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

Tesla is developing a brand-new, smaller, and more affordable all-electric compact SUV, according to four people familiar with the matter who spoke to Reuters in late January 2026. The automaker has initiated discussions with suppliers in recent weeks regarding the manufacturing process and specifications for this distinct vehicle, which is not a variant of the existing Model 3 or Y. This development follows CEO Elon Musk's controversial 2024 decision to scrap the long-anticipated 'Model 2' low-cost car project, pivoting the company's focus toward robotaxis and humanoid robots. The new effort appears to be a strategic move to address declining sales of its traditional, human-driven electric vehicles, which still constitute the vast majority of its revenue. The project, which remains in an early development stage, signals a potential recalibration of Tesla's strategy. According to sources, the compact SUV would measure approximately 4.28 meters (14 feet) in length, making it significantly shorter than the Model Y. Key to its affordability would be cost-saving measures like a smaller battery pack—resulting in a shorter driving range—a single electric motor instead of a dual-motor setup, and a lighter overall weight of about 1.5 metric tons. Initial production is planned for Tesla's Shanghai factory in China, with potential future expansion to the United States and Europe, though a start date is unlikely in 2026. A central question is whether this model represents a return to mass-market, human-driven EVs or is designed to align with Tesla's autonomous vehicle vision. Internally, Tesla's philosophy appears to be evolving to accommodate market realities. A Tesla employee familiar with the company's current product thinking indicated that while the ultimate goal is full autonomy, the automaker recognizes that many global markets will not see widespread regulatory acceptance of driverless cars for years. Therefore, the company now aims to build models that could be driverless but would retain the option for human driving controls. This flexible approach would allow Tesla to sell vehicles in markets not ready for full autonomy, helping to maintain factory utilization and sales volume. This development occurs against a backdrop of analyst predictions for a third consecutive year of declining sales for Tesla's core EV business, even as the company publicly champions its imminent Cybercab robotaxi, which has yet to receive necessary regulatory approvals for a vehicle without a steering wheel or pedals.