Eduardo Aguilar, a professor at the University of Monterrey, has a unique vantage point on one of Mexico’s most anticipated investments. Every day on his commute to work, he passes the land earmarked for Tesla’s “gigafactory” in Santa Catarina, Nuevo León. Despite persistent rumors suggesting the project, announced by one of the world’s most valuable companies, is faltering, and despite limited visible progress since its announcement a year ago, Aguilar remains convinced it is moving forward.
“The land itself looks unchanged from last year, that’s true, but the government-led infrastructure work surrounding the future plant site is clearly underway,” states Aguilar, who specializes in economic policy at Udem, located approximately 18 miles from the Tesla site. “The presence of heavy machinery and new signage indicates that the promised road expansion and stormwater management systems are being developed by the state,” he adds.
While Aguilar voices opposition to the project due to environmental concerns – Nuevo León grapples with water scarcity, significant pollution, and traffic congestion – these issues are not the primary reason the highly publicized investment has seemingly lost momentum. Tesla has undergone considerable shifts since CEO Elon Musk, known for his unpredictable nature, announced the $4.5 billion investment in March of last year.
This past January, China’s BYD surpassed Tesla to become the world’s leading electric vehicle manufacturer, driven by its offering of more affordable cars. Simultaneously, Tesla’s profit margins have significantly decreased from the peak sales period of 2021. The broader EV market has cooled down over the last year, and recently, Tesla reported its weakest quarterly sales figures since 2022, marking its first annual sales decline since 2020. Tesla has announced a 10% reduction in its workforce, and job postings for Nuevo León have been removed from its career page.
The narrative of the Tesla investment, still unrealized and questioned by many, mirrors the struggles of Nuevo León Governor Samuel García to deliver on promised incentives to Musk. Billboards featuring the Tesla logo, prominent on highways throughout the northern city, serve as a reminder of García’s attempt to leverage the investment announcement for a presidential bid. This ambition was short-lived, however, as García failed to secure approval from the opposition-controlled Congress for his gubernatorial replacement, nor could he persuade the federal government to allocate resources for the infrastructure improvements pledged to Tesla.
Nearshoring Benefits
Despite the uncertainties surrounding the Tesla project, Mexico has seen increased investment interest from other major companies since the initial announcement. In June, Argentine steel giant Ternium declared a $3.2 billion investment in Nuevo León. Another Argentinian company, e-commerce leader Mercado Libre, has committed $2.45 billion to Mexico this year. Furthermore, in February, Amazon unveiled a $5 billion investment, surpassing Tesla’s, through its cloud computing division, AWS.
These investments are largely driven by ongoing economic tensions between the United States and China. Companies seeking continued access to the North American market are increasingly looking to move operations out of China and into countries considered U.S. allies, positioning Mexico as an ideal location. Northern and central Mexican states are particularly well-suited to accommodate these relocating businesses. This context explains President Andrés Manuel López Obrador’s push to have the Tesla plant, intended to produce the company’s most affordable model, located in southern Mexico instead.
Matías Gómez Leautaud, an analyst with Eurasia Group in Mexico City, suggests that Tesla may have indirectly exerted its influence by resisting the federal government’s preference for a southern location. “This likely caused resentment within the López Obrador Administration, leading to a response of, ‘fine, go where you want, but you’re on your own’.”
Record Spending Concerns
Governor García managed to secure funding to initiate the infrastructure projects near Tesla’s land in Santa Catarina. However, the challenge now lies with Tesla’s diminished cash reserves compared to a year ago. “In the most recent quarter, they experienced a record $2.5 billion burn in free cash flow, an unprecedented level,” notes Gordon Johnson, a market strategist and founder of GJL Research in New York.
Johnson is well-known in Wall Street circles for his skepticism regarding Tesla and Musk. He has closely analyzed Tesla’s financial performance and has issued bearish recommendations on Tesla stock since 2018. His current estimate for the true value of Tesla shares is around $22, significantly lower than the current trading price of approximately $180. Johnson and his team believe Tesla stock is currently overvalued by 90%.
The Mexico plant announcement coincided with a period of declining Tesla stock in March 2023. Johnson believes Musk announced the project without a fully developed plan, hoping to boost the stock price. “That strategy failed,” Johnson states, “so the question becomes, how can they contemplate building an even larger factory when they are struggling to sell their existing production?”
According to Johnson, Tesla has produced more cars than it has sold in seven out of the last eight quarters, indicating they are selling only about 75% of their inventory. The competitive advantages Tesla enjoyed during its 2021 boom, such as faster production capabilities compared to competitors, have diminished as the automotive market has stabilized post-pandemic. Furthermore, BYD has emerged as a significant global EV competitor in the past year.
Gómez Leautaud concurs, stating, “There’s a plausible scenario where, even if all of Musk’s plans materialize, the project could still be abandoned for various reasons. He is known to be an unpredictable businessman, and the company is currently facing challenges. While the state government bears some responsibility for not yet fulfilling all its commitments, the situation likely extends beyond their control.”
‘Unsustainable’ Investment Model
Despite the challenges, compelling reasons remain for Musk to proceed with the Mexico factory. However, Tesla’s silence on the project fuels speculation about its potential cancellation. Professor Aguilar believes that even if Tesla withdraws, another company would likely seize the opportunity.
“The extensive infrastructure development around the factory site and the government’s concessions to Tesla have created a highly attractive opportunity for foreign investment,” Aguilar points out. If the federal government adopts a less welcoming stance towards investment, states like Nuevo León could proactively capitalize on the current climate. In fact, Nuevo León is currently the leading recipient of foreign direct investment in Mexico.
“There is constant promotion to attract increasing amounts of investment, without sufficient consideration for the environmental conditions of the metropolitan area, such as the ongoing water crisis, rising greenhouse gas emissions, and worsening traffic congestion,” Aguilar concludes. “The current model of foreign direct investment is fundamentally unsustainable, a point that is not being adequately addressed.”
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