Tesla Motors' Market Entry Strategy for Germany

Strategic Planning for Market Entry

The main strategy adopted by companies like Tesla Motors looking to expand operations domestically and in foreign locations is to be innovative, economical, and to offer more value for money. However, several critical questions must be answered: Is it worth being a pioneer in these rapidly changing times? Is it better to let others move first and then improvise, learning from the mistakes others commit? How much of a lead would you concede by holding back? What steps would ensure market share when newer entrants try to slice into your market? If you choose to follow rather than lead, which strategies are most beneficial? (Kalyanaram & Gurumurthy, 1998; Benjamin Levi, 2006). Tesla Motors' mainstay is its innovativeness. The company seeks radical changes in conveyances and strives to take the industry to the next level. Tesla Motors must address strategic planning in accordance with Germany's rules and regulations with due diligence, lest it falls short of expectations.

Scientific studies show that pioneers in an industry typically enjoy a considerable and lasting market-share advantage over those who follow. Tesla can choose to take the lead in the auto industry through its pioneering efforts, as Germany offers abundant opportunities for exactly this innovative spirit. However, late entrants can still succeed by adopting exclusive positioning alongside targeted advertising and marketing methods. Innovators, once they reach a settled phase, usually assume a dominant stance. At times, complacency seeps in and they may not be able to respond swiftly enough to changes in consumer demand or industry dynamics. This is an important consideration for Tesla Motors to remain alert about. Relatively new entrants can reap the benefits of the vacuum left unexploited by ageing innovators, or even adopt revolutionary solutions to address such gaps (Kalyanaram & Gurumurthy, 1998; Das, 2012).

Competing methods are generally dependent on the ambient market environment and the positioning and product/service profile of existing players. By adding a product at a lower price than established players, latecomers can bring in new customers who would not otherwise have purchased such a product — in essence, expanding the whole industry. Tesla can, to begin with, adopt a reduced-price strategy, as it may result in a shift of customer loyalties toward newer products. However, this tactic will likely result in diminished margins for the new entrant relative to other players already in the market, unless the new entrant's cost of manufacturing is sufficiently economical. Businesses can remain competitive by innovating, and Tesla Motors is nothing if not innovative. The advancement could be transformative or incremental. One form of incremental advancement is an enhanced version of an existing product. Such an enhanced product can compete directly with existing goods or can be targeted at a smaller segment within the existing market. Innovative products can occasionally attract new customers who were not the original target for existing goods and services. As products mature in base markets, organizations typically venture into more attractive foreign sectors (Kalyanaram & Gurumurthy, 1998). Regarding Tesla Motors, a well-planned entry into Germany therefore seems apt.

The German economy is among the largest in the world, contributing significantly to EU growth and accounting for more than one-fifth of EU GDP. Germany is the United States' biggest European trading partner and the sixth-largest market for American exports. Germany's "social market" economic system largely adheres to free-market principles while maintaining a considerable degree of government regulation and strong social welfare programs (Chapter 1: Doing Business in Germany, n.d.).

Going international is not always the only path forward. At times the risks of venturing abroad may not yield the anticipated financial returns. Focusing on existing markets where a firm has a strong command can carry less risk and generate faster profits. This can be achieved by repositioning existing goods and services through advertising, marketing, product appearance, and similar methods (Grünig & Kühn, 2011; Kalyanaram & Gurumurthy, 1998; Peng, 2014).

The most successful industry entrants are generally those that offer high-quality goods aligned with contemporary trends. Tesla Motors can take advantage of the fact that Germans are attuned to the technological advancement and superior engineering visible in American goods, including software, electronics, medical equipment, healthcare products, synthetic materials, and automotive products. Germany has one of the highest rates of internet access in the European Union, and its robust multimedia and high-tech sectors make it an active and growing market as more and more Germans come online. Selling price is not the sole deciding factor for German consumers, given their well-known preference for quality — a disposition that bodes well for Tesla (Chapter 1: Doing Business in Germany, n.d.).

