Entering the Indian Market: The Risks That Tesla Faces

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Table of Contents

Introduction
Occurrence of Risk in Relation to Economic and Legal Implications
Identification of Risks in the Context of Economic and Legal Implications
Risk Management Plan
Record Keeping and Review Frequencies
Summary
Reference List

Introduction

Tesla is one of the growing numbers of American companies expanding their operations to India. The company plans to increase the number of vehicles delivered to the global market to 20 million by 2030 (Shukla, 2021, p. 121). However, the company will face a number of risks associated with the business in the Indian market. Consequently, the purpose of this report is to critically analyze these risks and develop a risk management plan for Tesla.

Occurrence of Risk in Relation to Economic and Legal Implications

Definition of Risk

In financial and economic terms, the risk is the chance that an outcome or the actual gains in investment will differ significantly from the expectations or target. The concept of risk emerged during the enlightenment era, yet calculations performed by traders to assess possible future events related to their sea journeys were common even before the middle ages (Olofsson & Zinn, 2018). Basically, the idea of risk has been steadily evolving over centuries, and today, there are entire disciplines such as risk management which study it. According to researchers, risk is an inherent element in business, and it is always linked to uncertainty and the potential gains and losses which may arise from it (Crovini, 2019). Essentially, risk can be viewed as a combination of uncertainties and outcomes related to them, which can be analyzed and assessed according to their probability. Park and Shapira argue that “a business can assign probabilities to the possible outcomes where the magnitude of the outcomes’ impacts is measurable” (2017, p. 53). Consequently, risk involves measuring the uncertainty that a business should take to realize a gain from a specific investment.

Difference between Risk and Uncertainty

Although they are related, risk and uncertainty are different terms that apply to distinct situations. Every risk is a form of uncertainty, yet its main characteristic is that it can be controlled to some extent and measured (Vincentiis et al., 2019). In other words, uncertainty always involves a lack of knowledge of any potential outcomes, while a risk implies an assessment of possible future scenarios. Businesses exist in an environment full of uncertainties which concern different spheres of their operations. Yet, once the enterprise decides to analyze an existing uncertainty and discovers its potential outcomes and likelihood, it becomes a risk. Specifically, the risk is defined as “a situation under which an organization or investor understands the decision outcomes and their probabilities of occurrence…” (Park and Shapira 2017, p. 59). On the contrary, uncertainty is the situation under which the investor or business does not have such information. Park and Shapira assert that “…while the risk is the probability of losing or winning the gain in an investment, uncertainty means that the future events are unknown” (2017, p. 59). Moreover, risks are measurable and controllable, but uncertainties are not.

Origins and Nature of Risk

The concept of risk comes from the French word “risqué”, which means “liable to shock.” In English, the earliest known use of the French term dates back to 1621, while the use of its English version dates back to 1655. In English terms, the word was used quite differently as it applied to “negative outcome as people viewed it as an activity that potentially exposes people to danger” losses (Beyzaee and Marvi, 2020, p. 589). In his “Wager,” Blaise Pascal argues that “…people wager with their lives that God exists or is not in existence” losses (Beyzaee and Marvi, 2020, p. 589). He argues that the belief in God offers people a positive expected value because if He exists, a believer will receive infinite gains and avoid unlimited losses (Beyzaee and Marvi, 2020, p. 589). John Hopkin’s definition in the modern world classifies four categories of risks- compliance, control, hazard, and opportunity risks.

Compliance risk is a potential exposure of an organization to material loss, legal penalties, or financial forfeiture due to its failure to act as per regulations, laws, or policies. Hazard risks are those that can only result in adverse outcomes, which are pure in nature and exist as insurable or operational such as theft. Control risks are those that “…give rise to uncertainty about a situation’s outcome and are frequently associated with projects” (Zhang et al. 2019, p.4). Opportunity risks are those that companies deliberately take in the marketplace in order to achieve a positive return and are speculative in nature.

