Tesla Five Forces Analysis

Tesla, the world’s largest automobile brand based on market capitalization, has experienced impressive growth in automobile demand and sales in recent years. The company is advancing fast as the world’s largest producer of electrical vehicles.

 Its focus on innovation is a key factor that has enabled fast growth in popularity as well as excellent financial growth for the company. 

Tesla’s product portfolio includes electrical vehicles, energy production and energy storage products. In the automotive segment, the company also generates revenue from automotive regulatory credits.

In fiscal 2022, Tesla’s net revenue was $81.5 billion compared to $53.8 billion in 2021. In 2023 as well, the company’s revenue has significantly improved over the first three quarters compared to the same period of the prior year. 

The company has built a strong position as the most advanced EV maker in the global automobile industry. It is expanding its manufacturing and supply chain capabilities for fast expansion into new markets. Tesla is in a strong competitive position in the Electric vehicles sector.

A five forces analysis will help us understand its competitive position in the automobile sector and what are the main factors that are strengthening its competitive position with respect to the other players. The five forces analysis is an analytical framework used to understand the competitive position of a business and has been named after its creator Harvard Professor Michael E Porter.

Bargaining power of suppliers:-

The bargaining power of suppliers in the EV industry is moderate. It is due to several factors. The smaller suppliers hold little bargaining power which is because of their smaller size mainly. Tesla is a large and well established brand and places a strong focus on innovation. Its own technologies are quite advanced and the company has also built its own battery manufacturing capabilities. 

However, there are some key battery suppliers that hold strong bargaining power like the leading EV battery suppliers Panasonic, LG Energy solution and the China based EV battery manufacturer CATL.1 Yet, the threat of forward integration from the battery and parts suppliers is minimal. Additionally, being a financially strong and well established EV brand, Tesla enjoys a dominant position that helps it moderate the bargaining power of suppliers. The smaller suppliers are scattered and do not pose any threat of forward integration either.

Bargaining power of buyers:-

The bargaining power of buyers is moderate in the EV industry. Buyers are mostly the individual buyers that purchase EVs for personal use. However, a key factor that has driven the bargaining power of buyers in the EV sector is the intensifying competition. Tesla is the leading brand name in this area but the competition has increased from the leading players in the global automobile industry. The leading players have introduced a nice range of EVs and some are planning to switch to an entire portfolio of hybrids and EVs. Other companies are also investing aggressively in research and development for the production of EVs that are superior in terms of performance. Over time EV technology has also advanced a lot. The premium car brands have also released a nice range of electric vehicles. 

BMW and Audi have introduced  a nice range of electric vehicles. Growing competition among the automobile brands gives the customers some bargaining power. Any demand slump will also lead to higher bargaining power in the hands of the customers. Overall, the bargaining power of buyers is moderate because of many other factors too. 

Quality, passenger safety and customer experience are some critical factors that have helped Tesla gain strong bargaining power. Its strong brand image globally has also enabled the brand to grow its popularity and achieve higher sales. Its focus on innovation is also a key factor that its products enjoy higher brand and the company has achieved a strong competitive position in the sector. Overall, the bargaining power of customers is moderate.

Threat of substitute products:-

The threat of substitute products for Tesla comes from the other EV manufacturers. A large number of global and market leading car manufacturers have entered the fray and due to the demand growth in the EV sector over the past few years, they are investing more resources in the development and production of EV models.

The number of competitors that make EVs are high in the global brand and include several international and local brands. Tesla mainly sells premium products so the threat of substitute products is higher from the premium vehicle brands like BMW, Mercedes and Audi. These brands have also introduced a significant range of electric vehicles. 

So, the threat of substitute products has kept growing for Tesla. To a significant extent, this threat gets moderated by the brand image, product quality and other factors. Tesla is a market leading EV brand known for its cutting edge technologies. Its products are highly popular in its various markets and enjoy strong demand and sales. The company’s strong brand image and its investment in passenger safety and customer experience also moderate the threat from substitute products.

Threat of new entrants :-

The threat of new entrants in the automobile industry and the EV industry sector is very low. There are multiple strong barriers preventing the entry of new players in this industry sector. New players will need to be financially strong to enter this industry sector which is already marked by intense competition. Moreover, to be a competitive player and strengthen one’s position in the industry sector, companies need to have the technological knowhow and expertise to compete with the incumbent players. 

Another leading factor that bars the entry of new players in the industry is the presence of regulatory barriers. Even an EV maker like Tesla has to deal with several regulatory pressures and so will any new player trying to gain market share. Multiple other factors like brand equity and the required operational infrastructure as well as post sales services make it even more complicated for new players to enter the industry sector. 

Due to the intense competitive rivalry in the industry sector, incumbent players are quite aggressive about protecting their market share. They invest heavily in research and development to improve their existing products and bring new ones to the market. So, based on all these considerations, the threat from new players in the EV sector is minimal.

Intensity of competitive rivalry in the industry :-

Competitive rivalry in the automobile industry has kept intensifying. Some of the most important factors that help a company be strongly competitive in this sector include brand image, pricing strategy, product quality, technological innovation, post-sales service quality and marketing. The number of players in the industry is high.

 From the US to China, and South Korea there are several global brands competing for market share in all the leading automobile markets.

Tesla is rivaled by several leading global players that manufacture and sell premium cars, electrical vehicles and hybrids. Leading names among its rivals include Ford, Toyota, GM, Hyundai, BMW, VW, Volvo and several others. The intense competitive rivalry among the leading car brands has grown very intense. 

Every major global automobile brand is investing billions in research and development to improve its products and processes. Tesla spent around $2.9 billion in research and development over the first three quarters of 2023. Other brands also invest huge sums in R&D and marketing each year.

Overall, the intensity of competitive rivalry in the automobile industry and among the automobile and EV makers is very high.

Conclusion:

Tesla is the world’s leading brand of electric vehicles based in the United States. Led by Elon Musk, the company has experienced strong growth in demand and sales over the past few years. From 2020 to 2022, the company experienced more than 2.5X revenue growth. It has also strengthened its focus on innovation and has grown its investment in R&D. Technologically speaking, the brand is ahead of all the other EV makers. Its products are known for providing superior driving experience, passenger safety and strong performance. Its position has also been strengthened in the market by its strong brand image. The company is advancing fast both financially and technologically. So, its competitive position with respect to other players is quite strong. However, some challenges also exist before Tesla, which is currently facing tough competitive pressure. Overall, its position is quite strong and technology has bolstered its market share and financial growth in recent years.

  1. https://www.ft.com/content/a111e040-1372-4b9e-b562-3eb9c497c530 ↩︎