the competition, which may eventually cause the competition to retaliate in different and dangerous ways, or they will eventually “die out” as the competition from the company with the advantage may be too difficult to handle (ibid: 18). In addition to this, in a situation where a single or a select few companies control the market due to the sheer size and their competitive strength, such as in the situation of Aerospace Engineering (Boeing and Airbus), it is highly known that they dominate the market, and not only that, it is considered highly difficult if not impossible to compete with these two firms, as they control the market entirely (ibid: 18). Slow Industry Growth In a situation where the growth is slow in an industry, it causes the firms to turn the competition into a game for market shares, as it is one of the most effective and profitable ways to create expansion in such a situation (ibid: 18). In such a situation, a company can seize assets, market shares and more through different means, or some companies can be authorized to be allowed to have a merger, resulting in two companies becoming one, effectively increasing their strength, size and competitive power. High fixed or storage cost The high fixed cost also related to storage cost, causes a generally strong pressure for a company to fill capacity, which in turn will create escalating price cutting, when there are an excess amount of available space. Many companies suffer from such situations, especially large industries involving, aluminium, paper, steel etc. Generally, we can see that high fixed cost is one where the products have a high cost for storage. In a situation like this companies, may be tempted to either hide or shade prices to insure sales, or if cost is simply too high, they may liquidate or sell off products. An example can be H&M, a clothing company, whom have been known to sell or send their clothing to factories to be burned to produce heat, electricity and more (ibid: 18).

Lack of Differentiation or switching costs This is the stage, where the product in question has turned into a commodity, and generally the buyer is choosing his or her products through pricing and service, which causes severe competition. This type of competition is fierce, however, through product differentiation, you may create a layer of protection towards competitors. This is of course due to preference, loyalty and more from buyers (ibid: 19). Of course, examples of heavy competition and differentiation can he shown through the clothing industry, such as the competition between Nike, Adidas, Hummel and more, whom create products that may be very similar in looks, with different brands on them, it is more of a way of showing preference and loyalty through these companies. Capacity Augmented in Large Increments Capacity is generally a risk, in the way, that it adds to and can be disruptive to the supply and demand in an industry. As such, in a situation like this, there is a risk of bunching capacity additions, especially if the industry faces recurring periods of exceeding capacity and pricing, especially in manufacturing. Diverse Competitors Competitors have a very diverse and substantially different way of strategizing on the market, they even have different personalities, relationships between partners and unique goals specific to their company and the different sectors. As such this gives companies a high level of difficulty in reading and understanding one another's intentions. Additionally, it is important to mention that some decisions made by one company may be wrong for another, generally depending on the type of company, size, goals etc.. If we look at foreign companies, they bring a diverse set of values, goals and norms with them to the new market. The intentions, goals and perspective also depends on the type and size of company, as if it is a owner-operators company of a small manufacturing company, it may be satisfied with mediocre rates of return.

Bargaining Power of Buyers The bargaining power of buyers, is shown through their competitiveness in forcing the prices down, demanding higher quality and more services, and generally playing competitors against one another. This is generally at the expense of industry profitability. These buyer groups depend on several characteristics which range from market situation to the relative importance of its purchases. The factors which make a buyer group powerful in front of the industries are as follows: Purchasing in concentrated or large volumes In this case, the buyers are aiming for buying a large portion of sales, this eventually raises the importance of the buyer’s business in results. Large volumes buyers are heavy hitters in the industry, as they aim for fixed costs and they are strongly competitive towards the industry, as the different businesses would want such a buyer on their list. The products they purchase, represent a fraction of the buyer’s cost or purchases Here the buyers aim to shop for a favorable price, and general purchase selectively. Generally buyers are less sensitive if they purchase products which hold a fraction of the buyer’s cost. Standard or undifferentiated products Even though buyers can find alternative products, they may force companies to compete for the buyer’s by playing them against one another. Switching costs The buyers power is generally enhanced if the seller faces switching costs, causing their products to fluctuate in pricing.