Why Tesla Has Difficulties Entering the Chinese Market

For the past 15 years, Elon Musk has built Tesla from a small electric vehicle (EV) startup to becoming a $46 billion company and the forerunner in the EV industry. However, despite their massive success in American and European markets, Tesla is yet to see a breakthrough in the Chinese market. China’s EV industry has grown rapidly in the previous years, producing more than half of global electric vehicles in 2018, while the US only produced 20 percent. The Chinese government has taken initiative in growing this market, providing over $60 billion in direct subsidies since 2012 to lower the cost of electric vehicles for Chinese consumers. Currently China is definitely the biggest market for EV’s, and for Tesla to succeed it is necessary to establish its presence in the country.

The biggest problem that Tesla faces in China is that its products are extremely expensive relative to its competitors due to transport costs and large import taxes which has been worsened by the trade tensions between the US and China. For example, a Tesla Model S that runs for $80,000 in the US will cost around $140,000 in China after taxes. In comparison, local EV companies in China sell their cars for as low as $10,000-$20,000, a sizable difference that makes it nearly impossible for Tesla to compete against.

Tesla is desperate in tapping the Chinese EV market and is aware of the problems they face, that is why they have worked towards building a Gigafactory in Shanghai in order for them to be more competitive in the domestic market. Once they are able to produce their cars domestically, Tesla will be able to establish a local supply chain, become eligible for EV tax credits provided by the government, and more importantly, evade the costs of duties and tariffs that have been inflating the prices of their cars.

Tesla’s case in China is a textbook example of the Tariff-Jumping Hypothesis. Musk believes that the biggest obstacle to Tesla’s success in China is affordability, and the only was to access the massive demand in the country is by producing domestically to make their products affordable. By doing this, Tesla is able to avoid tariff barriers and dramatically reducing the costs of their cars, making them more competitive against local EV manufacturers.

Collins, J. (2019, March 05). Tesla’s Problems In China Highlight Its Biggest Threat: Negative Working Capital. Retrieved from https://www.forbes.com/sites/jimcollins/2019/03/05/teslas-problems-in-china-highlight-its-biggest-threat-negative-working-capital/#7c132c2b2b3c

Kolodny, L., & Evers, A. (2019, February 12). Tesla is staking its future on China – here’s what it’s up against. Retrieved from https://www.cnbc.com/2019/02/11/tesla-faces-steep-competition-in-china.html


The Impact of Private Politics on MNCs

For the past few decades it is clear that multinational corporations have truly evolved into something much greater than an economic actor. In her article Big Business and the State, Susan Strange argues how MNCs plays a central and not a peripheral role in the International Political Economy. Similarly, Peter Evans in his article The Eclipse of the State suggests that dominance of private power has caused an institutional shift that questions the capacity of states to exert their authority as MNCs have become stateless. These arguments presented by Strange, Evans and various other scholars suggest that MNCs have developed into an entity beyond the capacity of the state.

However, despite the amount of influence and power an MNC has, some MNCs (depending on the nature of its business) are not immune to the constantly changing expectations of social standards. Private politics is the method in which activist groups and NGOs push corporations to conform to these standards. Although ‘social standards’ are very broad, some of the main focuses include the effect on the environment, employment malpractices (in every step of the production process), animal welfare, and safety. The ultimate goal for activist groups is to get corporations to change its practices to follow the demands that are set by the social standard. Some of the methods activists use in order to achieve their goals include forming unions to organize a strike, boycotting a firm’s products, leveraging capital markets, and more recently, using social media to expose a firm’s malpractice to the public which could intensify the first three methods.

In most cases, private politics is an effective way to keep MNCs in check and keep them accountable for their actions. It is effective because it can greatly impact a firm’s operations and its profitability, which are extremely important especially for its shareholders. An example of this can be seen with the case of McDonald’s and the obesity epidemic in the US. Many Americans blamed fast food chains such as McDonald’s to be the primary cause of obesity in the US as it perpetuates unhealthy eating habits. The documentary film Super Size Me gave the public a closer look at McDonald’s’ contribution to the issue and its increasingly influential role in the lives of American consumers. In response to the issue, McDonald’s decided to diversify its menu to more healthy options such as salads and apple slices, and as a result, McDonald’s even became the biggest purchaser of apples in the US consequently after the change.

Private politics is not necessarily an entirely negative thing for corporations as it could also prove to be beneficial in the long run. Another example for this would be with the automotive industry and the constant pressure from activists to reduce carbon emissions which was further worsened with the Volkswagen emission scandal. Private politics in this case pushed automakers to become more innovative and create sustainable options for vehicles. This is evident today where electric cars have become the new trend in the automotive industry. Overall, private politics can be beneficial for both the firm and the consumer as it forces MNCs to be accountable and it also helps them to innovate in the process of conforming to social norms.

Diermeier, D., & Policy Research Initiative (Canada). (2009). Governing the global economy: The role of private politics. Ottawa, Ont.: Policy Research Initiative.

Evans, P. (1997). The Eclipse of the State? Reflections on Stateness in an Era of Globalization. World Politics,50(01), 62-87. doi:10.1017/s0043887100014726

Strange, S. (1993). Big Business and the State. Multinationals in the Global Political Economy,101-107. doi:10.1007/978-1-349-22973-4_6