The German market is not centralized and varies from state to state, with requirements differing meaningfully across regions. Companies that succeed take regional variances into account when building a strong national presence. Local awareness and experience are essential virtues for any market strategy, given that the primary competition for most American ventures consists of domestic businesses with an established command of the market. US companies can compete through higher product quality, competitive pricing, and dedicated after-sales support delivered through local staff. The German tax structure, however, is rather complex and merits careful study from the outset. Germany's relatively higher taxes and intricate tax regulations may constitute a barrier, though discounts, allowances, and write-offs make the overall tax structure globally competitive (Chapter 1: Doing Business in Germany, n.d.).

There are several formal obstacles that American firms — and by extension Tesla — must address when seeking to enter Germany. These stem partly from the German government's adherence to the EU's Common Agricultural Policy (CAP) and from restrictions imposed on certain American biotech products in the agricultural sector. Germany has urged the EU Commission to ease regulatory norms and foster innovation so as to stimulate competitiveness among EU member states. The Merkel government recognized the need for reforms, though the complexity of the structural situation made implementation difficult. Germany's regulatory framework tends to favor domestic businesses, and its regulations can prove daunting to foreign investors. Safety and environmental standards are enforced strictly, making American access to the market a challenging undertaking. US firms like Tesla that wish to enter Germany would do well to be thoroughly aware of the applicable testing and certification requirements and to comply with them rigorously. These standards are drawn largely from German regulatory bodies and applied across EU member states (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

American companies must be well versed in the regulations applicable across the EU — and specifically in Germany — before considering setting up operations there. There is a complex and sometimes confusing set of rules to follow in Germany, and the standards often differ from those prevalent in the United States. Tesla should be aware that regulatory implementation is strict, and firms will benefit greatly from understanding the rules thoroughly. Testing and certification processes must be completed in a timely manner; neglecting them could prove significantly disadvantageous (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

Merchandise examined and certified in the United States according to American criteria will likely need to be re-certified according to EU standards, owing to the EU's distinct approach to consumer safety, health, and environmental protection. Where goods are not governed by specific EU technical regulations, they are typically subject to the EU's General Product Safety Directive as well as relevant national directives (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

EU legal guidelines, along with the criteria produced under the New Approach, are applied uniformly across member states and the European Economic Area (EEA) to facilitate the free movement of goods. The New Approach has been replaced by the New Legislative Framework (NLF) since its implementation in 2010, which drives further regulation around CE marking and its legal standing. Since 2010–2011, existing guidelines have been reviewed to bring them into alignment with NLF requirements. While harmonization of EU legislation can aid access to the EU single market, Tesla Motors must remain abreast of both mandatory regulations and voluntary technical standards that may present trade barriers, given that regulations in the two regions can differ substantially (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

Germany's regulatory requirements and bureaucratic processes are generally demanding for those wishing to do business there and require close scrutiny by American companies. Existing security standards are applied rigorously and may present a significant challenge for a number of US products. US companies should take adequate care to comply with all norms through timely testing and certification (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

Barriers to Entry and Trade Regulations

TARIC (Tarif Intégré de la Communauté) has been formulated to present the various measures applied to specific goods imported into or, in some cases, exported from the EU. To determine whether permission is required for any particular product, TARIC should be consulted. TARIC can be searched by country of origin, Harmonized System (HS) code, and product description through the interactive web portal of the Directorate-General for Taxation and the Customs Union (Chapter 5: Trade Regulations, Customs and Standards, n.d.). Tesla Motors will need to refer to the relevant TARIC provisions for its specific products and remain current with applicable regulations and norms.

Conformity assessment is mandatory under EU product-specific regulations. The goal of conformity evaluation is to guarantee ongoing compliance at each stage — from design through production — so that products conform to required EU standards. Some flexibility exists: manufacturers may choose from a range of assessment approaches depending on risk evaluation, including full quality assurance systems, production quality controls, type examination norms, and self-examination systems for certain goods.

