• Low-cost version to be built in Shanghai from 2026, sources say

• Shanghai output mainly for China market, source says

• Version will also be built in Europe, North America, source says

Tesla Motors will make a lower-cost version of its best-selling Model Y in Shanghai, three people with knowledge of the matter said, aiming to regain ground lost during a price war in its second-largest market.

The U.S. electric vehicle maker is developing the model under a project codenamed "E41" and will build it using existing production lines, the people said. Mass production will begin at its biggest factory by output in 2026, said two of the people.

The car will be smaller and cost at least 20% less to produce than the refreshed Model Y launched late last year, two of them said. The Model Y, a mid-sized SUV crossover, retails from 263,500 yuan ($36,351).

The Shanghai output will be mainly sold in China to defend market share, one of the people said. The model will also be produced in Europe and North America, the person said, without providing a time frame.

The people declined to be identified as the project is confidential. Tesla did not respond to a request for comment.

Tesla's intention to make a lower-cost Model Y led by its China team was first reported by 36Kr. The project name and size of cost reduction are reported here for the first time.

CEO Elon Musk in January said Tesla would introduce lower-cost models in the first half of 2025 but did not elaborate on the size of cost reduction, pricing, size or specification.

The Model Y was China's best-selling car in 2023 and 2024 but is seeing strengthened competition from domestic peers who have launched at least six rival models in the past year.

Xiaomi's YU7 crossover could become its strongest rival when launched this year, analysts have said.

Tesla's market share in China's battery-only EV market slipped to 10.4% last year from 11.7% a year earlier.

The SU7 sedan from Xiaomi - the world's third-largest smartphone maker that only started selling cars in April - has outsold Tesla's Model 3 on monthly basis since December.

($1 = 7.2487 Chinese yuan renminbi)