For the largest economies in the Global South Tesla is one of the most sought after companies in terms of establishing commercial presence and boosting the development of the local EV sector. Throughout the past several years, government officials in Latin America, Africa and Asia, including from Indonesia, India and South Africa, have welcomed Tesla’s potential establishment of local business operations. To some degree the company’s experience in China where it played a key role in the creation of the EV industry has strengthened its credentials in the developing world and added to its “soft power” in the Global South. Tesla’s further forays into the EM space may benefit the company through greater diversification of its sourcing of materials and supplies. At the same time, the leading heavyweights across EM will strive to emulate China’s success in developing a competitive EV sector through partnership with companies such as Tesla.
In China Tesla launched its operations by building its Gigafactory in Shanghai in January 2019 – it thus became the first foreign-owner car factory to take advantage of China’s new policy measures that allowed foreign car producers to establish wholly-owned subsidiaries in the country. Tesla demonstrated admirable efficiency in speedily building its presence in China – within a year the Gigafactory produced the first batch of cars[1]. Production costs and labour costs are significantly lower in Shanghai for Tesla than in the United States, with the Shanghai Gigafactory accounting for a sizeable share of Tesla’s global deliveries and profits. Since the launching of the Shanghai Gigafactory Tesla has continuously expanded its investments into the facility, while also launching other operations, including a supercharger manufacturing factory[2]. Apart from the auto factory in Shanghai, Tesla is also building a new energy storage megafactory in China – the first such facility for Tesla outside the US market.
The key strategic drivers for Tesla’s entry into China included market size, market growth projections, business climate conditions as well as cost considerations, including access to materials. On the cost side, according to EV industry estimates China’s control over the supply chain and raw materials for the production of electric vehicles brought as much as a 20% cost advantage over EVs manufactured elsewhere[3]. The macroeconomic considerations were driven by China’s strong economic growth before the Covid pandemic – China was demonstrating some of the highest growth rates in the world economy (6.6% in 2018 and 6.1% in 2019 – the period when Tesla was starting its entry into China) that reduced poverty and created a burgeoning layer of “middle class”[4].
Perhaps the main rationale for Tesla’s entry into China is the sheer size of the country’s car market – it is the largest in the world in terms of both demand and supply[5]. Furthermore, China is also one of the most dynamic major auto markets in the EV segment due to the sizeable potential for greening its economy and the growing environmental awareness of the country’s middle class. With the EV industry experiencing a slowdown in more recent periods, in 2024 EV sales are projected to rise in China by 11.1% compared to 36.5% in 2023[6]. Overall, China currently accounts for 60% of worldwide EV sales – a testament to the dynamism and the scale of China’s EV market[7].
Building on the advances in China, Tesla is also seeking to diversify its supplier base by securing partnerships and supplies with other economies in Asia such as India, Korea and Indonesia. In May 2024 the authorities of Indonesia after the meeting between Tesla’s CEO Ilon Musk and the country’s President declared that Tesla would consider the Indonesian proposal to set up an EV battery plant in the country. One of the key factors in launching operations in Indonesia is the rising role of the country as the leading nickel producer (a key ingredient in batteries for EVs), the rising EV ambitions of Indonesia as well as activism on the part of Korea and China in investing in Indonesia’s nickel processing[8].
At this juncture, it appears that Tesla’s international expansion is driven by the level of demand for the company’s products (both in terms of the demand for “green products” as well as the purchasing power of the population), access to resources/materials and the relative economic openness of the country. With time, other factors may start to play an increasing role such as the scope to use the country’s market as a springboard to expanding sales and production in the broader region. Tesla’s international expansion strategy in EM may then crystallize into something similar to the “BRICS+ business model” we developed earlier this year, whereby production is concentrated in the largest core BRICS economies such as China to benefit from the relatively lower labour costs as well as a large consumer market[9]. The next stage in this business model strategy would be to expand into those BRICS+ regions of the regional partners of BRICS that have natural resources and also combine the benefits of low labour costs and a large consumer market. Tesla could also “reverse innovate” its products to supply EVs to developed economies in Europe and the US.
The key impediment to putting such a BRICS+ business model into practice is the lack of economic/trade openness in some of the largest EM economies, one of the cases in point being South Africa. According to Musk, “import duties are super high in South Africa to protect the domestic industry. Doesn’t make sense for Tesla, given that electric cars are not locally made”[10]. Musk’s remarks about Tesla in South Africa came shortly after South Africa’s Trade Minister Ebrahim Patel declared that South Africa could start exporting electric vehicles manufactured locally by 2026. Tesla has not moved in force into the markets of other BRICS heavyweights such as Brazil and India, where import restrictions are also significant in segments of the manufacturing sector.
