Tesla is developing a new smaller, cheaper EV, Reuters sources say

A motorist sits in a Tesla Model 3 at a Tesla charging station Friday, March 13, 2026, in Lakewood, Colo., in Denver. (AP Photo/David Zalubowski)

Tesla is developing an all-new smaller, cheaper electric SUV, four people familiar with the matter told Reuters.

The automaker has contacted suppliers in recent weeks to discuss details of the plan for the compact SUV – which would be a new vehicle and not a variant of Tesla’s current Model 3 or Y, the people said. The conversations involved the manufacturing process and specifications for various components, they said.

Three of the people said the compact SUV would be produced in China, and one said Tesla also aims to expand production to the United States and Europe. The car would be 4.28 metres in length, or about 14 feet, two of the sources said. That’s significantly shorter than Tesla’s top-selling Model Y SUV, which is about 15.7 feet long.

The effort follows a decision by Chief Executive Elon Musk to scrap a highly anticipated low-cost EV project in 2024 and pivot the company to focus on robotaxis and humanoid robots. A key question is whether this latest effort to develop a smaller SUV signals a strategy shift back to mass-market human-driven EVs or whether the new model would align more with Tesla’s vision for fully autonomous vehicles.

Such a model could potentially serve both purposes, according to one of the people familiar with the new-vehicle project and a Tesla employee with knowledge of its current product philosophy. The Tesla employee declined to confirm or deny details of any specific vehicle but said, in general, the automaker now aims to build models that would be driverless but offer a human-driven option.

While aiming for full autonomy across its lineup, the person said, Tesla realizes many global markets won’t see meaningful adoption – nor regulatory acceptance – of driverless vehicles for years. Preserving the option to build a particular model with or without driving controls could enable more sales and help ensure Tesla can keep its car factories running near capacity, the person said.

As Tesla chases a driverless future, some analysts predict a third-straight year of declining sales for the traditional EVs that provide the vast majority of its revenue. So far, Tesla operates a small number of robotaxis only in Austin, Texas, many with human safety monitors in the passenger seat.

Tesla didn’t respond to requests for comment about plans for a new vehicle.

The four people familiar with the project said it remained in an early development stage. Reuters couldn’t determine whether Tesla has given the green light for the car’s production.

The automaker has a history of starting development on products that end up long delayed or canceled. Tesla showed off concept vehicles for a Roadster supercar and a Semi freight truck in 2017, for instance, but still hasn’t produced the sports car or mass-produced the Semi.

Two of the sources said Tesla aims to offer the new vehicle at a substantially lower price than its entry-level Model 3 sedan, which starts at US$34,000 in China and about $37,000 in the United States. They said Tesla planned to save costs in part by using a smaller battery, which would mean a shorter driving range compared with 306 to 327 miles for the Model Y.

One of the people added that the automaker would also offer a single electric motor instead of two, a performance option on current Tesla models. Tesla also wants to make the car much lighter, this person said, at about 1.5 metric tons compared with about two tons for the Model Y.

Three of the people said the new model would be produced at Tesla’s Shanghai factory. While the timing remained unclear, the car’s production is unlikely to begin this year, the people said.

Tesla’s start-and-stop history on affordable EVs

For years after Tesla started in 2008 producing luxury electric cars, Musk said the company’s real mission was to produce affordable, mass-market electric-vehicles that would be critical to fighting the climate crisis. But start-and-stop efforts to deliver on that goal have so far fallen short.

Beginning in 2020, Musk said Tesla aimed to sell 20 million vehicles annually by the end of the decade, nearly double that of Toyota, the current global sales leader. A project Musk touted to produce a $25,000 EV, often called the “Model 2” by Tesla fans and investors, was expected to drive explosive vehicle-sales growth.

Then in 2024, Reuters reported that Tesla had abandoned plans for the Model 2, although it still planned a driverless robotaxi on the same platform. Tesla’s biggest EV rivals in China had already started producing much cheaper EVs. Later that year, Musk 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 an all-new cheaper traditional car would represent a significant departure from the company’s philosophy through mid-2025. Until then, the manager said, Tesla had dropped the effort to mass-produce an entry-level car in favor of robotaxis as the key to lowering costs per mile for riders and the car owners charging them for trips.

After scrapping the Model 2, Musk and other Tesla executives described different plans for new, “more affordable” EVs in vague terms. When the vehicles arrived last fall, however, they were stripped-down versions of the current Model 3 and Y offered in new “standard” trim levels at only a modest discount.

U.S. prices of $36,990 for the Model 3 Standard and $39,990 for the Model Y struck some investors as too high to attract a new class of buyers and haven’t yet made a significant difference in Tesla’s overall sales.

Is the driverless cybercab on track?

Publicly, Musk and Tesla have continued to emphasize plans for robotaxis and humanoid robots, which has been effective in sustaining Tesla’s eye-popping stock-market value.

Tesla’s market capitalization is about $1.3 trillion – far outpacing its financial fundamentals, even when compared with high-flying tech peers. Investors last year approved a compensation package granting Musk up to $1 trillion in Tesla stock tied to a series of product and financial goals.

The automaker now says 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. But it remains unclear when the car will go on sale or see use in a Tesla-operated robotaxi fleet. The automaker hasn’t sought a federal exemption required to sell a vehicle with no steering wheel or pedals, a spokesperson for the National Highway Traffic Safety Administration said.

Reporting by Zhuzhu Cui, Zhang Yan, Aditi Shah and Chris Kirkham. Editing by David Dolan, Brian Thevenot and David Crawshaw, Reuters