Tesla Planning Cheaper, Smaller Model Y to Boost China Sales

Tesla plans to make a cheaper and smaller version of its best-selling car, the Model Y, in Shanghai, sources have revealed.

The US electric vehicle maker is developing the model under a project codenamed “E41” and will build it using existing production lines, three people with knowledge of the matter told Reuters.

The plan aims to regain ground lost during a price war in its second-largest market. Mass production will begin at its biggest factory by output in 2026, two of the people said.

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The car will cost at least 20% less to produce than the refreshed Model Y launched late last year, two of them said. The Model Y, a mid-sized SUV crossover, retails from 263,500 yuan ($36,351).

The Shanghai output will be mainly sold in China to defend market share, one of the people said. The model will also be produced in Europe and North America, the person said, without providing a timeframe.

The people declined to be identified as the project is confidential. Tesla did not respond to a request for comment.

Tesla’s intention to make a lower-cost Model Y led by its China team was first reported by 36Kr. The project name and size of cost reduction are reported here for the first time.

CEO Elon Musk said in January that Tesla would introduce lower-cost models in the first half of 2025 but did not elaborate on the size of cost reduction, pricing, size or specification.

Musk has been a focus of global attention lately – a lot of it negative – since he started work helping the Trump Administration to trim federal government spending and try to reduce the US’s national deficit.

In an interview with Fox Business he admitted his work with Tesla and other companies was suffering, saying he had “great difficulty” running them while cutting government roles and services deemed by Republicans to be wasteful – remarks that led to Tesla shares sinking by 15% on Monday.

President Trump sought to lift Musk’s spirits, and repair some of the damage his companies have suffered since he took up his new role, by buying a Tesla, and making a big show of it.

Trump and Musk surveyed Tesla EVs in front of the White House on Tuesday in what the New York Times said was essentially an extended commercial for Musk’s company.

Market share in China dips to 10.4%

Meanwhile, the Model Y was China’s best-selling car in 2023 and 2024 but is seeing strengthened competition from domestic peers who have launched at least six rival models in the past year.

Xiaomi’s YU7 crossover could become its strongest rival when launched this year, analysts have said.

Tesla’s market share in China’s battery-only EV market slipped to 10.4% last year from 11.7% a year earlier.

The SU7 sedan from Xiaomi – the world’s third-largest smartphone maker that only started selling cars in April – has outsold Tesla’s Model 3 on a monthly basis since December.

Tesla of late has not announced any completely new products other than its autonomous ‘Cybercab’ robotaxi for 2026. Instead, it is fending off rivals, particularly in China, with different versions of existing models developed in quick succession.

It plans to launch a six-seat variant of the Model Y later this year in China, a market of increasing importance as sales plunge in Europe and the US, sources have said.