One of Tesla's biggest Chinese rivals, Xiaomi, just unveiled a new EV YU7. This electric SUV set to compete directly with Tesla's best-selling Model Y. Morgan Stanley is sounding the alarm on the rapidly intensifying electric vehicle (EV) race, suggesting China may have already clinched victory in the hardware battle—and Tesla knows it.

Xiaomi said the YU7 was a "luxury high-performance SUV," with high-tech features including intelligent door handles and a panoramic "hypervision" display below the windshield.

The company said that the YU7's maximum speed was 253 kilometers an hour, or 157 mph, and that it could reach 100 kph in 3.23 seconds.

It will have a maximum range of 835 km, Xiaomi said, and can add 620 km of range in 15 minutes of charging.

Xiaomi did not say how much the YU7, its second electric vehicle, would cost. In a social media post before the unveiling, CEO Lei Jun said the SUV would go on sale in July.

Morgan Stanley analysts led by Adam Jonas and Andy Meng wrote in a note previewing the YU7's launch that the new SUV would be another challenge to Tesla.

Here are Key thoughts and implications for the auto industry from Morgan Stanley:

Stunning design at an affordable price

A year ago, when Xiaomi launched the SU7, many of our clients thought it looked like a Porsche, had better tech than a Tesla M3 and was priced like a used VW iD3. With the YU7 small SUV, they may have done it again. It looks like a Ferrari Purosangue or Aston Martin DBX but will be priced like a VW or low-spec Model Y.

Explain why TSLA is moving away from 'car' and going all-in on autonomy

The speed and scale at which Chinese tech firms are combining high performance with affordability are forcing Tesla to shift its value proposition:

• If China has already won the EV hardware race, the next battlefield—and margin pool—is full self-driving software and data

• Tesla’s pivot from “best car” to “best autonomy stack” is seen as a direct response to the shrinking defensibility of its traditional EV advantage

Growth

Xiaomi’s breakneck pace is especially notable. The YU7 is only its second model, but even Ford’s CEO has admitted that U.S. legacy automakers are years away from fielding a comparable offering. By the time they catch up, Xiaomi’s third-generation vehicles will likely have moved the goalposts again.

Morgan Stanley projects Xiaomi’s EV business could generate RMB 233 billion (around US$32 billion) in revenue by 2027—roughly matching Tesla’s total automotive sales from 2020. That level of scaling in just three model generations compresses what used to take incumbent carmakers a decade or more.

Expand overseas markets

While both Xiaomi cars are available only in China, that may not be the case for long. Xiaomi said in March that it aimed to sell EVs in overseas markets by 2027.

While Western governments may use tariffs to slow the tide, Morgan Stanley warns that top-tier Chinese EVs are likely to find their way to premium buyers regardless. In fact, some global automakers are already exploring joint ventures or tech licensing deals with Chinese firms to gain access to critical EV and autonomy expertise while limiting capital expenditure and execution risk.

Tesla implications

In the bank’s view, equity markets are placing too much emphasis on Tesla’s near-term vehicle margins, underestimating the impact of incoming low-cost Chinese competition. The note underscores Tesla’s strategic shift toward autonomy as the company’s next defensible growth engine—spanning robotaxis, logistics, and other mobility platforms—as it braces for a future shaped increasingly in Beijing, not Detroit or Silicon Valley.