Bargaining power of Customers

A large number of competitors increases bargaining power of the costumers. A car purchase is costly and the Chinese consumers in the higher price segments are quality conscious, which is shown through the preference towards western brands. It is therefore likely to do a thorough search before they actually buy a car. The high criteria for a purchase can lower the buyers bargaining power in the industry, due to the limited high quality offerings. The history of battery quality in the Chinese electric car market taught us, that the buyer tend to prefer the brands, that can provide the best battery technology and range.

 

Producers as Tesla and BMW are building charger networks in order to expand the range of their cars. This will give them a competitive advantage by offering a complete eco system, which benefits the consumer. This is still quite unique to a couple of brands and therefore decreasing the consumer bargaining power. It is important to note, that there are other non-electric and hybrid cars that can increase the consumers buying power. Due to the lack of quality offerings in the EV segment, the consumer buying power seems relatively low. However, there is an opportunity to choose a substitute, so we put the overall bargaining power of the costumer to medium [32].

 

Threat of Substitutes

The threat of substitutes is substantial, since there are numerous alternatives to buy a fully electrical car. The combustion engine and hybrid cars that have the dominant market share are likely to be the largest competitors to electric cars in China, since they have a wide range of high quality alternatives from large automakers. (See competitive analysis) These can provide the same utility as an electric car, though without the same level of environmental friendliness. Automakers as Hyundai and Toyota are about to release the first commercial fuel cell cars. These are environmental friendly, but still require investments in technology and infrastructure in order to be successful and reach a broad market. They could become a potential threat in the future. Mainly because of the other non-electric luxury sedans available we see the threat of substitutes as high. [33, 34]

 

Threats of new entrants
The EV industry has high entry barriers. To be successful, it requires a large amount of capital investments and a specific set of skills and technologies. However, Tesla released their patents and there has been pressure from the Chinese government for EV producers to share their technology, in order to access the Chinese market. This makes it easier for new entrants as they can focus on understanding the technology instead of doing their own R&D from scratch. However, a company will still need a relatively high level of investments and knowledge to be competitive. As a market leader, Tesla is investing into new manufacturing plants to increase their economies of scale and be able to offer more affordable products. They already have charging stations located across the globe in key regions and BMW is planning to do the same in China. This all raises the entry barriers.
 

Nevertheless the Chinese EV market is expected to be the world’s largest by 2019 and the opportunities to make a profit for new entrants exist. The Chinese government has offered over time a wide range of incentives to domestic electric automotive manufactures and battery producers. Local and national officials are setting goals to increase the number of environmental friendly vehicles [35].

It is still uncertain how much goodwill the foreign brands will get, especially those not producing locally are likely to get less benefits. The Chinese government wishes to build and protect their own EV industry and are likely to give more preference to the local producers.

 

Chinese consumers have already shown a preference for western cars. (McKinsey) They are feeling the effects of pollution and according to a 2013 McKinsey report on the premium car market in China, 26% of the potential car buyers are interested in green technology. These factors will attract new entrants and therefore raise the risk of new players coming into the market.

 
Overall we feel that the attractiveness of the market weights heavy and it is likely that more domestic and foreign players will enter, to get a piece of, what is expected to be a large, Chinese EV market pie. Many of the entrants do this by partnering up with local firms, like BMW and Brilliance or Daimler and BYD. However, there are barriers all new players have to overcome regardless of entry strategy. Conclusively, we put the threat of new entrants from medium to high. [36, 37]

 

The Bargaining Power of Suppliers

The suppliers in the industry and Tesla specifically are secretive and it’s not easy to find information on their suppliers. However, producers of EV are facing high switching costs, firstly because of high quality of the parts required. Secondly, the EV market is still relatively early in its development and therefore a limited number of high level suppliers of some components exists. This increases the supplier power. Tesla is highly dependent on Mercedes-Benz, as they supply them with some interior parts of the car and certain components like airbags. On the other hand, Tesla is providing Mercedes with batteries for the B Class Electric Drive. [38]

 

Panasonic is Tesla’s main battery supplier. This gives power to Panasonic, as it would be a large challenge for Tesla to find a new supplier that can deliver the same amount and quality. Tesla and Panasonic have agreed to make one mega-factory together. Until this is finished, Panasonic will process some bargaining power, since both of them have invested a lot in this future project. Therefore, both parties want to keep a good relationship and not misuse their power.

 

In general, the Chinese market has a large number of suppliers of electric car components. It has been a focus of the Chinese government over time to grow this industry. As mentioned earlier, the quality issues continue to be a problem.
 

Overall suppliers in the industry have relatively high power as the manufactures rely on a few suppliers to provide high quality products. There is a trend in the industry that there are mutual benefits between suppliers and producers like in the case of Tesla and Mercedes. This reduces the bargaining power of the suppliers to a medium. However, this might change in the future, as the growth of the industry can change the power structure of suppliers. [39]

 

The Intensity of Rivalry in the Industry
The automotive industry is highly competitive, however the fully electric car industry is different and modestly competitive. There are more and more companies that are investing in electric cars. In the future this market can become highly competitive. Currently there aren’t luxurious electric cars besides Tesla’s Model S.

 

Especially in the more exclusive segments there are few options and they are all differentiated in price and other attributes. The players are also mutually dependent as they are each other’s suppliers and they are all trying to expand the EV market to make it larger and profitable for all. The industry is expected to grow in the years to come, this lowers the rivalry among the players in the industry.

 

The general automotive structure and the high level of substitutes affects the rivalry in the industry. The largest companies in the industry are competing on several fronts. In the luxury market it is not necessarily if the car is electric or not, which determines what model they want to buy.

 

More and more companies are investing in electric cars and the Chinese market is seen as a high strategic importance, as the current world’s largest automobile market and also expected to be the largest EV market by 2019. Local companies are also expected to continue to evolve and therefore further raise the rivalry. As of now, the rivalry is on medium intensity.