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Tesla Motors Five Forces Analysis

Tesla is the largest automobile company globally based on market capitalization.

However, Tesla is not just any automobile company. It is more of a technology company.

Based in the United States, Tesla is the maker of electric vehicles with a global presence and sells its automobiles and energy products in several leading markets including the US, China and others.

Its market cap has crossed $1 Trillion which puts it in the big league with the likes of Amazon, Google, Apple, Microsoft and Facebook.

Tesla’s growth has been driven mainly by the growing demand for electric cars worldwide and its focus on innovation. 

Led by Elon Musk, the company has experienced sharp growth in its market value in recent years and has finally been able to generate positive income in the fiscal year 2020.

It had been experiencing financial losses consistently for the past several years since its foundation.

Tesla’s mission is to accelerate the world’s transition to sustainable energy.

Like most other automobile businesses globally, Tesla’s business was also affected by the global pandemic.

During the first half of 2020, the company temporarily suspended production at some of its manufacturing facilities. 

This is a porter’s five forces analysis of Tesla Motors Inc. 

These five forces are a part of every industry and business.

They affect competitiveness, market position and profitability of businesses and therefore require attention.

Managers use the five forces tool to analyze the profitability of the industry and to improve the firm’s competitive edge.

Read how these five forces affect the competitive position and profitability of Tesla Motors. 

Bargaining Power of Suppliers:-

Suppliers are an important force in the automobile industry and it was proven during the pandemic.

The pandemic disrupted supply chains worldwide causing a crisis like situation, where all the major automobile manufacturers had to halt production due to unavailability of raw materials. 

Mostly the role of suppliers in the industry has remained limited to supplying raw materials and parts for automobile businesses.

The suppliers are mostly smaller businesses apart from a few large businesses.

They are scattered globally and companies like Tesla generally do not depend on a single supplier for any particular raw material.

In the case of Tesla, the bargaining power of suppliers is low.

It is because Tesla does not depend heavily on suppliers for raw materials.

One of Tesla’s leading suppliers is Panasonic. Tesla partnered with Panasonic in 2014 to build batteries at Gigafactory.

As a leading supplier, Panasonic holds significant bargaining power, but the other smaller suppliers do not have any significant bargaining strength.

The overall bargaining power of Tesla suppliers is low to moderate.

Bargaining power of Buyers:-

The bargaining power of buyers has relatively increased in the twenty-first century.

It is because of several factors including increasing competition in the automobile sector, growing price competition, increased demand for automobiles, growth in marketing channels and other factors.

However, the key factor that has led to growth in the bargaining power of buyers is the increase in the number of substitutes in the market.

Every buyer has several options before him when it comes to selecting a car.

Moreover, for several buyers it is a large purchase that they make after careful consideration and lots of research.

In order to draw buyers towards their brand, companies invest in product quality, innovation, marketing, and customer experience.

Tesla has focused on performance, customer experience and passenger safety among the other factors that drive superior loyalty and faster expansion. 

Apart from it, the unique marketing strategy of the company and its innovative brand image have also helped the company achieve higher customer loyalty.

Despite these factors, customers have significant bargaining strength.

Overall, their bargaining power is moderate as the company’s excellent image, marketing and innovative products moderate the bargaining power of the customers.

Threat of new entrants:-

The threat of new entrants in the automobile industry is very low due to the high entry barriers.

There are several major barriers to entry in the automobile industry.

It is why apart from Tesla no other new car brand has been able to expand its market globally.

Despite being the youngest, Tesla has grown into the biggest car company worldwide driven by its focus on innovation and product quality.

Tesla is a very different company when compared to any rival automobile brand.

The threat of new entrants in the automobile industry is minimized due to several factors including the very high financial barriers which make entry difficult for new players.

However, the financial constraints are not the only constraints in the industry.

Even a big brand like Apple with enough financial strength will need to have the support of an existing auto brand, if it wants to make cars.

Several times new players may fail due to the lack of know-how and qualified human resources.

Apart from a heavy investment in acquiring the required infrastructure, marketing and human resources, success is not guaranteed for a new player because of the heavy competition.

The incumbent players invest heavily in marketing, maintaining customer loyalty and market share, which makes it difficult for the new players to grow market share fast or to lure customers away from the incumbent players.

Tesla faces a minimum threat from new entrants.

Its brand image and focus on innovation have also helped it minimize the threat from any new player.

Overall, the level of threat posed by new entrants is absolutely minimum or negligible for Tesla Motors Inc.

Threat of substitute products:-

The threat of substitute products in the automobile industry arises from the competitors and other sources of transportation including ride sharing services, buses, trains, and flight services.

The demand for cars has grown in the 21st century because of the higher need for mobility among people worldwide.

Growing urbanization and economic development in various parts of the world has led to a growth in demand for automobiles.

These factors have to some extent moderated the threat from substitute products.

Tesla is a well known automobile company with a strong global footprint.

Apart from that, its strong brand image, focus on innovation, marketing and customer experience have also helped it moderate the threat from substitute products. There is intense competition in the automobile industry.

However, Tesla enjoys higher demand due to its differentiated business model and products. 

Level of rivalry in the industry:-

The level of rivalry in the auto industry is very high.

There are many brands operating in the automobile industry.

These are global brands with a strong market position and global presence.

The intensity of competitive rivalry in the automobile industry has increased due to technological innovation and the proliferation of digital technology.

Companies are investing a lot in research and development to bring vehicles offering superior performance, passenger safety, and an overall improved customer experience.

While the overall level of competitive rivalry in the automobile industry is very high, companies invest in R&D, marketing, and customer engagement to maintain their market share and grow customer loyalty.

Tesla invested around $1.5 billion in research and development in fiscal 2020.

However, the other leading brands like BMW, VW, Ford and Toyota also invest heavily in R&D and marketing to maintain their market dominance.

Tesla’s competitive position in the industry has continued to grow stronger because of the  company’s focus on innovation and its differentiated business model.

However, the overall level of competitive rivalry in the industry is very high.