Model 2 priced at US$22,000 may look like smaller Model Y as Tesla plans for 2 million production rate at Giga Mexico

Tesla has reportedly sent downstream memo across its supply chain to prepare it for a Model 2 production rate of 4 million units per year. Two million of those are supposed to come from its new Gigafactory in Mexico, while Giga Berlin and Shanghai will be tasked will assembling a million each. This jibes with previous rumors from local Mexican official that the Gigafactory which Tesla is building in Mexico will become a key hub for the Model 2 production in North America.

The supply chain insiders, however, shared an even more salacious tidbit, if the whole speculation turns out credible in the end. They claim that the Model 2, which has been envisioned as a hot hatch so far, will actually be a shrunken version of the Model Y SUV. At a quarterly meet with investors last year, Elon Musk divulged that its next-gen platform for mass market electric vehicles will result in "smaller, to be clear" cars.

Subsequent analyst calculations pegged the Model 2 as a 15% shorter and 30% lighter EV, but they were comparing it to the Model 3, whereas it now seems that the cheapest Tesla car may be a crossover of sorts, styled after the Model Y. In that case, Model Z could be a more fitting name than Model 2, given that Tesla already has a midrange Model Y, and a premium Model X.

According to the industry sources, "this low-priced model is a small Model Y," and "Tesla is building an annual production capacity plan of up to 4 million vehicles." That's quite the leap from its current production rate which hit a record last quarter, yet hasn't even cracked the 500,000 unit mark across Tesla's portfolio.

Still, Tesla ups its production efficiency with each new Gigafactory, and the one in Mexico will allow it to build cars like Legos, with 6 prefabricated sections assembled into one, which would reduce the cost drastically. After all, those supply chain insiders refer to the upcoming low-cost EV from Tesla as the "150,000 yuan car," or a retail price of about US$21,800.

Tesla is gunning for a 50% reduction of the Model 3's US$33,600 production cost estimate. With the recent drop in lithium carbonate prices and the fact that the Model 2 will be assembled in Tesla's most efficient Gigafactories, a sub-$17,000 production cost won't be hard to achieve. If Tesla indeed sells it for a US$22,000 or so starting price, that will keep its gross margin and the economies of scale can only widen it further as production ramps up.

If Tesla manages to bring the production of the Model 2's LFP batteries on US soil, as was recently rumored, it would even qualify for federal subsidies. This way it could charge more and still keep its venerable US$10,000 profit per vehicle even with the budget Model 2 that will sell in the millions.

The federal EV tax credits expire in 2032, though, so Tesla will probably unveil and start production of the Model 2 as soon as it can, before the competition like the VW ID.2all hits the market in 2025. The current supply chain rumor sources here note that the Model 2 production start is "at least a year away," so the announcement could happen as soon as 2023.

In fact, Tesla may break ground on its Giga Mexico factory this summer, and that's when it may share more details about its next-gen mass market EV platform that will be assembled there. If a Model 2 release happens in 2024 indeed, it would allow Tesla to be one of the first to market with a rather profitable electric vehicle for the masses.

Get the Wallbox Pulsar Plus 48А Level 2 Electric Vehicle Smart Charger on Amazon