Eduardo Aguilar, a professor at the University of Monterrey, has a unique vantage point on one of Mexico’s most discussed investments. Every day, his commute takes him past the land earmarked for Tesla’s highly anticipated “gigafactory” in Santa Catarina, Nuevo León. Despite circulating rumors questioning the commitment of the globally recognized electric vehicle giant and the seemingly slow progress since the project’s announcement a year prior, Aguilar remains convinced that the Tesla factory is still on the horizon.
“The plot itself appears unchanged from last year, that’s true, but the surrounding governmental infrastructure work related to the future plant is visibly underway,” notes Aguilar, who specializes in economic policy at Udem, located approximately 18 miles from the Tesla site. “The presence of heavy machinery and new signage clearly indicates that the promised road expansion and stormwater management systems are in development, spearheaded by the state,” he adds.
While many in Nuevo León have enthusiastically embraced the Tesla project, Aguilar holds reservations due to environmental concerns, including the region’s existing challenges with water scarcity, air pollution, and traffic congestion. However, these environmental debates aren’t the primary factors slowing down what was initially hailed as the investment of the year. Much has shifted within Tesla since its CEO, the famously unpredictable Elon Musk, announced the $4.5 billion investment in March of the previous year.
A significant shift occurred in January when China’s BYD surpassed Tesla to become the world’s leading electric vehicle manufacturer, largely due to its more affordable vehicle offerings. Furthermore, Tesla’s profit margins have experienced a considerable decline since the sales surge of 2021. The broader EV market has cooled in the past year, and recent reports indicate Tesla’s lowest quarterly sales figures since 2022, marking its first annual sales decrease since 2020. Adding to the uncertainty, Tesla has announced a 10% reduction in its workforce, and job listings for the Nuevo León factory have vanished from the company’s careers page.
The narrative surrounding the delayed Tesla investment—and growing speculation about its potential cancellation—is intertwined with the challenges faced by Nuevo León’s governor, Samuel García, in fulfilling the promised incentives to Musk. Billboards emblazoned with the Tesla logo still stand tall along the highways of this northern Mexican city, serving as a reminder of how García briefly leveraged the initial excitement around the investment announcement to fuel his presidential ambitions. However, this momentum proved short-lived as García encountered difficulties negotiating his gubernatorial succession with the opposition in Congress and securing federal funding for the infrastructure commitments made to Tesla.
The Nearshoring Magnet Effect
Despite the apparent slowdown in the Tesla project, Mexico has witnessed a surge in investment announcements from other major companies, albeit with less fanfare. In June, Argentine steel giant Ternium revealed a $3.2 billion investment in Nuevo León. Another Argentine company, e-commerce leader Mercado Libre, has committed $2.45 billion to Mexico this year. Notably, Amazon, through its cloud services division AWS, declared a $5 billion investment in February, surpassing Tesla’s pledged amount.
This influx of investment is largely driven by the ongoing economic friction between the United States and China. Companies seeking to maintain access to the North American market are increasingly looking to relocate production and supply chains away from China to countries perceived as allies of the U.S., positioning Mexico as a prime destination. Northern and central Mexican states are particularly favored due to their logistical advantages. Interestingly, Mexican President Andrés Manuel López Obrador had initially advocated for locating the Tesla plant, intended to produce the company’s more affordable models, in southern Mexico.
According to Matías Gómez Leautaud, an analyst at Eurasia Group in Mexico City, Tesla may have indirectly asserted its preferences by resisting the federal government’s push to relocate the plant to southern Mexico. “This likely caused some friction within the López Obrador administration, potentially leading to a ‘fine, go where you want, but you’re on your own’ stance,” suggests Gómez Leautaud.
Record Spending and Financial Realities
While Governor García managed to secure funding to initiate infrastructure development near the Tesla site in Santa Catarina, Tesla’s current financial situation is less robust than it was a year ago. “In the most recent quarter, Tesla experienced a record cash burn of $2.5 billion 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 skeptical perspective on Tesla and Elon Musk. He has been analyzing Tesla’s financials and issuing bearish stock recommendations since 2018. His current valuation of Tesla shares is approximately $22, significantly lower than the current trading price of around $180. Johnson and his team believe Tesla’s stock is currently overvalued by as much as 90%.
Johnson posits that the announcement of the Mexico plant in March 2023, coinciding with a period of Tesla stock decline, might have been a strategic move by Musk to boost investor confidence without a fully concrete plan in place. “However, that stock boost didn’t materialize,” Johnson points out, “raising the question of how Tesla can proceed with building a larger factory when they are already struggling to sell their current production volume.”
According to Johnson’s analysis, Tesla has sold fewer cars than it has produced in seven out of the last eight quarters, indicating a sales rate of only about 75% of their inventory. Furthermore, the competitive advantages Tesla enjoyed during its 2021 boom, such as superior production speed, have diminished as the automotive market stabilizes post-pandemic. The rise of BYD as a global EV powerhouse further intensifies the competitive landscape.
Gómez Leautaud concurs, stating, “There’s a plausible scenario where, even if the physical factory infrastructure is completed as Musk envisions, the entire project could be put on hold for various reasons.” He emphasizes Musk’s reputation for being a “fickle businessman” and Tesla’s current financial headwinds. “While the Nuevo León state government bears some responsibility for potential delays due to unmet commitments, the larger factors influencing the project’s future may be beyond their control,” he adds.
An ‘Unsustainable’ Investment Model?
Despite the uncertainties, compelling reasons remain for Musk to proceed with the Mexico Gigafactory. However, Tesla’s silence on the project’s status is fueling increasing speculation about its potential cancellation. Professor Aguilar from Udem suggests that even if Tesla were to abandon the project, the prepared site would still be highly attractive to other investors.
“The significant infrastructure investments being made for the factory, coupled with the government’s concessions to Tesla’s demands, create a golden opportunity for any foreign capital seeking a strategic location,” Aguilar argues. He believes that if the federal government adopts a less welcoming stance towards foreign investment, states like Nuevo León could become even more proactive in capitalizing on the current nearshoring trend. Indeed, Nuevo León is currently the leading recipient of foreign direct investment in Mexico.
“There is relentless promotion to attract ever-increasing levels of 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 attracting foreign direct investment at all costs is fundamentally unsustainable, a reality that is not being adequately addressed,” he concludes.
