Tesla developing a smaller, cheaper electric SUV with production in China and potential expansion to the US and Europe

Tesla is developing an all-new smaller, cheaper electric SUV, Reuters reported, citing four people familiar with the project. The discussions covered manufacturing processes and specifications for components.

Production plans and vehicle size

Three of the sources said the compact SUV would be produced in China, while one said Tesla also aims to expand production to the US and Europe. Two sources estimated the vehicle would be about 14 feet long, making it shorter than Tesla’s top-selling Model Y, which is about 15.7 feet.

Pricing and cost-cutting targets

Two Tesla sources said the company aims to price the new SUV substantially below its entry-level Model 3 sedan, which starts at about $37,000 in the US. The sources said Tesla plans to reduce costs in part by using a smaller battery, which would mean a shorter driving range than the Model Y’s 306 to 327 miles.

One source added that Tesla would use a single electric motor instead of two, similar to a performance option on current Tesla models. The same source said Tesla also wants to make the vehicle much lighter, at about 1.5 metric tons compared with about two tons for the Model Y.

Autonomy strategy and market constraints

The effort follows Elon Musk’s 2024 decision to scrap a highly anticipated low-cost EV project and pivot toward robotaxis and humanoid robots. A key question is whether the smaller SUV signals a return to mass-market, human-driven vehicles or whether it fits Tesla’s broader push toward fully autonomous vehicles.

One of the people familiar with the project and a Tesla employee with knowledge of the company’s product philosophy said the model could serve both purposes. The employee said Tesla now aims to build models that would be driverless but also offer a human-driven option.

The employee said Tesla recognizes that many global markets will not see meaningful adoption—or regulatory acceptance—of driverless vehicles for years. Preserving the ability to build a model with or without driving controls could help sales and keep factories running near capacity, the employee said.

Development stage and timing

Reuters reported that the four sources said the SUV remained in an early development stage. Reuters could not determine whether Tesla has approved the car for production. While timing was unclear, the sources said production is unlikely to begin this year.

Three sources said the new model would be produced at Tesla’s Shanghai factory.

Context: Tesla’s shift from mass-market EVs

For years after Tesla began producing luxury electric cars in 2008, Musk said the company’s mission was to make affordable, mass-market EVs critical to fighting the climate crisis. However, start-and-stop efforts have not yet delivered on that goal.

Beginning in 2020, Musk said Tesla aimed to sell 20 million vehicles annually by the end of the decade. A project he promoted to produce a $25,000 EV—often referred to as “Model 2” by Tesla fans and investors—was expected to drive rapid growth. In 2024, Reuters reported Tesla abandoned plans for the Model 2, while still planning a driverless robotaxi on the same platform.

Musk later said it would be “pointless” and “silly” for Tesla to make a $25,000 EV for human drivers because the company would soon offer driverless vehicles. A former Tesla manager said a cheaper traditional car would represent a significant departure from Tesla’s philosophy through mid-2025, and that until then Tesla had shifted toward robotaxis to lower costs per mile for riders and car owners.

Sales pressure and market expectations

Analysts cited by Reuters predict a third straight year of declining sales for Tesla’s traditional EVs, which generate most of its revenue. Tesla currently operates a small number of robotaxis only in Austin, Texas, many with human safety monitors in the passenger seat.

Tesla did not respond to Reuters’ requests for comment about plans for a new vehicle.

Broader financial backdrop

Reuters also noted Tesla’s market capitalization is about $1.3 trillion, far outpacing its financial fundamentals. Investors last year approved a compensation package granting Musk up to $1 trillion in Tesla stock tied to product and financial goals.

Separately, Tesla has said it plans to start production this month of a two-door Cybercab robotaxi, first unveiled as a concept vehicle in 2024 with no pedals or steering wheel. A National Highway Traffic Safety Administration spokesperson said Tesla has not sought a federal exemption required to sell a vehicle with no steering wheel or pedals, and it remains unclear when the Cybercab will go on sale or be used in a Tesla-operated robotaxi fleet.