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Analysis for Tesla’s Expansion into Russia

Analysis for Tesla’s Expansion into Russia

List of abbreviations:MEDC’s – More Economically Developed CountriesNIC – Newly Industrialized Country RUB – RublePPP* – Public-Private Partnership GDP – Gross Domestic Product PPP – Purchasing Power ParityFDI – Foreign Direct InvestmentOECD – Organisation for Economic Co-operation andDevelopmentEV – Electric VehicleWTO – World Trade OrganizationIMF – International Monetary FundBRICS – emerging national economies: Brazil, Russia,India, China and South Africa.Letter of Recomendation to the CEOTo:Elon MuskCEOof Tesla, IncReport on Russian Federationas a potential new market for Tesla, Inc. There is no doubt that eco-friendlyvehicles will dominate a global car market in the future. Telsa alreadyofficially presented in most MEDC countries and now is a time to think aboutTransition economies (including NICs). The electric car market in Russia isstill quite small but thanks to stabilising economy and sensible governmentpolicies there is a good potential to expand it. The ability to set up ourdealership chain relatively quickly must be a consideration. Lack of chargingfacilities 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 notonly in the creation of those facilities but also in the further operations ofit.As our research shows, Russia has ahuge domestic market which has a potential to expand and get more wealthy, whatmeans potentially a big client base. There are many state support programssuch as: (First Car, Family Car, Private Business, and public city electrictransport) with financing of 17.4bn RUB, subsidies given to Russian creditorganisations for the reimbursement of a shortfallin income from credits granted byRussian credit organisations in 2015–2016 to individuals for the purchase of cars (7.0bn RUB) and othersimilar programs. (PwC, 2017)Conditions for investment right noware perfect if Tesla wants to have a dominant position in that market inupcoming years. However, its important to considerall the risks and to understand that factors such as movements in the exchangerate of the ruble, access to auto loans, interest rates, amount andeffectiveness of government support and expansion of transport infrastructurewill predetermine demand more than anything else. IntroductionThis report will advise CEO of Tesla Inc on whether to expand theirofficial 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 AnalysisRussia is the biggest country in the world in terms of area (CIA, 2017a) and 9th in terms of population with over 142 million people livingthere. (CIA, 2017b) Despite all of its huge economicpotential, in recent years Russia has suffered an economic recession due tosanctions which were implemented by the US government on March 6, 2014 after anannexation of Crimea by Russian military forces. (U.S. Department of state, 2017) However recently situation inRussian started to improve and now there is a positive trend in its economicgrowth 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 inDecember 1991 (CIA, 2017c) and went through the 90s with two Chechen Warsfrom 11th of September 1994 to May of 2000 but even so, the active phase of thewar 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 nomajor conflicts within a country and regions such a Chechnya seen much of aneconomic growth and government stability mainly due to massive cash injectionsfrom Russia’s federalgovernment which were aimed at stabilizing recently unstable territory. (Financial Times, 2015)The Russian Federation today stands as one of the most powerful andinfluential  states in the world and  and it keeps diplomatic relations with 191countries 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 “manageddemocracy” due to a high level of Government intervention. (CIA, 2017d)Corruption Perceptions Index research from 2016 suggests that there isstill a very high level of corruption in Russia with the score of 29/100 whatranks 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 anindicator of a strong economy and prospective market. (World Bank, 2017). It’s economy mainly dependent onnatural resources such as oil and gas as they make up a huge part of Russianfederal budget revenue. For example, in 2016 this figure was equivalent to 36%which were made up of mineral extraction taxes and export customs duties oncrude oil and gas. (The U.S. Energy Information Administration, 2017) There is a positive trend in Russian economy today after a couple ofyears of recession which was caused by western sanctions and drop of oilprices. (WorldBank 2017)Inflation significantly went down from 15.5% in 2015 to 7.1% in 2016 and isprojected to reach the target level of 4% in 2018 and monetary policy is fairlybalanced with the current inflation rate. These improvements lead to a bettereconomic environment in general which caused a positive chain effect in abanking sector and improved terms of trade. (World Bank, 2017) An illustrative example ofimproving Economic environment in Russia is the fact that in 2015 the number ofFDI project grew by 61% in comparison with a previous two years. (“Invest inRussia” – Russian investmentagency, 2016) (S)ocial factors: Russian society went through a huge transformation after a collapse of aSoviet regime and has turned from autocratic structure society to moredemocratic one. There are nearly 200 national ethnic groups represented inRussia’s 2010 census which makes it one of the most multicultural societies inthe world. (Cia,2017e) Income inequality remains one of the big problems in Russian society.Gini index of Russia in 2015 was  37.7which is much better than 46.1 back in 1996, however it is still very high incomparison 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 technologicaltraditions. The 1990s crisis caused by the collapse of the Soviet regime led to thesignificant reduction of the government support for science andtechnology.  