Eduardo Aguilar, an economics professor in Monterrey, has a unique vantage point on one of Mexico’s most anticipated investments. Every day, his commute takes him past the site earmarked for Tesla’s “gigafactory” in Santa Catarina, Nuevo León. Despite persistent rumors suggesting the ambitious project by the globally recognized electric vehicle (EV) giant is faltering, and the apparent lack of visible progress in the year since its announcement, Aguilar remains convinced it’s still on track.
“The land itself looks unchanged from a year ago, that’s true, but the government-led infrastructure work around the future plant is clearly underway,” notes Aguilar, who teaches economic policy at the University of Monterrey (Udem), located about 18 miles from the Tesla site. “The heavy machinery and new signage indicate that the promised entrance expansion and stormwater infrastructure improvements are indeed in progress,” he adds.
Aguilar, unlike many in Nuevo León, holds reservations about the project due to environmental concerns – the state grapples with water scarcity, significant pollution, and traffic congestion. However, these are not the primary reasons why the project, initially hailed as a landmark investment, appears to have lost momentum. Tesla has undergone considerable changes since its CEO, the famously unpredictable Elon Musk, announced the $4.5 billion investment in March of the previous year.
In a significant shift in the EV landscape, China’s BYD surpassed Tesla in January to become the world’s leading electric vehicle manufacturer, offering more budget-friendly alternatives. Furthermore, Tesla’s profit margins have decreased substantially from the sales surge experienced in 2021. The broader EV market has cooled in the past year, and recently, the company reported its lowest 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 vanished from its careers page.
The narrative of Tesla’s delayed (and, as some speculate, potentially abandoned) investment unfolds alongside the struggles of Nuevo León Governor Samuel García to deliver on promised incentives to Musk. Billboards featuring the Tesla logo still dominate highways across the northern city, serving as a reminder of García’s brief attempt to leverage the investment announcement to propel a presidential bid. This ambition was short-lived, however, as García failed to secure congressional approval for his gubernatorial replacement and couldn’t persuade the federal government to allocate resources for the infrastructure commitments made to Tesla.
Nearshoring Benefits
Despite the uncertainty surrounding Tesla, Mexico has seen increased investment interest from other companies since the initial gigafactory announcement. In June, Argentine steel giant Ternium revealed a $3.2 billion investment in Nuevo León. Another Argentinian firm, e-commerce leader Mercado Libre, plans to invest $2.45 billion in Mexico this year. Adding to this trend, Amazon announced a $5 billion investment in February, exceeding Tesla’s commitment, through its cloud services division, AWS.
These investments are largely driven by ongoing economic tensions between the United States and China. Companies seeking to maintain access to the North American market are increasingly looking to move operations out of China and into countries perceived as U.S. allies. Mexico is ideally positioned to capitalize on this “nearshoring” trend. Northern and central Mexican states, with their logistical advantages, have become prime destinations for relocating businesses. This context underscores why Mexican President Andrés Manuel López Obrador initially pushed for the Tesla plant, intended to produce the company’s most affordable model, to be located in southern Mexico instead.
Matías Gómez Leautaud, an analyst with Eurasia Group in Mexico City, suggests that Tesla, perhaps inadvertently, exerted its influence by resisting the federal government’s preference for a southern location. “This likely caused friction within the López Obrador administration, leading to a ‘fine, go where you want, but you’re on your own’ response,” he speculates.
Record Cash Burn
Governor García managed to secure funding to initiate the infrastructure projects near Tesla’s Santa Catarina site, but Tesla’s current financial situation is less robust than it was a year ago. “In the last quarter, Tesla experienced a record-high cash burn of $2.5 billion in free cash flow,” states Gordon Johnson, a market strategist and founder of GJL Research in New York.
Johnson is well-known in Wall Street circles for his bearish stance on Tesla and Musk. He has analyzed Tesla’s financial performance and has issued negative recommendations on Tesla stock since 2018. He estimates the true value of Tesla shares to be around $22, while the stock currently trades near $180. Johnson and his team believe Tesla stock is significantly overvalued, by approximately 90%.
The Mexico plant announcement in March 2023 coincided with a period of declining Tesla stock value. Johnson believes Musk announced the project without a solid plan, hoping to boost investor confidence. “That strategy failed,” Johnson says, “so the question becomes, how can they realistically build a larger factory when they are struggling to sell their current production?”
According to Johnson, Tesla has produced more cars than it has sold in seven of the past eight quarters, indicating they are selling only about 75% of their inventory. Furthermore, the competitive advantages Tesla enjoyed during its 2021 boom, such as faster production capabilities, have diminished as the automotive market has stabilized post-pandemic. The rise of BYD as a global EV powerhouse in the last year further intensifies the competitive landscape.
Gómez Leautaud concurs, “There’s a plausible scenario where, even if all of Musk’s plans are realized, the project could still be shelved for various reasons.” He adds, “Musk is known for being an unpredictable businessman, and Tesla is not currently in its strongest financial position. While the Nuevo León government bears some responsibility for not fully delivering on its commitments, the situation likely extends beyond their control.”
‘Unsustainable’ Growth
Despite the challenges, compelling reasons remain for Musk to proceed with the Mexico factory. However, Tesla’s silence on the project fuels increasing speculation about its potential cancellation. Professor Aguilar from Udem believes that even if Tesla were to withdraw, another company would likely seize the opportunity.
“The groundwork laid for the factory, coupled with the government’s concessions to Tesla’s demands, presents a highly attractive opportunity for any foreign investor,” Aguilar states. He suggests that if the federal government adopts a less welcoming stance towards investment, states like Nuevo León could become even more proactive in attracting foreign capital. Indeed, Nuevo León currently leads Mexico in attracting foreign direct investment.
“There’s constant promotion to attract more and more investment, without sufficient consideration for the environmental limitations of the metropolitan area, such as the ongoing water crisis, rising greenhouse gas emissions, and worsening traffic congestion,” Aguilar cautions. “The current model of foreign direct investment is fundamentally unsustainable, and this critical point is not being adequately addressed,” he concludes.
