Tesla to sell cheaper Model Y and claw back sales

Elon Musk said Tesla plans to combat a marked drop in sales and EV credit revenue in the second quarter of 2025 with a new entry-level variant of Model Y.

In January 2026, Tesla plans to launch a vanilla Model Y variant to broaden its appeal. Think of this as a decluttered version of the brand’s best-seller.

Whether or not the company also plans to sell a Model 3 stripper is unclear. It is not yet known which markets will get the new model. 

One of the reasons Tesla is introducing a cheaper model Y is that the $7500 government electric car grant in the domestic market is being removed.

Tesla reported headwinds for the second quarter of 2025, with a second straight quarter of decreased operating income. And Musk warned that the trend could continue in what he described as ‘a challenging period’.

The primary cause of a 16 per cent dip in operating income was a 14 per cent decline in sales to 384,000 globally. A reduction in average model selling price didn’t help. There was also an increase in operating expenditure.

Critically, revenue from electric car credits bought by other manufacturers to meet mandated emissions targets dropped by 51 per cent (or $441 million) compared with a year earlier. Revenue from this source was also down by over $US150m compared with Q1 of this year.

This is because Trump has said that car makers no longer need to hit certain EV production targets. Therefore, they have no need to buy electric car credits.  

The previous Biden administration had said that by 2030 one-half of all new cars sold in the US had to be electric.

The Tesla share prices dropped five per cent following Musk’s announcement. Currently it is down by 13 per cent since the start of the year. 

To make matters worse, Tesla has been struggling in China which was previous one of its strongest markets. That is the result of tariff tensions and Musk’s ties with President Trump.

Musk said that new revenue streams for Tesla would arise from the brand’s upcoming self-driving technology. The robotaxi service is set to expand across America while sales of Cybercab should get underway in 2026. It is also investing in the ongoing development of its Optimus humanoid robots.

Musk concluded that by the end of next year when autonomy has scaled up, Tesla’s economics will be “very compelling”.