Comparative Analysis of the Impact of Macroeconomic Factors on Tesla Incorporation Operations in China and the United States

Comparative Analysis on Impact of Macroeconomic Factors on Tesla Incorporation Operations  in China and the United States

A firm’s success is influenced by the type of market structure in which it operates. Stackelberg et al. (2011) note that the structure of a market influences major decisions such as pricing and output decisions. Therefore, understanding the market structure is critical in businesses’ quest to achieve competitive advantage. A market can be characterised by different types of market structures, including perfect competition, monopoly, monopolistic or oligopolistic structure (Stackelberg et al., 2011).  In a monopoly, the production of goods and services is controlled by a single supplier. On the other hand, a monopolistic market structure is one in which the brand of a particular firm has a certain monopoly power over its own brand because no other firm can produce such a brand (Levi, 2014). In an oligopolistic market structure, the market is dominated by a few sellers. In an oligopolistic industry, the entire output is produced by a few large firms and as a result, the contribution made by each firm is significantly large in the market (Levi, 2014).

In addition to the type of market structure, businesses are subject to the prevailing macroeconomic environment, which depicts the prevailing economic condition (Levi, 2014).  In order to formulate operational and marketing strategies that contribute to the achievement of the intended level of competitiveness, it is essential for business managers to develop an adequate understanding of how different macroeconomic factors are likely to impact its business operations. Amongst the macroeconomic factors that businesses should consider include the growth rate of a country’s Gross Domestic Product (GDP), inflation rate, unemployment rate, interest rate, the balance of payment, exchange rate, GDP per capita,  and general governmental balances as a percentage of GDP (Levi, 2014). This paper entails a comparative analysis of the impact of macroeconomic factors on Tesla Incorporation's operations in China and the United States.

Company profile

Tesla Incorporation is an automobile company that specialises in designing, manufacturing, and marketing energy storage systems and electric vehicles (MarketLine, 2015). The firm was established in 2003 and serves the global automobile market (MarketLine, 2015). The firm has developed an adequate competitive advantage within the global electric and hybrid car market segment. Its competitiveness emanates from its effectiveness in designing and manufacturing eco-friendly luxury and sports cars that do not emit greenhouse gases (Mangram, 2012). Despite Tesla being a relatively new firm in the global automobile market, Stringham, Miller, and Clark (2015) note that the firm has managed to achieve a market capitalisation that is almost half that of General Motors or Ford and double that of Fiat Chrysler. Mangram (2012) opines that ‘Tesla Incorporation differs significantly from its industry peers such as Ford, General Motors, and Chrysler that have been struggling to evolve their aging lines to meet the increasing demand for electric and hybrid vehicles’ (p. 189). Tesla has integrated an effective business model that is based on continuous innovation ().  The firm is renowned for its two main models that include Model X sports utility vehicle (SUV) and Model S sedan (MarketLine, 2015). In addition to its competitiveness in designing and manufacturing electric cars, Tesla Motors has integrated effective strategic marketing approaches. One of the strategies that the firm has entrenched entails internationalisation. This move has enabled Tesla Motors to gain a global market footprint. Some of the countries where the firm has established operations include the United States and China.

Market structure

The global automobile market can be said to be in the maturity stage of the product lifecycle. This is due to the fact that the industry has experienced remarkable growth, as evidenced by an increase in the number of industry players (Levi, 2014). Thus, the market has a limited potential to experience additional growth. Nevertheless, the potential of industry players experiencing an increase in sales hence maximising profit is high. As one of the firms that operate in the U.S. and Chinese automobile industries, Tesla Incorporation encounters different market forces due to variations in the type of market structure between the two countries.

The US automobile market is characterised by an oligopolistic market structure. The market is dominated by three large firms namely, Ford, Chrysler, and General Motors (Reuters 2016). As a result of the oligopolistic market structure, the three firms have developed collusive behaviour (Morris, Devlin & Parkin, 2007; Decker, 2009). Accordingly, the three firms make their policies interdependently. One category of policies that the three firms formulate interdependently relates to pricing.  As a result of the collusive behaviour between the three firms, the US automobile market is now characterised by a high degree of price rigidity. In an effort to overcome the dominance that characterise the US automobile market, some relatively small automobile companies were accused of price-fixing schemes (Trop, 2013). The price-fixing was in relation to different car components. This aspect underlines the prevalence of price rigidity, which is a fundamental characteristic of an oligopolistic market.

