Tesla Prepares Smaller, More Affordable Model Y to Compete With Chinese Rivals

The new plan

According to a Reuters report, Tesla is developing a smaller and more affordable version of the Model Y to combat growing competition in the electric vehicle (EV) market, particularly from Chinese automakers like BYD.

The new vehicle is expected to be at least 20% cheaper to produce than the current Model Y and will primarily target the Chinese market before expanding to Europe and North America. Mass production is scheduled to begin in 2026.

A frugal evolution of the Model Y

Tesla’s move comes as its dominance in China faces pressure from domestic EV makers, who have aggressively expanded their market share. In 2024, the Model Y was the best-selling car in China, but sales have softened in 2025. In response, Tesla is reportedly working on a more cost-effective version of the Model Y, developed under the project codename “E41.”

Rather than building an entirely new vehicle, Tesla is taking a “depop” approach — a process of simplifying existing designs to accelerate production — according to Chinese media outlet 36KR. This new Model Y-based vehicle will reportedly feature cost-cutting measures similar to the budget-friendly Model 3 launched in Mexico. These reductions may include swapping vegan leather for cloth seats, removing the second-row touchscreen, and eliminating ambient lighting—sacrifices that could lower the price by around $4,000.

Production plans in China, Europe, and the U.S.

Tesla plans to manufacture this cheaper Model Y in its Shanghai facility, initially prioritizing Chinese consumers. However, sources indicate that production will eventually expand to European and North American factories. While no specific release timeline has been confirmed for these markets, the model’s affordability could help Tesla regain momentum as global competition intensifies.

This strategy aligns with Tesla’s January announcement that it would introduce more affordable models utilizing aspects of both its next-generation and existing platforms. Unlike the 2025 Model Y refresh — which brought incremental updates — this upcoming model could be a true price disruptor in the EV market.

Tesla faces increasing competition

Tesla’s decision to produce a lower-cost Model Y comes at a crucial time. The company’s stock has slumped, and its U.S. vehicle registrations fell by 11% in January. Meanwhile, domestic Chinese automakers have steadily eaten into Tesla’s market share. By lowering production costs and streamlining manufacturing, Tesla hopes to maintain its position as a global EV leader.

Despite these challenges, demand for Tesla’s refreshed Model Y remains strong, with over 200,000 pre-orders reported in China alone. If the smaller, more affordable version follows suit, it could play a key role in Tesla’s strategy to defend its market position against surging competition from BYD and other rivals.

Final thoughts

With mass production set for 2026, Tesla’s next move will be closely watched by the industry. If the new, budget-friendly Model Y delivers on affordability without compromising too much on features, it could help Tesla stay ahead in the ever-evolving EV landscape.