Analysis for Tesla’s Expansion into Russia

4056 words (16 pages) Essay in International Business

21/02/19

Disclaimer: This work has been submitted by a student. This is not an example of the work
produced by our Essay Writing Service. You can view samples of our professional work
here.

Any opinions, findings, conclusions or recommendations expressed in this material are

those of the authors and do not necessarily reflect the views of UK Essays.

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)

Get help with your essay today, from our professional essay writers!

Qualified writers in the subject of international business are ready and waiting to help you
with your studies.

 Get help with your essay

 View professionally written samples

(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.

Get help with your essay today, from our professional essay writers!

Qualified writers in the subject of international business are ready and waiting to help you
with your studies.

 Get help with your essay

 View professionally written samples

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:
 Al jazeera media network. 2014. Chechnya, Russia and 20 years of
conflict. [Online]. Available from:
http://www.aljazeera.com/indepth/features/2014/12/chechnya-russia-20-years-
conflict-2014121161310580523.html [10 November 2017].

 Automotive statistics ltd. 2017a. The Russian car market in 2016 decreased by
11%. [Online]. Available from: https://eng.autostat.ru/news/view/13836/ [21
November 2017].

 Automotive statistics ltd. 2017b . The number of electric vehicles has exceeded
1000 units in Russia. [Online].Available from:
http://eng.autostat.ru/news/view/14483/ [21 November 2017].

 Bertel schmitt. 2017. Who Is The World’s Leading EV Maker? It’s Not Tesla. 01
MAY 2017. Forbes. [Online]. Available from:
https://www.forbes.com/sites/bertelschmitt/2017/05/01/who-is-the-worlds-leading-
ev-marker-no-its-not-tesla/ [23 November 2017].

 CIA. 2017a. The World Factbook (geography). [ONLINE] Available

from: https://www.cia.gov/library/publications/the-world-
factbook/fields/2113.html#rs. [Accessed 9 November 2017].

 CIA. 2017b. The World Factbook (population). [ONLINE] Available

from: https://www.cia.gov/library/publications/the-world-
factbook/fields/2119.html#rs. [Accessed 9 November 2017].

 CIA. 2017c. The World Bank in Russia (Background). [Online]. Available from:
https://www.cia.gov/library/publications/the-world-factbook/fields/2028.html#rs
[10 November 2017].

 CIA . 2017d. The World Bank in Russia (Government Type). [Online]. Available
from: https://www.cia.gov/library/publications/the-world-
factbook/fields/2128.html#rs [10 November 2017].

 CIA. 2017e. The World Bank in Russia (Ethnic groups). [Online]. Available from:
https://www.cia.gov/library/publications/the-world-factbook/fields/2075.html#rs
[11 November 2017].

 CNBC. 2017.Putin tells Russia’s tech sector: Ditch foreign software or lose out
[Online]. Available from: https://www.cnbc.com/2017/09/09/putin-tells-russias-
tech-sector-ditch-foreign-software-or-lose-out.html [17 November 2017].

 Eurasia network. 2017 . 7 things to know about electric cars in

Russia. [Online]. Available from: https://eurasianetwork.eu/2017/08/19/7-things-to-
know-about-electric-cars-in-russia/ [21 November 2017].
 Financial times. 2015. Chechnya’s economic recovery tested by
slowdown. [Online]. Available from: https://www.ft.com/content/8233d33c-ecd0-
11e4-a81a-00144feab7de [10 November 2017].

 ICD – academy for cultural diplomacy. 2014 . Summit

Overview. [Online]. Available from:
http://www.culturaldiplomacy.org/academy/index.php?cccs-20131-moscow [10
November 2017].

 Invest in Russia . 2017a. Overview of the Russian and CIS automotive

industry. [Online]. Available from:
http://investinrussia.com/data/files/sectors/Overview-of-the-Russian-and-CIS.pdf
[27 November 2017].

 Invest in Russia . 2017b. Key Facts. [Online]. Available from:

http://investinrussia.com/key-facts [28 November 2017].

 “Invest In Russia” – Russian investment agency. 2016. EUROPEAN

ATTRACTIVENESS SURVEY 2016 RUSSIA FINDINGS. [Online]. . Available from:
https://www.investment-in-
russia.com/uploads/European_attractiveness_survey_Eng.pdf [11 November 2017]

 Organisation for economic co-operation and development (oecd). 2017. How’s Life
in the Russian Federation?. [Online]. Available from:
https://www.oecd.org/statistics/Better-Life-Initiative-country-note-Russian-
Federation.pdf [17 November 2017].

 Porter M. (2008). The Five Competitive Forces That Shape Strategy.

HarvardBusinessReview, January 2008, pp. 2-18.

 PwC. 2017. In 2017, the extention of the traditional state support programmes and
introduction of new more target-oriented measures is planned. [Online]. Available
from: https://www.pwc.ru/en/automotive/publications/assets/auto-report-
eng.pdf [28 November 2017].

 Russian automotive news. 2017a. Tesla electric cars sales have grown by 92% in
Russia . [Online]. Available from: http://rusautonews.com/2017/10/31/tesla-
electric-cars-sales-have-grown-by-92-in-russia/ [23 November 2017].

 Russian automotive news. 2017b. Russian government has proposed transport tax
exemption for electric vehicles. [Online]. Available from:
http://rusautonews.com/2017/11/15/russian-government-has-proposed-transport-
tax-exemption-for-electric-vehicles/ [23 November 2017].
 Sputnik. 2009. Medvedev outlines priorities for Russian economy’s modernization.
[Online] Available from: https://sputniknews.com/russia/20091011156428675/ [17
November 2017].

 Tesla. 2017. Find us. [ONLINE] Available

from: https://www.tesla.com/en_EU/findus/list. [Accessed 9 November 2017].

 The U.S. Energy Information Administration. 2017. Russia. [Online]. Available

from: https://www.eia.gov/beta/international/analysis.cfm?iso=RUS&src=home-b2
[11 November 2017].

 The World Bank. 2017. Country Context. [Online]. Available from:

http://www.worldbank.org/en/country/russia/overview#1 [11 November 2017].

 The World bank. 2017. GDP, PPP (current international $) . [Online]. Available
from:
https://data.worldbank.org/indicator/NY.GDP.MKTP.PP.CD?locations=RU [11
November 2017].

 The World Bank . 2017. Poverty & Equity Data Portal

(Russia). [Online]. Available from:
http://povertydata.worldbank.org/poverty/country/RUS [11 November 2017].

 The World Bank. 2017. Recent Economic Developments. [Online]. Available from:
http://www.worldbank.org/en/country/russia/overview#3 [11 November 2017].

 The World Bank. 2017. The World Bank in Russia (Overview). [Online]. Available
from: http://www.worldbank.org/en/country/russia/overview#1 [10 November
2017].

 Time. 2011. Russia Looking to Reverse Brain Drain of Young Scientists.

[Online].Available
from: http://content.time.com/time/world/article/0,8599,2099861,00.html [17
November 2017]. https://www.kommersant.ru/doc/1816338 Russian version.

 Trading economics. 2017. Russia Average Monthly Wages. [Online]. Available

from: https://tradingeconomics.com/russia/wages [23 November 2017].

 Transparency international . 2016. Russia. [Online]. Available from:

https://www.transparency.org/country/RUS [10 November 2017].

 U.S. department of state . 2017. Ukraine and Russia Sanctions. [Online]. Available
from: https://www.state.gov/e/eb/tfs/spi/ukrainerussia/ [Accessed 9 November
2017].