Tesla Scraps Affordable Model 2, Shifts Focus to Robotaxi (Despite Musk's Denial)

Tesla has so far stuck to Elon Musk's Master Plans, following the company's mission to bring affordable electric vehicles to the masses. To reach that point, Tesla followed a stepped approach, starting with luxury EVs and expanding its market from there with more affordable EVs. However, a truly affordable electric vehicle from Tesla is still not on the market, even though other carmakers, mostly from China, are already producing affordable EVs.

Tesla ditched the plans to build a $25,000 EV in 2022 when the post-pandemic shock ground supply chains to a halt and raised car prices through the roof. The affordable EV made a surprising comeback in 2023 after demand for existing Tesla models suddenly evaporated, forcing Tesla to cut prices. Tesla started the development of its most affordable model with big plans, including a new manufacturing process that would cut production costs in half.

These plans have changed a few times, first by moving initial production from Mexico to Texas and later by setting up plans for several gigafactories around the world to produce the compact EV at scale. However, if a Reuters report is true, they may have changed again. Worse than that, Reuters claims that Tesla scrapped the affordable EV plans completely. Instead, the EV maker will focus on developing the robotaxi model that shares the Gen-3 platform with the $25,000 EV.

The publication cites several anonymous sources, including internal communication that confirms the mass-market EV, known internally as NV91 and externally as H422, is dead. "Suppliers should halt all further activities related to H422/NV91," read one message, while another from a manager thanked their employees "for their hard work and dedication."

Within minutes of the report's publication, Tesla's share prices dropped by more than 5%. Elon Musk denied the report about 15 minutes later, saying, "Reuters is lying (again)." Immediately, the stock bounced back, a roller coaster move that made some people accuse Reuters of market manipulation. After all, scrapping the affordable EV plans doesn't make sense.

To be fair, this is not the first time Musk postponed the $25,000 EV development. He also indicated in the past that the robotaxi is his dream project. However, as Walter Isaacson showed in his book about Elon Musk, the Tesla CEO was talked into building the compact EV in addition to the robotaxi. This ensured that the latter was viable and economically feasible. After all, without the volumes of an affordable EV, the development costs for the robotaxi would've been insane.

Even though Tesla Full Self-Driving has made a breakthrough, Tesla would find it almost impossible to sell its robotaxis outside North America. Local regulations, especially in Europe, make autonomous vehicles nearly impossible to certify. If Tesla wants to develop a new car model for the low volumes afforded by the American market, the company is really in trouble. The demand for the current lineup seems to have peaked, and the Gen-3 EVs were considered the cure that would've allowed Tesla to grow again.

Hopefully, this would prove just a hoax or an April Fool's joke that Reuters reporters discovered too late in a drawer. Production of the next-generation EVs was planned to start in the second half of 2025 at Giga Austin in Texas. Last year, Tesla notified suppliers to prepare for an initial production of 10,000 units per week. Canceling everything one year before production would not make much sense that late in the game, especially as Tesla desperately needs this model.

Tesla has reportedly decided to end development of its affordable electric car for the mass market. Reuters, citing unnamed sources, claims that the electric automaker will now prioritize preparing an autonomous robotaxi, which was initially planned to be based on the same platform. However, CEO Elon Musk has directly refuted the report, stating on Twitter that ‘Reuters is lying (again)’.

Informally referred to as the Model 2, the affordable EV was supposed to have a starting price of around $25,000. It was set to utilize a new vehicle platform and manufacturing method aimed at significantly reducing production costs and the required manufacturing footprint. As a crucial component of Tesla’s goal to achieve annual sales of 20 million vehicles by 2030, the Model 2 played a pivotal role in the company’s ambitious plans. However, unnamed sources, supported by internal memos reviewed by Reuters, now suggest that the Model 2 program has been terminated. According to one of the sources, ‘Elon’s directive is to go all in on robotaxi. Tesla did not immediately respond to a request for comment. However, on the CEO’s social media platform, X, he wrote, “Reuters is lying (again).” He did not point to any specific falsehoods, though.

Musk did post the side eyes emoji in response to a post by noted Tesla fan and X personality Sawyer Merritt, positing that Tesla was “so impressed with how good FSD 12 has performed and were maybe thinking they should be shifting even more resources to the Robotaxi/FSD effort.” He suggested that this might imply the Model 2 has been put on the back burner rather than completely canceled and interpreted Musk’s response as approval. However, an internal email seen by Reuters tells a different story. In the email, a manager instructed employees working on the project that “suppliers should halt all further activities related” to the vehicle. The manager also urged employees to document their progress to ensure that their efforts do not “go to waste.” After the report was published, Tesla shares dropped approximately 3 percent. Investors highlighted the potential high sales volume an affordable EV could have brought as one of the factors influencing the automaker’s lofty stock valuation.

Tesla has been beaten to the punch on an affordable EV in China, the world’s largest EV market. Meanwhile, companies like Volkswagen say they are working on an affordable EV of their own, which will start at €25,000 (around US$27,100 at current exchange rates), and may even work on one with a starting price of €20,000 (around US$21,700).

Although Musk has publicly touted the Model 2 for some time, there are indications that he may not have been fully convinced of its potential behind the scenes. In Walter Isaacson’s biography of the CEO, it was noted that senior company executives had to make a concerted effort to persuade Musk of the vehicle’s value. In fact, Musk attempted to put the project on hold in 2022, arguing that the development of the robotaxi would render it irrelevant. Musk has placed a significant emphasis on autonomous technology recently. After launching FSD 12, he mandated that the system be installed on every new vehicle. Additionally, Musk offered every Tesla owner in America a free sample of the system to encourage adoption, particularly as its growth had stagnated.

While Musk has lauded FSD as “mind-blowing” and deemed advanced driver assistance systems as the most valuable part of the company, the technology has been embroiled in controversy. Faced with recalls and lawsuits, it now lags behind other systems on the road. Additionally, like other autonomous technologies, it faces skepticism from American consumers.