Business and Society Setting

Based in Palo Alto, California, Tesla Inc. is an American corporation that manufactures electric vehicles. The company has the largest sales of battery electric vehicles and plug-in hybrids in the world at 23% and 16%, respectively (Deb et al., 2018, p. 3016). This business is relatively new, given that electric vehicles have been recently invented (Mohanty and Kotak, 2017, p. 389). The EV sector is part of the larger motor vehicle industry, but it relies heavily on technology because the products do not use petroleum products as a source of power (Diaz, 2020, p. 64). EVs and related technologies such as batteries are developed specifically for the general market, especially now that petroleum resources are declining, expensive, and the large environmental pollutants (Debnath et al., 2021, p. 216). Tesla’s primary customers, therefore, are individuals, organizations, and governments who wish to reduce the use of petroleum as well as the amount of carbon emission.

In India, Tesla is seeking to sell EVs to individuals, organizations, and governments. By estimation, the Indian motor vehicle market is the fifth-largest in the world, with more than 3.5 million units sold per year (Kumar and Padmanaban, 2019, p. 139). The EV market, however, is not popular since, according to studies, the country has only 1 million buyers of budget EVs per year, the number which, nevertheless, is expected to experience a rapid increase of over 20% per annum in the next few years (Tarei, Chand and Gupta, 2021). Consequently, India is a highly promising market for EVs, considering the large population and an enlarging middle class. Moreover, India is one of the Asian nations with the largest population of English speakers, given that its colonial history has dictated the use of the language in education and as an official language.

Figure 1. Graph showing the growing volume of sales for Tesla’s EVs in the global market (Tarei, Chand, and Gupta, 2021)

Identification of Risks in the Context of Economic and Legal Implications

Compliance Risks

Entering the Indian motor vehicle market is quite challenging, especially for companies like Tesla that want to sell products developed outside the country through importation. The probability of this risk is less than 10% because the company is well aware of its tax requirements in India (Sunitha and Sathischandra, 2017, p. 56). Specifically, tax compliance is the largest risk that the company faces, given the heavy levies imposed on imported vehicles. The Indian government has a compulsory levy duty of 60% on EVs costing $40,000 or less and 100% on those with prices over $40,000 (Dhar, Pathak, and Shukla, 2017, p. 133). Consequently, complying with this tax regulation will mean that Tesla’s EVs will be too costly for Indian buyers and a sales limitation for the company. In addition, failure to comply with the duty will attract a fine of not less than 25% of the total cost of the product plus the levy itself as provided under section 112 of the Customs Act, 1962 of India (Sunitha and Sathischandra, 2017, p. 56). Therefore, the compliance risk is a major challenge that Tesla is facing in its entry strategy. Moreover, the company employs local and foreign employees in its business in India, which means that local labor laws must apply. For example, a workplace with ten employees and above must have an Internal Complaints Committee as required in the Sexual Harassment of Women at Workplace 2013 (Sign, 2017, p. 34). The probability of such a risk is quite moderate and stands at 30% because Tesla already has an experience of failing to comply with foreign laws. For instance, the company had to pay a fine of $14 million in Germany due to the poor recycling of its batteries (Hense, 2020). The possible impact is that the company will be fined due to compliance failure and will have to pay INR 50,000 and above. While the impact of such a violation in terms of budget is low, the reputation damage which will be suffered by the company is potentially high.

Hazard Risks

Fire outbreak is the third biggest risk to the operations and continuity of businesses in India. Between 2014 and 2019, India had a 300% increase in cases of fire incidents in commercial buildings and 218% in government buildings (Erbaş et al., 2018). Tesla also has had incidents involving fire in the past; for example, in 2021, a fire broke out in the company’s factory in Clermont (Kolodny, 2021). Taking into consideration the existing situation in India with fires and the prior accidents occurring on Tesla’s facilities, the probability of such a risk is quite high and can be estimated to be at 70%. Tesla stocks its inventories in established commercial buildings and showrooms, therefore, there is a high risk that Tesla’s EVs will be destroyed. As a result, the impact will be extremely high, especially if the fire gets out of control.

