Tesla CEO Elon Musk has recently announced via X that the company is officially terminating its highly anticipated affordable electric vehicle (EV) project, the Model 2. Instead, Tesla will redirect resources towards AI and robotics. In an internal meeting, Musk bluntly stated that the Model 2 is a product of traditional thinking and that Tesla’s future lies in AI and robotics. This statement directly overturns the company’s core strategic plan of the past three years.
According to sources, the Model 2 was originally scheduled for release in June 2025, with a starting price of USD 25,000 and an ambitious annual sales target of 5 million units. The goal was to replicate the market success of the Toyota Corolla. However, Musk believes that building low-cost cars “won’t change the world,” and has chosen instead to invest in the autonomous robotaxi project and the humanoid robot initiative Optimus.
As early as Tesla’s Battery Day event in 2020, Musk first proposed the idea of developing an entry-level EV, targeting a price of USD 25,000, aiming to capture the mainstream consumer market. However, in late February 2024, after two years of back-and-forth discussions, he convened senior executives from various Tesla departments at the company’s headquarters in Palo Alto, California, with the fate of the Model 2 becoming the central topic of the meeting.
Many Tesla executives believed that the Model 2 could achieve multi-million-unit sales over the next few years, effectively offsetting potential losses from the robotaxi project and providing financial support for Musk’s AI ambitions. More importantly, the Model 2 and robotaxi could potentially be developed on the same platform. Nonetheless, Musk rejected the proposal. Instead, he again suggested reducing certain features of the Model Y to lower its price. Following the meeting, three senior executives who had advocated for continuing the Model 2 project abruptly resigned.
In response to earlier rumors that the Model 2 project had been canceled, on April 29, 2024, Musk officially confirmed the Model 2 release plan. The vehicle was positioned as a compact hatchback, scheduled to begin production in 2025 at Tesla's factories in Mexico, Berlin, and Shanghai, with a target price of around USD 25,000. According to insiders, compared to the Model 3, the Model 2 was expected to be about 15% shorter in length, roughly 30% lighter, and have about 25% less battery capacity. This design aimed to maintain strong performance while enhancing energy efficiency and environmental friendliness.
Now, all of this has suddenly changed, potentially marking a critical turning point for Tesla. Musk appears increasingly disillusioned with the future of new energy vehicles (NEV), showing significantly less interest. The underlying reason may be that the EV industry has entered a new phase, one that has made Musk acutely aware of emerging pressures. This shift could be what ultimately pushed him to make the decisive move. In this new stage, Tesla now faces two major challenges.
First, China’s entry into the NEV market has led to intense competition and rapidly declining prices. This trend mirrors the historical development of the internal combustion engine vehicle market: the era of high profits for EV is over. In the next phase of development, the market is likely to evolve similarly to that of gasoline cars, where companies like those from South Korea entered the market by undercutting prices and using imitation to gain market share.
Among the emerging forces, Chinese EVs stand out the most. Backed by substantial government subsidies and aggressive investment, China’s NEV industry has developed at an exceptional pace, outpacing global average growth. In 2020, China’s share of global new energy passenger vehicles saw a major shift. In 2021, China maintained a strong global share of 52.4%. In 2022, its global share exceeded 63%, and in the next year, it reached 64%. Last year, the figure surged further to 70.1%. In the first quarter of 2025, China continued to hold a high global share of 67.7%, a year-over-year increase of 5.4 percentage points.
Under these circumstances, the profit margins of NEVs are being continuously squeezed and are becoming increasingly thin. According to data from the China Automobile Dealers Association, in 2024, China’s automotive industry generated a total revenue of RMB 10.65 trillion, a year-on-year increase of 4%. However, industry profits fell by 8% to RMB 462.3 billion, resulting in a profit margin of just 4.3%, lower than the industrial average of 6%. In particular, in November 2024, profits in the auto sector dropped 35% year-on-year, with the profit margin falling to just 3.3%. Notably, these figures still include the effects of substantial government subsidies throughout various stages of the industry chain, without which the situation would look even more grim. In August 2024, the average discount rate in the new car market reached as high as 17.4%, further indicating the intensity of market competition.
Crucially, the profitability across the NEV sector remains generally low. Currently, only a few NEV companies have achieved profitability, such as Tesla, BYD, AITO, Li Auto, and Leapmotor. Even among the leading players, Tesla and BYD, profitability has shown signs of decline. In the first three quarters of 2024, BYD’s net profit margin held at 5.02%, slightly down from 5.2% in 2023. For the full year 2024, Tesla reported a net profit of USD 7.091 billion, a sharp 53% year-on-year drop, with a net profit margin of 7.3%, down nearly 7.7 percentage points compared to 2023. Most other NEV companies have yet to achieve sustainable profitability.
