Why did Tesla choose Mexico to build a new factory?

The electric vehicle market is exploding globally. The International Energy Agency predicts that electric vehicles will account for 60 percent of global vehicle sales by 2030. According to Kelly Blue Book, total US vehicle sales in 2022 are up 65 percent despite an 8 percent year-over-year decline in electric vehicle sales.

With a bright future, Mexico is considered one of the biggest beneficiaries of the global expansion of electric vehicles, and has already ushered in a wave of investment in electric vehicle production. However, Mexico wants to become a major electric vehicle country, is still a long way to go.

Investment hot spot

Since Mexico signed a free trade agreement with the United States and Canada in 1993, mainstream car companies such as General Motors, Ford, Toyota and Nissan have produced and exported cars in Mexico. 2021, Mexico became the world's seventh largest car producer. With the transformation of the automotive industry's electrification, Mexico still seems to have little attraction.

Related data show that in the fourth quarter of 2022, the Mexican automotive industry welcomed 62 official projects from 17 countries. Of these, 28 were new investments, 33 were expansions and one was an acquisition. In addition, as more and more multinational companies move their supply chains to Mexico, the occupancy rate of Mexico's industrial parks reached a record high last year, with an average occupancy rate of more than 97%, and to some extent, the automotive industry is the main driving factor, including the manufacture of components and electric vehicles.

Sergio Arguelles, president of the Mexican Association of Private Industrial Parks, predicted that such expansion will continue in the next three to four years, as the association has identified a total of 47 new parks proposed or under construction, with demand coming mainly from companies in China, Italy, Germany and South Korea, among other countries.

In February, Mexican Foreign Minister Marcelo Ebrard said Mexico plans to keep up with the global electric vehicle boom and is preparing to establish multiple electric vehicle manufacturing centers across the country, and is in talks with some of the world's top automakers, including BMW, Audi, GM, Stellantis and Tesla, who have all expressed interest in producing electric vehicles in the country. interest in the country.

Almost simultaneously, German automaker BMW announced that it will invest 800 million euros (about $866 million) in the central Mexican state of San Luis Potosi to produce the high-voltage battery and all-electric "Neue Klasse" model. According to BMW's plans, the company will begin expanding the plant and building a new battery assembly line in early 2024 and expand battery and electric vehicle production in early 2027.

BMW plant in San Luis Potosi Photo credit: BMW Group

In early March, Tesla officially announced that it will build a new super factory in Monterrey, Mexico, where it will produce Tesla's next-generation cars. Later, Samuel Garcia, governor of the Mexican state of Nuevo Leon, said that Tesla will probably start producing its first cars in Mexico next year. Mexican officials have said the plant will be the world's largest electric car manufacturing plant, with an investment value of about $5 billion. garcia said, "this will change the traditional industry to the industry of the future, the green industry," and could bring a total investment of $10 billion to the state in the next few years.

In addition to BMW and Tesla, other car companies are also laying out electric vehicle capacity in Mexico. According to statistics, some companies are converting factories, at least eight factories have begun to assemble electric vehicles in Mexico. For example, Ford is producing Mustang Mach-E in Cuautitlan Izcalli's Cuautitlán stamping and assembly plant, about 20 miles from Mexico City, and will triple its electric vehicle capacity to 210,000 units; GM is investing $1 billion to retrofit its plant in Coahuila to start production from 2024 Chevrolet's new Blazer electric car. In addition, GM also plans to renovate two other plants to produce electric cars by 2035.

In addition, Nidec plans to invest $715 million in a Mexican plant to produce electric motors for electric vehicles. Previously, it was also reported that Ningde also listed Mexico as one of the candidates for North American origin.

Clear advantages

Speaking of the advantages of the Mexican automotive industry, many people first thought of the estimate is close to the United States. The United States is the world's largest importer of cars, which means that Mexico's cars have a larger market, which in turn increases its attractiveness as a manufacturing base. Of course, and the United States "proximity" is not the only advantage of the Mexican auto market.

Labor advantage: Mexico has long been known for its highly skilled labor force, and compared with other low-cost manufacturing countries, Mexico's wages are very competitive. Mexico also has a stable demographic structure, which is becoming increasingly important for countries experiencing manufacturing labor shortages.

Free Trade Incentives: Under the US-Mexico-Canada Agreement (USMCA), which takes effect July 1, 2020, 75 percent of automotive components (70 percent for heavy-duty trucks) must be produced in North America, and core automotive parts must originate in the United States, Canada or Mexico. Only products that meet these requirements will receive duty-free access after the phase-in of cars and trucks in 2023 and 2027, respectively. Coupled with Mexico's global network of free trade agreements, manufacturers from around the world have the opportunity to reduce export costs through factories in Mexico.