Control Risk

The automobile industry faces various control risks, including safety, quality, obsolescence, security, and recalling. EVs need to be safe for users and should meet high-quality standards (Deb et al., 2019, p. 272). Failure to meet these demands means that Tesla can have massive recalls due to incidents associated with the use of vehicles, such as fires, accidents, breakdowns, and others. In addition, the software and technology used in developing components of EVs should be up-to-date and functional, failure to which can result in recalls or legal suites (Capuder et al., 2020, p. 105). Tesla, as any automaker, has had problems with its vehicles in the past, some of which were extremely severe. For example, in 2021, the company had to recall more than 11,000 vehicles due to an issue with self-driving software (Alamalhodaei, 2021). At the same time, taking into consideration the fact that Tesla produces approximately one million cars every year, 11,000 vehicles is a fairly small number. Therefore, a risk involving poor quality control at Tesla factories is 10%, therefore, low. Nevertheless, the impact of such a control risk can be quite moderate considering the costs of logistics and repairs involved in managing several thousand cars.

Opportunity Risks

The main opportunity risk for the company comes from its decision to enter the Indian market, which will happen in the near future. Nevertheless, the probability of risk failure on the Indian market is rather high and stands at 70% due to several factors. In particular, the EV market in the country is about 3% of the total automobile market industry (Gujarathi, Shah, and Lokhande, 2018, p. 31). Basically, the demand for electric cars in India is low, even considering the large population of the country. Moreover, India has one of the highest import tariffs for electric vehicles, which range between 60% and 100%, which was also acknowledged by Elon Musk (Hanada, 2021). If the import duties remain at the same level, the price of Tesla cards in India will be among the highest on the planet. India is a developing country which does not have an affluent population, and new Teslas will be affordable only for a small group of people. Therefore, there is a need to conduct an adequate risk analysis before entering the market. Tesla is taking the new venture regardless of the fact that the Indian market is highly dynamic and unpredictable. If the venture is not successful, Tesla will suffer a considerable economic loss because the company will face lower sales if the risk is not controlled, therefore the impact of the risk is moderate.

Risk Management Plan

Control Measures

Tesla needs to hire an external legal consultant with thorough knowledge of Indian law, regulations, culture, and economy. The consultant should provide the company with the right and useful information about the country’s laws, regulations, policies, and work culture. With this knowledge, Tesla will ensure that it understands the local laws and regulations and their impacts on the workplace and work culture. Consequently, it will be in a position to comply with the relevant laws relating to employment, workplace, and impact on society. Labor laws, in particular, should be well understood as the company needs to have both local and foreign workers in its Indian business (Erbaş et al., 2018, p. 1023). Contracts given to foreign and local employees need to be in line with the local labor laws. In addition, the company needs to protect workers, including females, as per the Sexual Harassment of Women at Workplace Act 2013 by establishing a complaint committee in each of its outlets across the country.

In dealing with hazard risks, Tesla must comply with fire policies, both internal and those established by authorities in India. In each of its outlets and showrooms, the company needs to have fire alarms, safety doors and windows, fire extinguish equipment, automatic smoke/fire detection units (Arribas-Ibar, Nylund and Brem, 2021, p. 1319). In addition, there must be adequate and effective measures that employees must follow to prevent and deal with fire outbreaks.

Tesla’s products must meet the demands for quality, safety, and security. It is necessary that the company sell EVs that are safe for the users on roads. The products should not be prone to fire incidents, accidents, stalling, and failure of components (Wu et al., 2019, p. 402). In addition, the technology used to make their components and systems must be updated and able to meet the local demands. Furthermore, the batteries must be functional and able to retain electric energy for a prolonged period to ensure that users use them over long distances.

It is also necessary that Tesla conduct initial market research and a pilot study for the new venture. The idea is to use a third party or an internal initiative for conducting a survey of the Indian EV market to understand its strengths, weaknesses, opportunities, and threats based on such models as SWOT, PESTEL, and other approaches (Dandage, Mantha, and Rane, 2019, p. 239). In this way, it will be possible to deal with opportunity risks such as market failure. In addition, a pilot study will be effective in determining how the actual market entry strategy should be designed as it will show the areas with potentials, weaknesses, and strengths and address the notable challenges.