Second, the technological path for EV batteries remains uncertain, where the outcomes are unclear, the breakthroughs unpredictable, and it is still unknown which technologies will ultimately prevail. More importantly, Tesla appears unprepared in this area.
Specifically, liquid-state battery technology is approaching its ceiling. The current mainstream lithium iron phosphate (LFP) batteries are nearing their theoretical energy density limit of 255 Wh/kg. While ternary lithium batteries can exceed 300 Wh/kg, they face significant risks of thermal runaway and high production costs. Solid-state batteries are widely regarded as the most promising next-generation battery solution. They have been incorporated into national strategic plans in China, the U.S., the EU, Japan, and South Korea, becoming a critical battleground in the global race for battery innovation. Many automakers have announced plans to begin mass production of solid-state batteries by 2026 or 2027, such as Geely’s 400 Wh/kg battery. However, based on current progress and practical challenges, this appears to be more of an illusion of solid-state battery industrialization.
Compared to other lithium-ion power batteries, solid-state batteries offer superior technical specifications, but these advantages are largely based on controlled laboratory conditions and are far from ready for industrial-scale mass production. A significant gap remains between lab performance and real-world application. For instance, different solid electrolyte materials each present their own challenges: sulfide-based electrolytes offer high theoretical energy density up to 500 Wh/kg, but their toxic nature demands extremely strict production environments, such as inert gas protection, and their unit cost is higher. Oxide-based electrolytes are safer but have low ionic conductivity, limiting their power output potential. Polymer-based electrolytes are easier to manufacture due to mature processing techniques, but their performance at high temperatures remains inadequate. These limitations underline the uncertainty and technical bottlenecks that still surround the commercialization of solid-state battery technology.
Even more challenging is the so-called “death spiral” of production processes. Sulfide-based electrolytes must be manufactured in absolutely dust-free environments, with high construction costs. Oxide-based electrolytes require high-temperature sintering, but the yield rate is below 60%, resulting in energy consumption per unit that is three times higher than that of liquid-state batteries. Even semi-solid-state batteries, considered a transitional solution, come at a steep cost that is 2.4 times that of liquid batteries. For example, the 150 kWh semi-solid-state battery pack used in the NIO ET7 accounts for nearly 40% of the vehicle’s total price.
Given these two major factors, Musk’s decision to abandon the low-cost Model 2 is, in fact, understandable. Tesla had originally taken a more "opportunistic" approach to its technological path, focusing its resources on safer lithium battery packaging and fast-charging technology, aiming to gain a market edge in these areas, which are relatively easier than solid-state battery development. However, this strategy clearly does not address the core challenges facing the industry. Therefore, unsurprisingly, Musk is showing signs of disillusionment with the future prospects of the EV sector. As for Tesla’s new focus on autonomous vehicles, this shift is more viable in the U.S. market, where it is also more likely to receive regulatory approval. Autonomous driving would pivot Tesla toward becoming a software-centric company, allowing it to maintain a stable, monopolistic advantage through continuous upgrades, which is a potentially disruptive transformation. That said, the investment required for autonomous driving is substantial, its outcomes remain uncertain, and the actual impact on Tesla’s overall business performance is still to be seen.
Overall, with significant policy support, the current global EV landscape is highly favorable for China’s EV industry. From a competitive standpoint and in terms of market trends, China’s position in this sector today is comparable to the role South Korea once played in the internal combustion engine era. However, the key to the future ultimately depends on real advancements in battery technology. Only with genuine breakthroughs in battery innovation can China’s EV industry achieve a true leap in quality and global competitiveness.
Final analysis conclusion:
Elon Musk has clearly lost much of his interest in new energy vehicles. As things stand, Tesla is facing two major challenges. First, with China’s entry into the EV market, competition has become fierce, and the era of high profit margins is over. Second, the future direction of battery technology remains uncertain, with no clear path or guaranteed breakthroughs. Hence, Tesla’s focus will shift to autonomous vehicles, but this requires substantial investment and its success is still unclear. Overall, the current landscape is highly favorable for China’s EV industry, but the decisive factor remains genuine progress in battery technology.
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Xia Ri is an Industry Researcher at ANBOUND, an independent think tank.