Similar to the U.S., the Chinese automobile industry is characterised by an oligopolistic market structure. One of the factors that contributed to the oligopolistic nature of the Chinese automobile industry entails the protection of the industry by the government. Deng and Ma (2010) report that the Chinese automobile industry is characterised by a few jointly-owned firms. The rationale for the government’s protection over the Chinese automobile industry is to enhance the industry’s growth by limiting negative competitive practices.

Comparative analysis

Tesla Incorporation's operations in the U.S. and China are affected by different macroeconomic factors.

Gross Domestic Product growth rate

The Gross Domestic Product of a country refers to the total monetary value of all final goods and services produced within such a country (Stackelberg, et al., 2011). The growth rate of a country’s GDP is influenced by the prevailing economic activity. Countries are characterised by varying rates of growth relative to GDP (Mankiw, 2016). During the fourth quarter of 2016, China’s economy expanded by 1.7% (Trading Economy, 2017a). China has experienced a remarkable economic growth rate over the past decade, which has contributed to the expansion of the country’s economy. From 2010, China has grown at an average rate of 1.84% from 2010 (Trading Economy 2016). The country has been characterised by a slight fluctuation in GDP growth rate (Trading Economy, 2017a). Graph 1 below illustrates the trend in the country’s GDP growth rate from 2012. 

Graph 1 (Source: Trading Economics, 2017a)

Graph 1 above shows that China’s annual GDP growth rate has been above 1.6. However, in 2016, the firm’s GDP declined to approximately 1.3 (Trading Economics, 2017a). Similar to China, the U.S. has experienced a remarkable rate of growth with reference to GDP. During the last quarter of 2016, the US GDP grew by 1.9% (Trading Economics, 2017b). This indicates that the US experienced a relatively high rate of GDP growth rate. The graph below illustrates the trend in the US GDP growth rate from 2008.

Graph 2 (Source: Trading Economics, 2017b)

The high rate of GDP growth in China and the United States has arisen from an increase in the rate of consumer spending across the two countries. A study conducted by Bloomberg (2017) indicates that the level of spending in China has stabilised. Similarly, the U.S. has experienced a remarkable increase in the rate of consumer spending (Reuters, 2016). The high GDP growth rate experienced in China and the U.S. is a strong economic indicator that Tesla Motors is likely to achieve its profit maximisation objective. 

Rate of inflation

             A country’s rate of inflation indicates the change in a country’s price level over time (Hall & Lieberman, 2008). China has managed to maintain the rate of inflation at a relatively low level. For example, the country’s rate of inflation declined from a high of 5.4% in 2011 to a low of 1.99% in 2015 as illustrated by graph 3 below (Statista, 2017a).

Table 1

 Source: Statista, 2017a)

According to graph 3 above, it is projected that China will experience an increase in the rate of inflation to 3% by 2021 (Statista, 2017a). Similarly, the US has been characterised by a relatively stable rate of inflation. Table 2 below illustrates the trend in the rate of inflation in the US.

(Source: Statista, 2017b)

In January 2017, the US haserienced a 2.5% year-on-year increase in the rate of inflation. Over the past decade, the average rate of inflation in the US has remained at 3.29% as illustrated by graph 4 below (Trading Economics, 2017c).

Graph 3 (Source: Trading Economics, 2017c)

A comparison of the rate of inflation in the United States and China indicates that the two countries are characterised by a relatively low rate of inflation. However, the projected increase in the rate of inflation in China might present a challenge to Tesla’s operation in China. This arises from the fact that an increase in the rate of inflation might reduce the consumers’ purchasing power. 

Unemployment rate

According to Goodwin et al. (2015), unemployment presents a critical economic problem. A high rate of inflation might lead to social problems such as crime hence reducing the attractiveness of a country to local and foreign investors. Additionally, a high rate of unemployment leads to a reduction in a country’s productivity (Goodwin et al., 2015).  In 2008, the US was characterised by a high rate of unemployment due to the global economic recession. The country’s rate of unemployment was estimated to be 10% in 2010. However, the US has managed to lower the rate of unemployment to approximately 5% by the end of 2016 as illustrated by graph 5 below (Trading Economics, 2017d).

Graph 5

Source: (Trading Economics, 2017d)

Similarly, China has managed to maintain stability with regard to the rate of inflation despite the increase in the rate of unemployment between 2008 and 2010. During this period, the country’s rate of inflation increased from 4% to 4.3%. However, the country’s rate of unemployment has stabilised at a level of 4% as illustrated by graph 6 below (Trading Economics, 2017e). 