Corrective Actions

Tesla needs to establish an effective approach for improving its business processes to eliminate the causes of risks and hazards. First, the company needs to have an internal office that will deal with the taxation in the Indian market (Jaiswal et al., 2021, p. 121089). Such an office can be established within the finance department and will have the mandate to ensure that every EV and related components are taxed as per the import policies in India.

Secondly, the company needs to have an internal human resource HR department that will deal with compliance with labor laws. The department should continuously review laws such as on a monthly or quarterly basis. This department should be responsible for recruitment and hiring, which should be done based on the existing laws in India. The idea is to ensure that employees in all the showrooms and outlets meet the existing policies and are protected from harassment, discrimination, poor workplace environment, and poor treatment. Buildings used for offices, showrooms, sale outlets, employee housing, and others must be fireproof. These establishments need to have fire alarms, safety doors and windows, fire extinguish equipment, automatic smoke/fire detection units (Liao, 2021, p. 11). In addition, there must be adequate and effective measures that employees must follow to prevent and deal with fire outbreaks.

Tesla is known for its heavy investment in technologies and has been a leading innovator in green energy and the development of EVs and related products. It is recommended that the company use this strategy when entering the Indian market. All the technologies used in developing the products and their components must be up-to-date and functional (Habib et al., 2020, p. 302). In addition, they must be frequently updated to ensure that they meet the changing needs of users. For example, new batteries need to be developed with newer technology each time to ensure continuous improvement. This means that customers will buy a more efficient battery than the previous one each time they need replacement. It is necessary that the company sell EVs that are safe for the users on roads. The products should not be prone to fire incidents, accidents, stalling, and failure of components.

Finally, Tesla must ensure that the corrective measures for dealing with opportunity risks are maintained throughout its operations in India. In this case, the EV survey must be conducted monthly to understand its strengths, weaknesses, opportunities, and threats based on such models as SWOT, PESTEL, and other approaches (Jhunjhunwala, Kaur, and Mutagekar, 2018, p. 46). In this way, it will be possible to keep the business up-to-date and ensure continuity. Frequent pilot studies will be effective in determining how the actual market expansion strategy should be designed as it will show the areas with potentials, weaknesses, and strengths and address the notable challenges.

Record Keeping and Review Frequencies

The aim of keeping records and reviewing them frequently is to ensure that the causes of incidents are noted and rectified and mitigation strategies established to prevent future occurrences. In these records, Tesla should note the number of times and implications of breaches of labor laws and regulations. The risk register should also have this data at all times. In addition, the HR department should frequently review these records, such as annually or twice a year. Tesla should record the number of times and implications in which it experienced a fire incident in any of its outlets, showrooms, and other premises. The operations department needs to acquire all the information from every outlet and ensure that the records are frequently reviewed, such as two times a year.

Breaching of quality standards for Tesla’s EVs and related components in sale in the Indian market should be recorded and reviewed at all times. In this case, the idea is to record the number of times the organization has breached the quality standards for its products, including safety, security, product operation, and others. The information should also appear in the risk register, and the HR department should review these documents at least two times a year.

Finally, dealing with opportunity risks should also be included in the risk register. In this case, Tesla’s HR department in the Indian market should record the number of times and the implications in which it has failed to capture the potential gains of the opportunity risks. The information on the losses incurred from each incident should appear in the records as well as the risk register. Frequent reviewing should be done, such as four times every year, and the senior managers should access this information as it is necessary for decision making. It should be noted that the senior managers need this information in making decisions for expansion into multiple cities and towns in India in the next few years.

Summary

This report provides a comprehensive analysis of the risks that Tesla faces and which it needs to address as it enters the Indian market. The analysis demonstrates that there are four categories of risks involved- compliance, opportunity, hazard, and control risks. Each category of risks will need special attention and focus on ensuring that the company reduces the chances of failing in the new market. The report provides the control measures that Tesla needs to use to mitigate the risks involved.

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