US exporters seeking entry into the 28 EU member states, as well as Iceland and Liechtenstein, must apply for and obtain CE marking in accordance with the norms applicable to their specific products. CE certification regulations require marketers and manufacturers to choose among stipulations concerning safety or health considerations, manufacturing standards to be adopted, or adherence to the harmonization norms applicable across all member states. US manufacturers must study this area carefully to appreciate the full scope of the complexities involved (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

The most comprehensive norms applicable to EU member states are set out under ETSI, CEN, or CENELEC certifications. Products bearing these marks conform to EU trade directives, enabling the manufacturer to declare conformity. A certified product may then appear on the markets of all EU member states. Should a manufacturer choose not to obtain the markings, the safety, health, and performance standards must be stated explicitly in connection with the product's use. In certain cases, design standards rather than performance standards are stipulated — and these may be complex for US exporters who may not have access to the mandated design specifications.

The CE marking was adopted to ease product surveillance by member states. However, because surveillance was often absent or difficult to implement in practice, the New Legislative Framework came into being in 2010. The NLF covers all aspects required of a product, encompassing harmonization across member states, CE marking legislation, market surveillance, and EU accreditation. Tesla will need to identify the specific CE marking and certification requirements for its products and complete them in a timely manner. These registrations allow authorities to trace the origin of a product, though they do not carry technical specifications. Technical details must be available from the seller or manufacturer upon request (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

EU attestations are conducted by notified bodies — laboratories that test and certify products and are duly authorized by member states. European Accreditation is an organization of authorized accreditation bodies that accepts members who implement applicable regulations and conform to EN and ISO/IEC standards (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

DAR, the German Accreditation Council, comprises representatives from industry, state ministries in Germany, and federal government ministries. This council monitors and coordinates certification and testing activities among relevant bodies, functioning primarily as a facilitator and advisory body representing Germany in international forums (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

There are different ways for overseas firms to do business in Germany, and each requires careful consideration of the pros and cons before committing to a course of action.

Given the analysis of the competitive landscape and available resources, firms may choose to pursue the greenfield path where offered resources or features are insufficient. Under such circumstances, firms may adopt one of the following approaches:

1. Pursuing a greenfield investment independently, or
2. Seeking a local partner to work with.

Opting for the first choice, firms typically cite concerns about loss of managerial control or technological know-how as key factors. Even so, this option presents its own difficulties, including complex startup procedures, substantial capital investment, the establishment of infrastructure with support from headquarters, and the challenge of identifying local expertise and knowledge (Market Entry and Growth, n.d.; Group, 2011). In Germany, the regulatory environment does not encourage fully foreign-controlled operations, and Tesla should rule out this possibility — going it alone would only compound difficulties.

Engaging local partners to assist with greenfield projects would help address these business challenges. Working with local teams, communities, and other local resources can accelerate the greenfield startup process. Those seeking to establish a completely new production facility with advanced technology can leverage local partners' knowledge for land acquisition, completing essential paperwork, securing banking support, and accessing the primary market. The trade-off would typically involve technology transfer to the local partner or a commercial stake in exchange for services rendered. This is essentially what a Joint Venture (JV) means, and it can be a good vehicle for greenfield projects and for penetrating new markets. Partners pool their respective resources to advance shared commercial and technological interests (Market Entry and Growth, n.d.).

Market Entry Strategy Selection

Given Germany's status as a leading automotive technology provider and a sophisticated marketplace, accessing automotive sub-sectors will be challenging. Nevertheless, market opportunities exist for companies with innovative technology — as is the case with Tesla. Progressive and rigorous EU policies and regulations, particularly concerning emission standards, continuously create openings to meet regulatory demands. Opportunities exist especially in high-tech sectors, including advanced components and features, technologies to improve fuel efficiency, alternative drive systems, and radically new vehicle types, together with modern urban mobility solutions. Tesla Motors can take full advantage of these conditions for its products and innovative designs (Doing Business in Germany 2014 Country Commercial Guide for U.S. Companies, 2014).