Graph 6

Source: (Trading Economics, 2017e)

A comparison of the two country’s rates of unemployment indicates that China and the US are characterised by a relatively stable rate of unemployment. Nevertheless, China’s rate of unemployment is relatively high. As a result of the relatively low rate of unemployment, Tesla Motors is likely to experience an increase in sales revenue to the high in the consumers’ purchasing power.

Monetary, fiscal, and foreign trade policy

A country’s government can influence economic activity through the formulation of fiscal monetary and foreign trade policy (Leightner, 2014). Mishkin (2007) asserts that monetary policy entails an interventionist measure aimed at influencing the level and pattern of economic activity. The purpose of formulating monetary policy is to stimulate a country to achieve full employment, price stability, and economic growth (Fernando, 2011). One of the monetary policy instruments that countries integrate entails the interest rate policy. The interest rate policy adopted by a country influences a firm’s decision to invest in a country. In an effort to ensure the stability of its interest rate, China ensures that the rate of interest is control.  The rationale for controlling the interest rate is to minimise the financial risk associated with fluctuation in the rate of interest (Bloomberg 2016). In the quest to control the rate of interest, the Chinese government has entrenched a neutral monetary policy, which is neither too tight nor too loose (Mu, 2017).

In addition to controlling the rate of interest, the Chinese government has adopted a fixed monetary policy, which is characterised by pegging its currency, the Yuan, to different currencies. For example, China has over the years pegged the Yuan to the US dollar. Jawadi and Barnett (2015) emphasise that ‘from 1994 to 2005, China operated a fixed exchange rate regime, which gained additional importance in 1998 following the financial crisis in Asia’ (p. 342). China has over the past decade focused on changing its monetary policy. Nevertheless, the country is yet to fully adopt a flexible exchange rate regime. Jawadi and Barnett (2015) affirm that the country’s exchange rate and interest rate are controlled by the central bank. Through this approach, China has been able to maintain a stable monetary policy (Hsu, 2015).  Unlike China, the US has adopted a flexible exchange rate regime. Under this type of monetary policy, the country’s rate of interest and exchange rate is determined by market forces.

Apart from monetary policy, a country’s government can stimulate economic growth by employing fiscal policy. The two types of fiscal policies that a government can employ include expansionary and contractionary fiscal policies. Expansionary fiscal policy is aimed at stimulating economic growth while contractionary fiscal policy focuses on tightening economic variables such as money supply in order to achieve economic stability (Ahmed, 2016; Allied Publishers, 2012). With regard to fiscal policy, both the US and China have adopted an expansionary fiscal policy. For example, in 2009, China and the US implemented an economic stimulus package, which constitutes an expansionary fiscal policy by reducing the rate of taxation and increasing government spending (Kahn, 2016). The rationale of the expansionary fiscal policy is to enhance the countries’ economic growth following the global economic recession (The Economic Times 2015).

With reference to foreign trade policy, the two countries have adopted an open trade policy. This is evidenced by the fact that the two countries are members of the World Trade Organisation (McBride, 2017;). As members of the WTO, China and the US have eliminated barriers to trade between the member states. This means that Tesla Motors will be able to engage in international trade with other countries cost-efficiently hence increasing its sales revenue. 

In the course of its operation in the Chinese and US market, Tesla Motors will be affected by the prevailing monetary and fiscal policy. Considering the fact that the US is characterised by a flexible exchange rate regime, the firm’s sales will be subject to fluctuation in the rate of exchange. On the contrary, the neutral monetary policy adopted by China means that the firm’s sales revenue will be relatively cautious from fluctuations in the rate of interest and exchange rate.

Conclusion

The analysis above indicates that Tesla Incorporation faces different macroeconomic factors in the Chinese and United States market. However, the two countries are characterised by a relatively strong macroeconomic environment despite the adoption of different monetary and fiscal policies. For example, the two countries are characterised by a relatively low rate of inflation, and rate of unemployment. Additionally, China and the US have experienced a relatively high rate of economic growth as indicated by their respective GDP growth rate. The two countries’ adoption of open trade policy presents an opportunity for Tesla Motors to trade with other countries. Therefore, Tesla Motors can achieve sustainable competitiveness by exploiting the economic opportunities available in the Chinese and US markets.

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