Tesla (NASDAQ:TSLA) is working on a more affordable version of its Model Y in Shanghai, aiming to reclaim ground in China's crowded EV market, Reuters reported, citing sources.

The new model, known internally as "E41," is expected to cost at least 20% less to produce than the current Model Y, which starts at 263,500 yuan ($36,405.8). Production could kick off in 2026, with China as the main focus, though Tesla may expand manufacturing to Europe and North America later.

CEO Elon Musk hinted at cheaper Tesla models arriving in early 2025 but didn't share specifics on pricing or size. Instead of launching brand-new vehicles, Tesla is tweaking existing models to stay competitiveespecially against aggressive Chinese rivals.

The move comes as Tesla struggles with declining sales and a shrinking market share in China. The company's stake in the country's battery-electric vehicle market slipped to 10.4% in 2024, down from 11.7% a year earlier. Meanwhile, Tesla's stock has plunged about 40% year-to-date, reflecting investor concerns over slowing demand and price cuts.