Tesla is working on plans for a compact, budget-friendly electric SUV, according to four sources with knowledge of the project who spoke with Reuters.
The electric vehicle manufacturer has reached out to suppliers in recent weeks to discuss manufacturing processes and component specifications for the new compact SUV, which would be an entirely new model rather than a modified version of existing Model 3 or Y vehicles, the sources revealed.
Three sources indicated the compact SUV would be manufactured in China, while one source mentioned Tesla’s plans to eventually expand production to facilities in the United States and Europe. The vehicle would measure approximately 4.28 meters (about 14 feet) in length, making it notably smaller than Tesla’s popular Model Y SUV, which stretches about 15.7 feet long, according to two of the sources.
This development comes after CEO Elon Musk canceled plans for a much-anticipated affordable electric vehicle project in 2024, redirecting the company’s focus toward robotaxis and humanoid robots. The key question remains whether this new compact SUV represents a return to Tesla’s mass-market strategy for human-operated vehicles or aligns with the company’s autonomous vehicle ambitions.
According to one source familiar with the project and a Tesla employee knowledgeable about the company’s current product strategy, the new model could potentially fulfill both roles. While the Tesla employee wouldn’t confirm specific vehicle details, they explained that the company now designs models to be driverless while maintaining human-driving capabilities.
The employee noted that while Tesla pursues full autonomy across its vehicle lineup, the company recognizes that many international markets won’t embrace or regulate driverless vehicles for several years. Maintaining flexibility to produce vehicles with or without driving controls could boost sales and help keep manufacturing facilities operating at full capacity.
As Tesla pursues its autonomous future, industry analysts forecast a potential third consecutive year of declining sales for traditional electric vehicles, which currently generate most of the company’s revenue. Currently, Tesla operates a limited robotaxi service only in Austin, Texas, with many vehicles still requiring human safety operators.
Tesla did not respond to requests for comment regarding the new vehicle plans.
The four sources emphasized that the project remains in early development phases. Reuters could not confirm whether Tesla has approved the vehicle for production.
The automaker has previously begun development on products that faced significant delays or cancellation. Tesla unveiled concept versions of a Roadster sports car and Semi freight truck in 2017, but has yet to produce the sports car or achieve mass production of the Semi.
Two sources indicated Tesla plans to price the new vehicle substantially below its entry-level Model 3 sedan, which currently starts at $34,000 in China and approximately $37,000 in the United States. The company would reduce costs partly by incorporating a smaller battery, resulting in shorter driving range compared to the Model Y’s 306 to 327 miles.
One source added that the vehicle would feature a single electric motor instead of the dual-motor performance option available on current Tesla models. Tesla also aims to significantly reduce the vehicle’s weight to about 1.5 metric tons, compared to the Model Y’s approximately two-ton weight.
Three sources confirmed the new model would be manufactured at Tesla’s Shanghai facility. While timing remains uncertain, production is unlikely to begin this year, according to the sources.
For years following Tesla’s 2008 launch with luxury electric vehicles, Musk emphasized the company’s mission to create affordable, mass-market electric vehicles essential for addressing climate change. However, repeated attempts to achieve this goal have encountered setbacks.
Starting in 2020, Musk announced Tesla’s goal to sell 20 million vehicles annually by decade’s end, nearly doubling Toyota’s current global sales leadership. A project Musk promoted for a $25,000 electric vehicle, commonly called the “Model 2” by enthusiasts and investors, was expected to drive dramatic sales growth.
In 2024, Reuters reported Tesla had abandoned Model 2 plans, though the company still intended to develop a driverless robotaxi using the same platform. Tesla’s major Chinese competitors had already begun producing significantly cheaper electric vehicles. Later that year, Musk declared it would be “pointless” and “silly” for Tesla to manufacture a $25,000 electric vehicle for human drivers, given the company’s imminent driverless vehicle offerings.
A former Tesla manager described an entirely new affordable traditional vehicle as a significant shift from the company’s philosophy through mid-2025. Until recently, the manager explained, Tesla had abandoned mass-production efforts for entry-level vehicles in favor of robotaxis as the primary method for reducing per-mile costs for passengers and vehicle owners offering ride services.
After canceling the Model 2, Musk and other Tesla executives outlined various plans for new, “more affordable” electric vehicles using vague language. When these vehicles debuted last fall, they were simplified versions of current Model 3 and Y vehicles offered in new “standard” trim levels with modest price reductions.
U.S. pricing of $36,990 for the Model 3 Standard and $39,990 for the Model Y disappointed some investors who considered the prices too high to attract new buyer segments and haven’t significantly impacted Tesla’s overall sales performance.
Publicly, Musk and Tesla continue emphasizing robotaxi and humanoid robot plans, which has helped maintain Tesla’s remarkable stock market valuation.
Tesla’s market capitalization stands at approximately $1.3 trillion, far exceeding its financial fundamentals even compared to high-performing technology companies. Investors approved a compensation package last year granting Musk up to $1 trillion in Tesla stock tied to various product and financial milestones.
The company now plans to begin production this month of a two-door Cybercab robotaxi, initially revealed as a concept vehicle in 2024, featuring no pedals or steering wheel. However, the timeline for sales or deployment in Tesla’s robotaxi fleet remains unclear. The automaker has not requested the federal exemption required to sell vehicles without steering wheels or pedals, according to a National Highway Traffic Safety Administration spokesperson.