There are, however, some considerations that Tesla must address in the post-sales area — for example, warranties, knowledgeable buyers, multiple competitors vying for market share in auxiliary products, lubricants, care goods, accessories, and spare parts. New-to-market players need to invest substantially to displace competition. A compelling and distinctive unique selling proposition (USP) is essential in German distribution networks and is imperative for engaging resellers (Doing Business in Germany 2014 Country Commercial Guide for U.S. Companies, 2014).

Germany is the preferred export destination for many US manufacturers, and the figures speak for themselves: the US is Germany's largest trading partner in Europe, and Germany is the sixth-largest export destination for the United States. Germany accounts for approximately twenty percent of the EU's combined GDP. Working market conditions in Germany are liberal and open to foreign investment, though strict regulatory compliance — including social welfare components — is expected. The commercial strength of the German market and Germany's officially positive disposition toward US companies should facilitate Tesla's entry into Germany and, by extension, the broader EU market. Germany boasts the largest European consumer base of approximately 80 million people. It also nurtures a global outlook and serves as a launching pad for worldwide opportunities, hosting major international exhibitions and events such as MEDICA, AUTOMECHANIKA, and ITB. US companies see Germany not only as a commercial hub but also as a geographic gateway to other EU member states (Doing Business in Germany 2014 Country Commercial Guide for U.S. Companies, 2014).

Germany is known for its economic resilience. The severe economic crisis of 2009, which eroded its GDP by five percentage points, did not shake its foundations for long; by early 2011, Germany had quickly recovered to its pre-crisis stature. Forecasts at the time projected growth of 1.8% in 2014 and 2.0% in 2015 (Doing Business in Germany 2014 Country Commercial Guide for U.S. Companies, 2014).

The German labor market remained strong and vibrant throughout 2013. A sweeping structural reform agenda — Agenda 2010 — initiated between 2003 and 2005 by Chancellor Gerhard Schröder and his Social Democrat/Greens coalition addressed the structural weaknesses of the nation's welfare state and put in place corrective measures. This overhaul is principally responsible for the job growth and overall economic performance visible today. Unemployment was also contained through temporary measures, including government short-time work schemes that helped companies facing serious economic difficulties avoid layoffs and compensate workers for shorter hours. Slower wage growth was accepted, labor bargaining became more balanced, and broad retention agreements helped navigate the challenges faced by Germany's labor market during this period (Doing Business in Germany 2014 Country Commercial Guide for U.S. Companies, 2014).

US firms seeking to offer franchises in Europe may find a robust and generally supportive market environment. There are numerous laws and regulations governing franchise operations in the EU, but these tend to be broad and general in their precepts and do not significantly limit the competitive capacity of US players. Prospective franchisors should review not only EU regulations but also the local rules and policies related to franchising in each specific jurisdiction (Alon, 2012; Hero, 2010).

Operating under a JV structure is a complex proposition under Germany's competition laws. In Germany, JVs fall under the purview of the Federal Cartel Office (Bundeskartellamt). Regulations require that the partnership conduct "genuine entrepreneurial" activities. This means:

Organizations that essentially carry out routine activities of importing or distribution will not be regarded as JVs; and JVs must have adequate capital and personnel resources to conduct all activities they intend to carry out.

The Bundeskartellamt is required to block mergers where they are "expected to create or strengthen market dominance." Market dominance refers to a situation in which effective competition is absent, not substantially challenged, or where one party holds a very significant position relative to its rivals. This applies in the automotive sector throughout Germany, and Tesla must be aware of these fundamentals when seeking to acquire local partners through a JV (Chapter 5: Trade Regulations, Customs and Standards, n.d.).

With the antitrust considerations around dominant market position appropriately managed, Tesla should find Germany's other regulatory environment favorable when it comes to patents and innovative ideas. Germany actively welcomes and provides significant protection for intellectual property, which should serve Tesla well in its licensing activities (Chapter 5: Trade Regulations, Customs and Standards, n.d.).