Strong supplier network: In the past century or so, Mexico has been supporting the development of the automotive manufacturing industry, has attracted hundreds of primary, secondary and tertiary suppliers. Therefore, Mexico gradually developed multiple automotive clusters, bringing economies of scale to more effectively support local manufacturers. In addition, Mexico has also emerged as a new resource for automotive manufacturing training institutions, further strengthening the support of the automotive industry.

And in the era of electric vehicles, Mexico's other major advantage is increasingly prominent. That is the rich lithium resources. Mexico is a large lithium reserves, ranking tenth in the world. Lithium is a key component of the electric vehicle battery, often referred to as the industry's "platinum". According to the US government's Inflation Reduction Act introduced last year, electric vehicles can only receive tax credit subsidies if they use raw materials sourced or processed from the US or countries with which the US has a free trade agreement (such as Mexico). For electric car manufacturers who want to get subsidies in the United States, Mexico may become one of the important procurement of lithium.

In addition to the above advantages, some other factors are also driving automakers in Mexico to improve the production of electric vehicles and components. For example, the new crown epidemic caused by supply chain challenges and geopolitics, making more and more manufacturers re-layout the supply chain, more inclined to close to the target market (such as the United States) to source parts and manufacturing vehicles.

Photo credit: Tesla

Thanks to various favorable conditions, Mexico is considered to become one of the centers of electric vehicle production. Alejo Czerwonko, chief investment officer for emerging markets in the Americas at UBS, and Gabriela Soni, chief investment officer for Mexico, said in a report, "Mexico is uniquely positioned to help consolidate its position in the auto manufacturing industry during the electric vehicle transition."

Czerwonko and Soni will Tesla in Mexico to build a factory as a "vote of confidence in Mexico's auto manufacturing industry, as well as its share of the global electric vehicle market with some hope.

Challenges abound

Before Tesla announced the construction of the new plant, the Mexican auto parts industry group INA predicted that Mexico's electric vehicle production this year will soar from 78,000 units in 2022 to 142,000 units. With the new Tesla plant confirmed, Mexico hopes to increase domestic electric vehicle ownership.

Marcelo Ebrard, Mexico's leading contender for the next president and current foreign minister, said the government wants electric vehicles to account for half of Mexico's domestic new car sales by 2030, including all zero-emission vehicles. However, it's not that easy.

Data from the Mexican Automobile Industry Association (AMIA) show that electric cars accounted for only 0.5 percent of domestic car sales in Mexico last year, far less than the U.S. share of 5.8 percent. If you add hybrid vehicles, the share is 4.7%. On the current sales situation, Mexico wants to achieve the 2030 electric car sales is very unrealistic. Mexico's local electric car manufacturer Zacua CEO Nazareth Black said, "I have reservations about meeting the authorities' expectations in 2030." The head of General Motors Mexico, on the other hand, said that a 15 percent share would be more realistic.

Mexico needs to address a number of issues before electric vehicles become widespread.

From the consumer side, currently for most Mexicans, zero-emission vehicles are still too expensive. For example, Tesla's cheapest model costs about $55,000, plus the cost of charging posts; cheap models like the Nissan Leaf cost more than $50,000, and even the two-seat Zacua car costs about 600,000 pesos ($31,767). However, according to official data, the average monthly salary of Mexican workers is only 366 U.S. dollars. Moreover, the Mexican government lacks subsidies for electric car consumers to boost sales.

Second, Mexico lacks sufficient charging stations, so driving an electric car in most parts of Mexico is also very impractical. According to AMIA data, Mexico has about 1,100 charging stations across the country, most of which are located in major cities such as the capital. By comparison, the U.S. state of New York alone has 9,000 charging stations. Tesla's Supercharger stations are everywhere in densely populated areas of the United States, but very few in Mexico, and many states do not even have them.

For the production side, the lack of a stable energy infrastructure in Mexico is a bigger problem. Electric vehicle production facilities are energy-intensive industries, and the production of electric vehicles is even more so.

Under the current President Lopez (Andres Manuel Lopez Obrador), Mexico is again focused on fossil fuel production and often neglects investment in renewable energy. The country's government is known to prioritize the sale of electricity generated by state-owned enterprises, which mostly use oil and natural gas and are more expensive than many private energy companies.

Due to Mexico's dependence on fossil fuels and frequent power outages, energy availability is a matter of utmost concern to businesses. If energy costs rise and supply becomes uncertain, manufacturers say it is possible that Mexico will no longer be a competitive place to produce. For example, GM Motors said a few months after announcing the renovation of the plant in 2021 that it would not continue to invest if Mexico's laws do not encourage clean energy.

Mexico is already aware of the problem, and Ebrard said last month that the country will build five large solar power plants to produce 50GW of energy to support multiple electric vehicle manufacturing centers. However, some industry sources point out that there is still a great deal of uncertainty about the financing of such an ambitious plan, as well as the efficiency and operational management capabilities of the state-owned power company to deploy such a large investment.