Tesla Motors Inc (NASDAQ:TSLA) has been an absolute gorilla on the markets recently. The company just completed a new financing round, giving it a crisp $1 billion to work with. That is allowing Tesla to pay off a $450 million loan it was given by the federal government to build its advanced vehicles.
The cash raised in this round will also be used to help develop new models. One example is the Model X, a sport-utility vehicle that could offer Tesla Motors Inc (NASDAQ:TSLA) enormous margins when it can get such a vehicle to market at scale.
Tesla is in a great position. It is redefining what we think about automakers. Instead of simply manufacturing cars, Tesla Motors Inc (NASDAQ:TSLA) is a technology company, bringing fresh ideas into what was previously a stagnant auto industry. From thinking about self-driving vehicles to building service stations and offering customers unique financing, it’s clear why investors are clamoring for Tesla stock.
Yet there is a market that has been serving the traditional automakers well that Tesla could dominate. The company wants to shake up the market for passenger cars. And with Tesla Motors Inc (NASDAQ:TSLA)’s knowledge in advanced automotive technology, it have an opportunity to further entrench itself.
Consider the first-time car buyer. Since young people often find their career-defining jobs in the city, they need a vehicle that reflects their urban environs. These potential car owners are looking for something that looks good, is efficient and can be navigate the city.
What kind of car are we talking about? We’re talking about small cars, a category that Tesla Motors Inc (NASDAQ:TSLA) has not touched. At least it hasn’t yet.
The big automakers are already deeply ingrained in the small-car market. General Motors Company (NYSE:GM) knows that in order to captivate new customers, it has to get small cars right. General Motors Company (NYSE:GM) has learned that getting smart about the small-car market can pay huge rewards. Brand loyalty is important to consumers.
That is how rival imports were able to steal market share from General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) in years past. They made high-quality small cars. When consumers were ready to trade in and perhaps upgrade, they stuck with their Toyota or Honda brand.
Competing with the big automakers in small-car frames will pose its share of difficulties for Tesla. For example, Ford Motor Company (NYSE:F) currently has three small cars in its lineup: the crossover Escape, the hatchback Fiesta and the Focus sedan.
Tesla Versus Scale
Tesla will be challenged in terms of Ford Motor Company (NYSE:F)‘s sheer scale. But that does have some advantages. In order for Ford to make a profit on small cars, it must deliver them by the tens of thousands. Ford also relies on a complex network that spans around the globe for car parts as well as dealers that sell their models.
Tesla is operating on a much smaller model, and has the advantage of being more nimble and perhaps receptive to customer feedback.
That feedback is going to be important for Tesla Motors Inc (NASDAQ:TSLA). Its current lineup includes the Model S sedan and the Model X sports car. Those two vehicles reside in the premium market for vehicles since they start at over $60,000.