During China’s National Day holiday, Tesla introduced two budget-friendly models for the North American market: the Model Y Standard, priced at USD 39,990, and the Model 3 Standard, priced at USD 36,990.
Compared with their counterparts, the two standard versions are USD 5,000–5,500 cheaper, bringing Tesla’s entry-level pricing into the USD 35,000–40,000 range. The lower price, however, comes with tradeoffs. The standard models omit front and rear light strips, use fabric upholstery, and require manual adjustments for the steering wheel and side mirrors. Only the front seats are heated. Both versions are equipped with traffic-aware cruise control but lack Tesla’s “Autopilot” system.
The market’s reaction was negative. Following the announcement, Tesla’s share price fell, wiping out billions of USD in market capitalization. This raises key questions: can Tesla’s lower-cost models sustain sales momentum, what drives its continued reliance on price cuts, and how much room remains to reduce prices further?
A struggle to sustain sales momentum
In essence, Tesla’s new standard versions represent a disguised price reduction, lowering effective prices by removing features to attract price-sensitive buyers. The move appears aimed at countering slowing sales growth and likely reflects three main considerations.
First, to offset the potential decline in sales once the USD 7,500 federal tax credit in the US expires.
Second, to stimulate demand in pressured markets through more accessible pricing. Tesla’s sales growth has slowed in both China and Europe. Based on current North American pricing, a locally produced Model 3 Standard could start at about RMB 205,000 (USD 28,700), while a Model Y Standard could start at around RMB 235,000 (USD 32,900). If launched in China, these models would enter the RMB 200,000–250,000 (USD 28,000–35,000) price range, the most competitive bracket in the domestic electric vehicle market.
Third, the rollout serves as a test bed for Tesla’s future low-cost Model 2, which will be built on a new platform.
Still, can Tesla’s budget versions hold up?
In theory, lower prices should expand Tesla’s customer base and reinforce its market share. However, many analysts believe the impact will be limited. Even after the reductions, the standard Model 3 and Model Y remain priced between USD 35,000–40,000,above the USD 20,000–30,000 range many consumers associate with budget-friendly EVs. As a result, the appeal of these pared-down models may prove modest.
In China, the challenge is greater. The RMB 200,000–250,000 segment is already one of the most competitive, occupied by models such as the BYD Han, Xiaomi SU7, Xpeng P7i and G6, and Onvo L60.
Over the past two years, as offerings have become more homogenous, Chinese automakers have built strong value propositions through aggressive pricing and feature upgrades. Consumers now expect vehicles that combine performance, style, and technology without compromise. Tesla’s minimalist approach may therefore struggle to convince buyers to trade comfort for brand prestige.
Still, if Tesla introduces these lower-cost models in China, it would likely ignite another wave of intense competition, forcing rivals to respond with further price cuts or upgrades.
Running out of room for price cuts
Tesla’s strong profitability, supported by manufacturing efficiency and its direct-sales model, has historically allowed it to cut prices while maintaining margins. Its above-average gross margins once acted as a cushion for short-term price reductions, while high operating margins sustained its long-term strategy.
Before 2023, Tesla’s gross margin hovered between 20–25%, giving it a 15–20 percentage point edge over most Chinese EV makers and roughly a ten-point lead over BYD.
As competition intensified, however, Tesla repeatedly lowered prices to defend its market position, eroding its profitability. From 2023 to the first half of 2025, Tesla’s gross margin fell from 25.6% in 2022 to 16.8%, a nearly ten-point drop. Its automotive gross margin declined even further, from 26.2% to 12.8%, its lowest in years.
Meanwhile, Chinese automakers have improved profitability through scale, supply chain integration, and cost control, narrowing Tesla’s margin advantage from nearly 20 points to less than two. In the first half of 2025, Tesla’s gross margin slipped below the industry average, lagging by about one point. Companies like BYD and Li Auto have now surpassed Tesla for three consecutive years.
At the same time, higher R&D spending on new models, autonomous driving, and robotaxi development has driven Tesla’s operating margin down to 3.4% in the first half of 2025, from a peak of 17% in 2022, declining more than 13 points.
If this continues, Tesla may no longer be able to rely on internal profits to fund operations and long-term investments.
Trading profit for volume
If price cuts are compressing margins, why does Tesla persist? The answer lies in scale: volume remains the foundation of Tesla’s cost advantage and leadership in the EV race.
As the global EV market shifts from supply constraints to saturation, competition has intensified. Chinese automakers such as BYD, Xiaomi, and Li Auto are leveraging supply chain control, scale, and speed to capture market share, particularly as exports to Europe grow. Tesla’s sales in both China and Europe face mounting pressure.
In this environment, price cuts are Tesla’s most direct tool to defend its position.
Automobile manufacturing is capital-intensive, requiring heavy investment in factories and evolving vehicle platforms. Profitability depends heavily on economies of scale: higher production volumes reduce per-unit costs and strengthen margins.
Scale also enhances supply chain bargaining power, leading to better material pricing and longer-term cost advantages.
In short, higher volumes yield stronger cost efficiency and more stable profitability. This strategy explains Tesla’s willingness to sacrifice short-term profits for long-term market share.
There is also a strategic layer: Tesla’s vehicle sales underpin its broader technology narrative. Its high valuation reflects investor belief that Tesla is more than an automaker, with future growth tied to autonomous driving, software, and mobility services.
Larger vehicle volumes expand the user base, generating more driving data for autonomous driving development. Subscriptions for Tesla’s “Full Self-Driving” system and related software revenues are already said to be growing faster than hardware sales, supported by this expanding base.
Ultimately, Tesla’s long-term vision depends on continued sales growth. As long as investors accept the tradeoff between margins and expansion, Tesla can justify short-term profit sacrifices as part of its strategy to cement long-term leadership.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Ding Mao for 36Kr.