TMTPOST -- Tesla is developing a more affordable version of its best-selling Model Y at its Shanghai factory, according to three sources familiar with the matter. The move aims to help the U.S. electric vehicle (EV) maker regain ground lost during a price war in China, its second-largest market. The new model, codenamed "E41," will be built using existing production lines, the sources said. Mass production is expected to begin in 2026 at Tesla's Shanghai plant, which is its largest factory by output, two of the sources added. The vehicle will be smaller and at least 20% cheaper to produce than the updated Model Y launched in late 2023, two sources noted. The current Model Y, a mid-sized SUV crossover, starts at 263,500 yuan ($36,351) in China. The Shanghai-produced model will primarily target the Chinese market to defend Tesla's market share, one source said. The company also plans to manufacture the vehicle in Europe and North America, though no timeline was provided. The sources declined to be identified due to the confidentiality of the project. Tesla did not respond to requests for comment. Tesla's plan to develop a lower-cost Model Y led by its China team was first reported by Chinese media outlet 36Kr. This marks the first time details about the project name and cost reduction scale have been disclosed. In January, Tesla CEO Elon Musk announced that the company would introduce lower-cost models in the first half of 2025 but did not provide specifics on pricing, size, or specifications. The Model Y was China's best-selling car in both 2023 and 2024. However, it faces increasing competition from domestic rivals, which have launched at least six competing models over the past year.