Many Russian scientists wentto 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 hasstarted to improve, and the government launched a campaign which was aimed atinnovation and modernisation. Current priorities for the Russiastechnological/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 replacementof foreign technologies and raw materials by domestic ones. This has worked asa push factor towards more develompment and reserch in some key sectors such asIT and energy.In September 2017 Russian President Vladimir Putin reminded of thatstrategy in meeting with Russian technology producers where he said that, insome spheres, state institutions could not work with companies running foreignsoftware because that represented a risk for national cyber-security. (CNBC, 2017)Porters Five Forces AnalysisMarket defenition: Our analysis focuses on the new passenger cars market inRussia, particularly on electric/hybrid segment. Passenger cars are defined asvehicles with at least four wheels, used for the transportation of passengersfrom point A to point B, and consisting maximum of eight seats not includingdriver’s seat. The Russian car market in 2016 decreased by 11% but it isexpected to come back to moderate growth from the end of 2017 due to a positivetrend in the Russian economy. (Automotive statistics ltd, 2017a)Competitionin the industry:  The electric car market in Russia is relatively small in comparison with many MEDCcountries, however, it is predicted to grow. There are 1,100 electric cars inRussia 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. (Automotivestatistics ltd, 2017b)As we can see there is a high concentration ratio in theElectric car market in Russia as 89% of the cars are from top three firms inthe market and Tesla already one of this three companies with a market share of19% which is still quite a high number considering the fact that they don’thave their official dealership in Russia yet. Potentialof new entrants:The decree which allows standard petrol stations to operatecharges for electric cars was signed in autumn 2015 and took force on November1, 2016. Russian charging infrastructure is expanding. PJSC “RussianGrids” already operates 130 charging stations across Russia and by the endof December 2017 this number expected to rise up to 2017 and up to 1000 by theend of 2018.(Eurasia network, 2017)As there is a constant growth in a number of chargingstations in Russia it could stimulate demand for electric cars and make themeven more attractive therefore attract new entrants into the market.There are not many potential companies who could offer anelectric car of a similar quality as Tesla right now, however, there are manyhybrid options out there which are potential rivals and could easily enter themarket as entry barriers are getting lower and lower with more Governmentincentives being introduced and new charging stations being built. Also, there are some big companies who are already lookinginto expanding into Russian market as well, such as Renault-Nissan coalitionwhich is now the leader of the global EV market. (Eurasia network, 2017) (Bertel Schmitt, 2017)  Powerof suppliers: In our report, we are looking for a potential expansion ofTesla dealership centres and not manufacturing sites. Therefore the power ofsuppliers is not important as cars and all needed materials for its maintenancewill be imported by existing supply routes like in many other cases where Teslaoperates. Powerof customers: When considering an expansion into a Russian market, Teslashould 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 inRussia which represents a 92% rise in comparison to previous year. (Russianautomotive news, 2017a)  Demand is likely to rise further and Tesla’spotential client base could increase enormously due to an amendment to the taxcode which is discussed in State Duma right now. The idea proposed is to exempttransport tax for electric vehicles from 2018 onwards. (Russianautomotive news, 2017b) Bargaining power of buyers would be low, as Tesla in Russiawould be considered as “high-end” product particularly due to a lowaverage income in Russia (37500RUB=650USD) comparing to most western countries.(Tradingeconomics, 2017) Also,Tesla is one of the most advanced electro cars in the global market, thereforethere are not many potential substitutions to it in that market segment whatmakes it quite a unique product and allows Telsa to have some power over itsexisting and potential client base in nearest future. Threatof substitutes:The main substitutes for electric cars, of course, would beconsidered standard petrol vehicles or a market of used cars. Especially usedcar segment seems to be the most promising one in upcoming years due to theaverage length of car ownership declining thanks to the recovery from therecent 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 substituteperforms the same or a similar function as an industry?s product by a differentmeans”. (Porter, 2008)  Therefore we can say that mostof those won’t be considered as substitutes because they are unable to fulfilsuch key passenger car features such as representing social status, providingcomfort, immediate availability, independence of destination choice andflexible route change, what makes their substituting force pretty low.Nevertheless, a used car segment is more or less capable of performing most ofthe functions listed above. 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