Tesla, AMLO reach deal on Monterrey plant
Mexican President Andrés Manuel López Obrador (AMLO) has confirmed Tesla will be building a large-scale, electric vehicle (EV) assembly plant in Monterrey, Nuevo León state, under a deal that ensures water sufficiency among other concessions.
AMLO, speaking Tuesday in his daily press briefing, said he reached the agreement after talks Monday with Tesla’s billionaire CEO Elon Musk. Musk is set to flesh out the details on the investment and terms of the agreement at Tesla’s 2023 Investor Day, later today, March 1.
Only days earlier, the deal looked doomed, with the president insisting Tesla could only move forward if Tesla moves the project to central or ideally southern Mexico, with arguments centering on the serious water scarcity situation in Monterrey.
Tesla made it clear, however, it was ready to announce it would go with its plan B – a plant in Indonesia, if Mexico blocked the deal in Monterrey outright.
AMLO has used water issues to force firms to re-locate projects from northern states, notably where his political opposition is strongest to states strong with his base. The cancellation of Constellation Brands’s US$1.4 billion brewery in Mexicali, Baja California state, already under construction, and eventual demand that it moves to Veracruz state, is just one example.
But Tesla stands to benefit from the already robust automotive manufacturing ecosystem that exists in the cluster of Mexican states close to the US border with access to an affordable labor force and workers with extensive experience in the industry. The USMCA free trade agreement, a needed update to Nafta is also in play, particularly in the north, as another incentive for Tesla to put down roots in Monterrey.
The Tesla deal is also the largest yet for Mexico tied to the nearshoring phenomenon, a confirmation that private capital is ready to bring projects closer to home to avoid the supply chain problems that came with COVID-19 or disruptions from distant geopolitical conflicts.
The Tesla plant is also likely to impact the eventual build-out of Mexico’s lithium supply chain taking root in Sonora state with national lithium company LitioMx looking to partner for extraction and processing of vast deposits of the mineral in the state south of Arizona to be used in making EV batteries in the years ahead.
Monterrey is just a two-hour drive from the Texas border with the industrial hub only about 600 km from Tesla’s Austin facility. However, it’s more than 1,600 km from Sonora’s lithium mining area, with Tuesday’s announcement also denying Sonora Governor Alfonso Durazo’s hopeful pleas in recent weeks to bring the Tesla project to his state.
AMLO did not disclose Tesla’s estimated investment on the project; however, estimates range between US$2 billion and US$10 billion, with some analysts seeing a lower price tag given lower labor costs in Mexico.
But considering the rumored production rate at the new plant is around 1 million EVs annually, the following offers some guidance: Tesla’s initial investment on the Austin Gigafactory was US$1.1 billion to reach 150,000 vehicles per year (not including the planned US$717 million expansion), and the US$5.5 billion plant it opened a year ago in Berlin is expected to reach production of more than 500,000 EVs per annum.
Regardless, the move is bound to spark a wave of capex from potential parts and services suppliers feeding to the plant close to the planned Tesla plant in the Monterrey borough of Santa Catarina. Multiple firms have already begun to announce new investment nearby in anticipation of Tesla’s arrival.
The move is most clearly a political win for Nuevo León’s youthful governor Samuel García who has been actively involved in bringing Tesla to Monterrey over the last year. It also appears to have enlisted Tesla as a backer for much needed improvements to the state’s water security.
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