Tesla Developing New Compact Cheaper EV After Model 2 Scrap

Affordable Teslas have remained a distant promise for over a decade. As traditional EV sales stagnate and cheaper rivals from China proliferate, the company is once more exploring a smaller, lower-cost electric vehicle. Four people familiar with the plans told Reuters that Tesla has contacted suppliers in recent weeks to discuss a new compact SUV distinct from the Model 3 or Model Y. The project sits in early development. Production approval has not yet been granted.

The vehicle would measure 4.28 meters long, weigh roughly 1.5 metric tons, use a single electric motor and a smaller battery pack, and target a price substantially below the Model 3, which starts at $34,000 in China and about $37,000 in the United States. Range would fall short of the Model Y's 306 to 327 miles. Initial output would occur at the Shanghai factory, with later expansion possible in the United States and Europe. These details come directly from the Reuters sources; Tesla declined to comment.

At the center of the story lies an unresolved tension. After scrapping the so-called Model 2 project in 2024 and redirecting resources toward robotaxis and humanoid robots, does this new effort mark a strategic retreat to mass-market human-driven cars? Or does it extend the autonomy bet? One source close to the current product philosophy said Tesla now designs models that default to driverless capability while preserving the option for conventional controls. Many global markets will lack both regulatory approval and consumer adoption of fully autonomous vehicles for years. Offering both versions could sustain factory utilization and broaden sales, the person added.

This latest attempt fits a longer pattern. Elon Musk outlined a $25,000 EV as central to 20 million annual vehicle sales by 2030. Reuters first reported the Model 2 cancellation in 2024; Musk labeled those accounts "lies" at the time. The company instead launched modestly discounted "standard" versions of the Model 3 and Model Y last fall. Priced at $36,990 and $39,990 respectively in the U.S., those variants have not produced meaningful sales growth. Tesla's first-quarter 2026 deliveries reached 358,000 vehicles, a 6 percent increase from 337,000 a year earlier according to company figures compiled by InsideEVs. Analysts nonetheless project a third consecutive annual decline in conventional EV revenue.

Development history adds caution. The Model X, Model 3, Model Y and Cybertruck each encountered delays in design and manufacturing scale-up. Similar risks apply here. Tesla showed concept versions of the Roadster and Semi in 2017; neither has entered volume production. Bloomberg has forecast Tesla's free cash flow swinging from $6.2 billion positive at the end of 2025 to negative $5.8 billion in 2026, a $12 billion reversal that could constrain new-vehicle investment.

Public emphasis remains on autonomy. Tesla operates a limited robotaxi service in Austin with safety monitors. Production of the two-seat Cybercab, unveiled in 2024 without steering wheel or pedals, is slated to begin this month, yet the company has not applied for the federal exemption required by the National Highway Traffic Safety Administration to sell such a vehicle. The company's $1.3 trillion market capitalization rests heavily on these future bets rather than present automotive fundamentals.

The new compact SUV could theoretically serve dual roles, functioning as either a traditional EV or part of a future driverless fleet. Whether it receives final approval, reaches cost targets, or arrives before further strategy shifts remains unknown. Tesla's repeated starts and stops on affordable vehicles have left investors, customers and competitors watching closely for concrete progress beyond supplier conversations.