Tesla scraps its 'half-price' $27,000 EV amid fierce competition from cheap Chinese automakers - and share price crashes

Tesla has shockingly canceled production of the much-anticipated $27,000 car it was relying on to break into the mass market.

The 'half price' electric car was due to go into production starting next year and viewed by investors as the saving grace that could rescue the struggling automaker.

Tesla will instead continue developing self-driving robotaxis, according to Reuters, which broke the news on Friday morning.

Minutes later, Tesla's share price fell more than 5 percent but gradually started to recover. The company's stock is one of the worst performing in the S&P 500 this year.

Currently the cheapest Tesla Americans can buy is the Model 3, pictured, which retails at a starting price of $38,990

Elon Musk has always been keen to launch an ultra-affordable Tesla. Pictured: CEO Elon Musk getting into a Tesla outside of a hotel in Beijing, China

Earlier this week its share price tumbled after it reported it fell well short of delivery estimates in the first quarter. Competition is also ramping up with Chinese rivals like BYD, which recently launched an EV starting at $10,000.

News of Tesla's plans to sell a $27,000 electric car first emerged in November. A source familiar with the matter told Reuters at the time that the vehicle would be manufactured at Tesla's factory near Berlin.

The company was said to be aiming to make a vehicle that retails for 25,000 euros - or $26,838.

Had CEO Elon Musk followed through the cut-price EV would have cost less than half the price of an average electric car now, $55,353, according to January figures from Kelley Blue Book.

On Friday, it was reported that employees were told of the decision to cancel the development of the affordable in late February. 'Elon's directive is to go all in on robotaxi,' a person that attended the meeting told Reuters.

In an internal company message from a manager, staff involved in the project were urged to document their work.

'I'd like to thank everyone for all your hard work and dedication to pushing boundaries and executing the best design possible given the aggressive constraints we had to work within,' the message said.

'We would not want all our hard work to go to waste, so it's important that we tie things off and document things properly.'

In the minutes after Reuters broke the news Tesla's share price fell more than 5 percent but gradually started to recover

The decision to cancel the so-called Model 2 represents the abandonment of a longstanding goal that Musk has often characterized as its primary mission: affordable electric cars for the masses.

His first 'master plan' for the company in 2006 called for manufacturing luxury models first, then using the profits to finance a 'low cost family car.' 

Musk had long planned to make a more affordable electric car and promised such a vehicle to investors. In 2022 he said the company had not yet mastered the technology required to make it a reality.

Sources told Reuters in September the carmaker was closing in on an innovation that would allow it to die cast nearly all of the underbody of the EV in one piece, a breakthrough that would speed up production and lower costs.

He has since repeatedly promised such a vehicle to investors and consumers. Tesla did not respond to requests for comment.