Porter’s Five Forces analytical framework developed by Michael Porter (1979) represents five individual forces that shape an overall extent of competition in the industry. Tesla Porter’s Five Forces Analysis below contains the application of these factors to analyse the competitive environment for the alternative fuel vehicles manufacturer.
The threat of new entrants into alternative fuel vehicles manufacturing industry is moderate. The following factors play an instrumental role in the formation of threat of new entrants into electric vehicles industry:
1. Compromise between performance and cost of electric vehicles. One of the major challenges for electric vehicles is the bargain or compromise between their performance and cost. On one hand, almost all major automakers such as General Motors, Ford, Toyota, BMW and others have built electric cars that are not very expensive, but performance of these cars are compromised. Specifically, electric cars were known for being slower compared to traditional cars and their batteries did not last for long.
On the other hand, Tesla has been able to develop its Model S, Model X and Model 3 cars that are fully electric and boasts with advanced technical characteristics such as high speed and long milage in a single charge. However, such fully electric advanced vehicles are technically challenging and expensive to produce. Any potential new market entrant is going to face the same set of challenges as General Motors, Ford, Toyota, as well as, Tesla. Taking into account the fact that established market players are yet to find solutions to these challenges, it can be argued that unless they find innovative solutions, the new market entrants are going to be overwhelmed by the same set of issues as well.
2. Economies of scale. Established market players benefit from economies of scale to a great extent and this benefit is not available for new market entrants, at least for the first few years of their operations. Massive capital requirements can be mentioned as another significant barrier for new market entrants into electric vehicles industry. At the same time, it is important to note that the decision by Tesla to waive its patent rights and to make its processes and innovations an open source available to others increases the threat of new entrants.
3. Time of entry. Despite the challenges for new entrants discussed above, the time of entry into electric vehicles industry is a significant factor inviting current automakers, as well as, new companies to claim their piece of cake from the growing sector. As illustrated in Figure 2 below, the sales of electric vehicles in the US is expected to exceed 6,5 million and the sale of autonomous electric vehicles worldwide is forecasted to exceed 8,5 million units by 2040.
Moreover, according to estimations by research firm Wood Mackenzie, global demand for oil is expected to decline starting from year 2025 due to increasing popularity of electric vehicles and 38% of all vehicles sold will be electric vehicles by 2040. Such forecasts motivate potential new market entrants to find ways to deal with industry entry barriers and establish their firm long-term presence as electric auto manufacturers.
Figure 2 Electric vehicles sales forecast
Bargaining power of buyers in Tesla Porter’s Five Forces Analysis
Bargaining power of buyers in electric vehicles industry is significant. Buyer bargaining power for Tesla depends on the following set of factors:
1. Absence of switching costs to competitors. There are no costs for customers to switch from Tesla’s Model 3 to another electric vehicle such as Jaguar’s I-Pace, Porsche’s Mission E-Cross, or Audi’s E-Tron Quattro. The absence of switching costs increases buyer bargaining power to a considerable extent.
2. Price sensitivity. Price sensitivity is another important factor that can affect buyer bargaining power. With the increasing range of electric vehicles from various established and new automobile companies, customers may notice that Tesla prices are actually very expensive. Accordingly, by choosing alternatives, buyers may exercise their bargaining power to make Tesla reconsider its pricing strategy to put more pressure on profit margin.
3. Product differentiation. The extent of product differentiation between various electric vehicles manufacturers is an important factor affecting buyer bargaining power. Currently, Tesla differentiates its electric vehicles on the basis of their performance and minimalist, as well as attractive design. For example, today Tesla Model S Plaid is the fastest accelerating electric car available on the market. Accordingly, the bargaining power of customers seeking high performance and attractively designed electric cars is limited because there is no abundance of offers in the market offering these benefits.
Bargaining power of Tesla suppliers is generally moderate. The following factors, among others, determine the bargaining power of suppliers:
1. The importance of having business with Tesla. Various suppliers would like to have business with the Tesla due to the extensive brand recognition and strong brand image of the company in the global scale. Specifically, Tesla is a good reference company for suppliers to find more customers and this fact diminishes supplier bargaining power in relation to Tesla.
2. Large numbers of suppliers. Tesla purchases components from multiple sources. It is important for suppliers to have business with Tesla and the electric automaker can replace the majority of its suppliers without difficulties. These factors decrease the supplier bargaining power.
At the same time, there are many components that Tesla purchases from a single source. For example, Tesla has only one qualified cell supplier for the battery packs it uses on production of vehicles. Moreover, Panasonic is the only supplier of lithium-ion cells at Gigafactory 1 in Nevada and PV cells and panels at Gigafactory 2 in Buffalo, New York.
3. Importance of volume to suppliers. Supplier bargaining power is negatively correlated with the volume of order supplier receives. In other words, greater volume of orders for supplier diminishes supplier bargaining power. Tesla’s manufacturing capacity has been consistently increasing and the alternative fuel vehicles manufacturer delivered 180,000 vehicles in Q4, 2020. Accordingly, increasing volume of orders by Tesla to its suppliers is going to further decrease supplier bargaining power.
Tesla Inc. Report contains a full analysis of Tesla Porter’s Five Forces Analysis. The report illustrates the application of the major analytical strategic frameworks in business studies such as SWOT, PESTEL, Value Chain analysis, Ansoff Matrix and McKinsey 7S Model on Tesla. Moreover, the report contains analyses of Tesla leadership, business strategy, organizational structure and organizational culture. The report also comprises discussions of Tesla marketing strategy, ecosystem and addresses issues of corporate social responsibility.
 Porter, M. (1979) “How Competitive Forces Shape Strategy” Harvard Business Review
 Source: Wood Mackenzie (2021)