The importance of greater economic openness is becoming an increasingly critical differentiating factor for corporates such as Tesla in their localization decisions amid the propagation of practices combining industrial policy and protectionism. In this respect, the implementation of a BRICS+ business model could potentially address several key priorities for corporates that are exploring the potential to enter into the BRICS+ space:
- Greater optionality in localizing production – something that is becoming particularly important in the face of protectionism, particularly vis-à-vis China
- Creation of entry points into the main regions of the Global South (East Asia, Latin America, Africa, etc)
- Making use of the existing network of FTAs for materials/spare parts supplies as well as sales of final products
And as we stated earlier the greater the trade liberalization impulses within BRICS/BRICS+, the greater the scope for the implementation of the BRICS+ business model and for higher investment flows to be directed into the BRICS+ circle.
Overall, Tesla’s forays into the EM space are not devoid of risks and challenges, as is illustrated by Tesla’s own experience in China. In a way, Tesla in China became a victim of its own success – it created a new EV market, educated the labour force, brought in its advanced technology only to see its market position weaken against the backdrop of China’s EV producers making inroads not only in the domestic market, but also globally. Nevertheless, Tesla’s experience in China will have important implications for the world economy and EM in particular in the coming years. In the corporate space companies operating in sectors related to green and sustainable development will increasingly explore the potential for expanding operations in EM while being cognizant of the risks and pitfalls experienced by the likes of Tesla. At the same time, emerging markets will aim to build new sectors of their economies in sustainable development that will serve as a key source of future growth and competitiveness.
Perhaps most importantly, corporates such as Tesla and other leading companies operating in the “green economy” segment may increasingly serve as a key bridge between the Global North and the Global South at a time of rising protectionist and geopolitical frictions. Addressing these global challenges will necessitate innovation and new approaches from all key stakeholders – from EM in terms of opening markets and designing new strategies to boost investment to corporates such as Tesla in terms of business model innovation.
Yaroslav Lissovolik, Founder, BRICS+ Analytics
[1] “Tesla’s New Mega-Factory Project in Shanghai to Start Construction Technology.” CGTN, April 18, 2024, https://news.cgtn.com/news/2024-04-18/Tesla-s-new-mega-factory-project-in-Shanghai-to-start-construction-1sTAnMdGPRu/p.html.
[2] “Tesla Announces New Mega Battery Factory Project in Shanghai Amid US Executives’ Frequent Visits in China.” Global Times, December 22, 2023, https://www.globaltimes.cn/page/202312/1304150.shtml.
[3] “Tesla’s China Expansion Hits Speed Bump Amid Industry Over Capacity.” Reuters, June 16, 2023, https://www.reuters.com/business/autos-transportation/teslas-china-expansion-hits-speed-bump-amid-industry-overcapacity-2023-06-16.
[4] “Business Instant View: China’s Economic Growth Slows to 6.1% in 2019, near 30-Year Low.” Reuters, January 17, 2020, https://www.reuters.com/article/idUSKBN1ZG092/#:~:text=The%20world’s%20second%2Dlargest%20economy,down%20from%206.6%25%20in%202018.
[5] Singh, Sarwant. “Global Automotive Market: Predictions For 2024.” Forbes, January 11, 2024, https://www.forbes.com/sites/sarwantsingh/2024/01/11/global-automotive-market-predictions-for-2024/?sh=5dc9e78f492b.
[6] Singh, Sarwant. “Global Automotive Market: Predictions For 2024.” Forbes, January 11, 2024, https://www.forbes.com/sites/sarwantsingh/2024/01/11/global-automotive-market-predictions-for-2024/?sh=5dc9e78f492b.
[7] Russell, Clyde. “China’s EV Strategy of Going Small and Cheap to Pay Big Dividends in Asia.” Reuters, April 23, 2024, https://www.reuters.com/world/china/chinas-ev-strategy-going-small-cheap-pay-big-dividends-asia-russell-2024-04-23/#:~:text=The%20IEA’s%20Global%20Electric%20Vehicle,2030%20expected%20to%20be%20electric.
[8] Strangio, Sebastian. “Musk to “Consider” Opening Battery Plant in Indonesia, Senior Official Says.” The Diplomat, May 21, 2024, https://thediplomat.com/2024/05/musk-to-consider-opening-battery-plant-in-indonesia-senior-official-says.
[9] https://brics-plus-analytics.org/business-model-innovation-in-em-towards-a-brics-business-model/
[10] https://techcentral.co.za/elon-musk-tesla-south-africa/238305/
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