Its possible it will use everything from the Highland but smaller battery packs?
Not sure how much of "everything" you mean.
The body and panels for the main (middle) and rear would have to be redesigned, at minimum. Its supposed to be a compact, so the body lines of the M3 won't work if you chop out roughly the space of the second row seating or half the cargo area, if you want to keep the seats. If anything, the MY might be a better choice in "borrowing" the body. The rear glass is higher in the MY, so you have a better chance of keeping that intact, while redesigning the middle to be a two seater.
The front and rear subassemblies for the motor and wheels might also need to be redesigned due to the shorter wheel base (if they've gone with the smaller cargo area, then its for sure in the rear). But we know it's using a new motor, so that could also be another reason for a redesign of the subassembly. If the subassembly does get redesigned, then the subframe (which would be gigacasts in MY and M3) might also need to be redesigned.
Not sure about the costs, but potentially, it could use 48v low voltage system and even steer by wire. Again, I don't know about costs break downs. It could be cheap enough already or could be expensive now but "planned" to cheap by enough the time production starts up, if implemented. Then again, we should all know Tesla's track history. They tend to launch higher price variants first to "subsidize" the base trim that comes later. So it could still be expensive, but an acceptable cost, even after production starts.
Oh, remember that the compact is also supposed to be but using the "unboxed" process, which isn't used in "Highland," whether you consider that the codename for the car or production process.