TLDR
- Tesla plans to produce a smaller, cheaper Model Y crossover in Shanghai, costing 20% less to produce
- Most production will be sold in China, with future expansion to Europe and North America
- Tesla faces increasing competition in China from BYD and Xiaomi’s SU7 sedan
- The company warned the Trump administration that tariffs could increase manufacturing costs
- Tesla’s stock has fallen nearly 50% since December peak, while CEO Elon Musk balances political and business interests
Tesla is planning to introduce a cheaper version of its best-selling Model Y crossover, targeting the competitive Chinese market where it faces mounting pressure from local rivals. According to Reuters sources, the new variant will be manufactured at Tesla’s Shanghai plant.
The smaller Model Y will reportedly cost at least 20% less to produce. This could help Tesla maintain its market position in China, where it has seen increasing competition.
Most of the production from the Shanghai facility will be sold within China. Mass production is expected to begin next year.
The sources indicated that manufacturing would later expand to Europe and North America. Tesla has not officially commented on these reports.
Tesla CEO Elon Musk had previously announced in January that the company would introduce cheaper models in the first half of this year. However, he did not provide specific details about pricing or vehicle size.
Last year, Reuters reported that Tesla had abandoned plans for a lower-cost vehicle often referred to as the “Model 2.” Musk denied these reports without providing evidence to the contrary.
China’s best-selling car
The Model Y has been China’s best-selling car for the past two years. But local competitors, particularly BYD, have been steadily gaining market share in the electric vehicle segment.
Tesla also faces a formidable new challenger in Xiaomi. The phone manufacturer’s first car, the SU7 sedan, has been outselling Tesla’s Model 3 since December.
While planning its product expansion, Tesla has also expressed concerns about potential trade policies. The company warned the Trump administration about the possible negative impacts of tariffs on its business.
In an unsigned letter submitted to a regulatory docket on March 11, Tesla cautioned that a trade war could increase manufacturing costs for its vehicles. The letter also noted that retaliatory tariffs from other countries could harm Tesla vehicles made in Austin and electronic equipment produced in California and Nevada.
“Past US special tariff actions have thus increased costs to Tesla for vehicles manufactured in the United States, and increased costs for those same vehicles when exported from the United States, resulting in less competitive international marketplace for US manufacturers,” the company stated in the letter.
This warning comes despite Musk’s close association with former President Donald Trump. Musk has been named a “special government employee” working with Trump’s efforts to streamline the federal government.
Tesla stock down 50% since its December high
Tesla’s stock has faced challenges, falling by nearly half since its December peak. Musk recently mentioned he was having difficulties managing his businesses due to his involvement with the White House DOGE office.
According to a National Highway Traffic Safety Administration filing, 20-25% of components for Tesla’s 2025 model-year vehicles come from Mexico. This makes the company vulnerable to proposed tariffs on imports from that country.
Tesla’s Chief Financial Officer Vaibhav Taneja acknowledged this concern during a January earnings call. “Over the years, we’ve tried to localize our supply chain in every market, but we are still reliant on parts from across the world for all our businesses,” he said.
“Therefore, the imposition of tariffs, which is very likely, will have an impact on our business and profitability,” Taneja added.
The letter warning about tariffs was uploaded to a public comment portal for the US Trade Representative on the same day Trump invited Musk and several Tesla vehicles to the White House for a publicity event. During this event, Trump said he would purchase a Tesla to show support for Musk and his company.
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