Eduardo Aguilar, an economics professor, has a unique vantage point on one of Mexico’s most anticipated investments. Daily, on his commute to the University of Monterrey, he passes the land earmarked for Tesla’s massive “gigafactory” in Santa Catarina, Nuevo León. Despite rumors suggesting the project, announced by a global powerhouse, is faltering, and despite the apparent standstill since its unveiling a year prior, Aguilar remains convinced of its eventual realization.
“The site itself appears unchanged from last year, that’s true, but the government-led infrastructure developments surrounding the future plant are visibly underway,” observes Aguilar, a faculty member specializing in economic policy at Udem. The university campus is situated approximately 18 miles from the Tesla location. “The presence of heavy machinery and new signage clearly indicates the commencement of the promised entrance expansion and stormwater management infrastructure by the state authorities,” he elaborates.
Aguilar, unlike many in Nuevo León, holds reservations about the widely celebrated project, primarily due to environmental concerns in a state grappling with water scarcity, significant pollution, and traffic congestion. However, these environmental anxieties are not the primary factors behind the perceived loss of momentum in what was initially hailed as the investment of the year. The landscape at Tesla has undergone considerable shifts since CEO Elon Musk, known for his unpredictable nature, announced the $4.5 billion investment in March of the previous year.
Earlier this year, China’s BYD surpassed Tesla to become the world’s leading manufacturer of electric vehicles (EVs), offering more affordable models. Furthermore, Tesla’s profit margins have significantly contracted from the peak sales period of 2021. The EV market has experienced a slowdown in the past year, and recently, Tesla reported its weakest quarterly sales figures since 2022, marking its first annual sales decline since 2020. In response, Tesla announced a 10% reduction in its workforce, and job postings related to Nuevo León disappeared from the company’s careers page.
The narrative of Tesla’s delayed, and potentially abandoned, investment mirrors the struggles of Nuevo León’s governor, Samuel García, to deliver on the incentive package promised to Musk. Billboards featuring the Tesla logo, prominent along highways in the northern city, serve as a reminder of García’s brief leveraging of the investment announcement to fuel his presidential ambitions. This momentum proved short-lived as García faced setbacks in negotiating his gubernatorial replacement with the opposition in Congress and in securing federal resources for the infrastructure commitments made to Tesla.
The Nearshoring Factor
Despite the uncertainties surrounding the Tesla Gigafactory Nuevo Leon, the initial announcement has spurred broader investment interest in Mexico. Since Tesla’s commitment, other major corporations have declared significant investments in the country, albeit with less fanfare. In June, Argentine steel giant Ternium announced a $3.2 billion investment in Nuevo León. Another Argentine multinational, e-commerce leader Mercado Libre, has earmarked $2.45 billion for investment in Mexico this year. Adding to this trend, Amazon revealed a $5 billion investment in February through its cloud services arm, AWS, surpassing even Tesla’s pledged amount.
These companies are drawn to Mexico primarily due to the ongoing economic friction between the United States and China. Businesses seeking to maintain access to the North American market are increasingly looking to relocate from China to countries considered allies of the U.S., positioning Mexico as an ideal alternative. Northern and central Mexican states, with their logistical advantages, have emerged as prime beneficiaries. This dynamic explains President Andrés Manuel López Obrador’s push to relocate the Tesla plant, intended to produce the company’s more affordable vehicle model, to southern Mexico.
Matías Gómez Leautaud, an analyst with Eurasia Group in Mexico City, suggests that Tesla, perhaps unintentionally, dictated terms by resisting the federal government’s preference for a southern location. “This likely caused resentment within the López Obrador administration, leading to a ‘fine, go where you want, but you’re on your own’ stance from the federal level.”
Record Spending and Financial Headwinds
While Governor García managed to secure resources to initiate infrastructure work near the Tesla site in Santa Catarina, Tesla itself is now facing a less favorable financial climate compared to a year ago. “In the most recent quarter, Tesla experienced a staggering $2.5 billion burn in free cash flow, marking an all-time high,” notes Gordon Johnson, a market strategist and founder of GJL Research in New York.
Johnson is well-known in Wall Street for his bearish outlook on Tesla and Musk. He has consistently analyzed Tesla’s financial performance and issued negative recommendations on Tesla stock since 2018. His estimates place the intrinsic value of Tesla shares closer to $22, significantly below the current trading price of around $180. Johnson and his team believe Tesla stock is currently overvalued by approximately 90%.
The Tesla Gigafactory Nuevo Leon announcement in March 2023 coincided with a period of declining Tesla stock value. Johnson speculates that Musk might have announced the Mexico project without a fully developed plan, hoping to boost investor confidence and stock prices. “That strategy didn’t succeed,” Johnson states, “so the question becomes, how can they justify building an even larger factory when they are struggling to sell their existing production?”
According to Johnson, Tesla has outpaced sales with production in seven out of the last eight quarters, indicating that they are selling only about 75% of their manufactured inventory. Furthermore, the competitive advantages Tesla enjoyed during the 2021 boom, such as faster production capabilities, have diminished as the automotive market stabilizes post-pandemic. Compounding these challenges, BYD has emerged as a dominant global EV player in the past year.
Gómez Leautaud concurs, “There’s a plausible scenario where, even if all of Musk’s plans materialize, the project could still be stalled due to various factors. Musk is known for being an unpredictable businessman, and Tesla is currently navigating a challenging period. While the Nuevo León state government bears some responsibility for not fully delivering on its commitments, the issues likely extend beyond their control.”
An ‘Unsustainable’ Model?
Despite the mounting uncertainties, compelling reasons persist for Musk to proceed with the Mexico Gigafactory. However, Tesla’s silence on the project fuels growing speculation about its potential cancellation. For Professor Aguilar, even if Tesla were to withdraw, Nuevo León’s appeal as an investment destination remains strong.
“The extensive infrastructure development initiated for the Tesla factory, coupled with the government’s concessions to Tesla’s demands, presents a golden opportunity for other foreign investors,” Aguilar points out. If the federal government adopts a less welcoming stance towards investment, states like Nuevo León could proactively capitalize on the current nearshoring trend. Indeed, Nuevo León is currently the leading Mexican state in attracting foreign direct investment.
“There is relentless promotion to attract more and more investment, without adequately addressing or prioritizing the ecological limitations of the metropolitan area, such as the escalating water crisis, increased greenhouse gas emissions, and worsening traffic congestion,” Aguilar cautions. “The current model of attracting foreign direct investment is fundamentally unsustainable, a critical point that is not being sufficiently acknowledged,” he concludes.
