Tesla’s plans in Mexico are not dead. They’ve just lost steam

Eduardo Aguilar has a front-row seat to Mexico’s most talked-about investment. The university professor drives by the plot of land bought by Tesla to build a “gigafactory” in Santa Catarina, in the state of Nuevo León, daily on his way to work. Contrary to rumors that plans announced by one of the most valuable companies in the world are dead, and despite the fact that little has been done since its announcement a year ago, Aguilar is certain the project is happening.

“The land is the same as it was a year ago, no doubt about that, but all the government works around what will be the plant have already begun,” says the academic, who teaches economic policy at the University of Monterrey (Udem). The campus is located around 18 miles from the Tesla location. “The machinery and signage show that the entrance expansion and stormwater infrastructure that the state had promised have already begun,” he adds.

Unlike many in Nuevo León, Aguilar opposes the popular project for environmental reasons (the state suffers from water shortages, high pollution and road congestion), but those are not the reasons why the project, which was promoted as the investment of the year, has lost steam. Much has changed at Tesla since its CEO, the unpredictable and “fickle” Elon Musk, announced the $4.5 billion investment in March of last year.

In January, China’s BYD overtook Tesla as the world’s leading electric vehicle (EV) maker, offering cheaper cars. In addition, the profit margins of Musk’s company have been sharply reduced since the sales boom it experienced in 2021. In the last year, the EV market has slowed and last month, the company reported its lowest quarterly sales since 2022 and its first annual drop since 2020. Tesla announced it was laying off 10% of its workforce and even the job offers it had in Nuevo León disappeared from its webpage.

The story of the Tesla investment that is yet to happen (and that, many speculate, will not) runs parallel to the failure of the governor of Nuevo León, Samuel García, to deliver the incentives that he promised Musk. The billboards that tower over highways in the northern city with the Tesla logo are a reminder of how García managed, briefly, to ride the wave of inertia generated by the announcement of the investment to make a run for the presidency. This did not last long, as García was unable to negotiate his replacement as governor with the opposition in Congress. He was also unable to convince the Federation to send resources for the works promised to Tesla.

Nearshoring

Since Tesla’s big factory announcement, other companies have said they’re investing in Mexico, though without making a big splash. In June, the Argentine steel company Ternium announced that it would invest $3.2 billion in the same state. Another Argentine company, the e-commerce giant Mercado Libre, has an investment of $2.45 billion in Mexico for this year. And in February, Amazon announced a $5 billion investment, larger than Tesla’s, through its cloud services subsidiary AWS.

What brings these companies to Mexico is the ongoing economic tensions between the United States and China. Companies that want to continue selling to the North American country are looking to exit the Asian country and relocate in countries considered “allies” to the U.S., and few countries are better positioned than Mexico. The biggest winners have been the northern and central states, better placed to receive companies, which is why President Andrés Manuel López Obrador fought to bring the Tesla plant, which was supposed to assemble the firm’s cheapest model, to southern Mexico instead.

Perhaps indirectly, Tesla imposed its conditions by not being willing to move the plant to the south of the country as the federal government wanted, says Matías Gómez Leautaud, analyst for Eurasia Group in Mexico City. “This most likely caused a sting within the López Obrador Administration, which responded with ‘okay, go where you wish, but you’re on your own.’”

Record spending

Governor García found the resources to start the works that are already being carried out near Tesla’s land in Santa Catarina, but now, it’s the company that does not have the cash flow it had a year ago. “In the most recent quarter, they burnt through $2.5 billion in free cash flow, an all-time record high burn of cash”, says Gordon Johnson, market strategist and founder of GJL Research in New York.

Johnson is famous in Wall Street circles for his skepticism toward Tesla and Musk. He has studied the company’s financials and issued bearish recommendations for Tesla shares since 2018 and, in his estimates, the true value of one share of the automaker is close to $22. The stock is currently trading at $180. In other words, Johnson and his team believe Tesla stock is 90% overvalued.

The announcement of the plant in Mexico was made in March 2023, at a time when Tesla’s stock was falling, and Johnson believes that Musk went ahead to announce the project without having a concrete plan in the hopes that it would boost the stock. “That didn’t happen”, Johnson says, “so how in the heck are you going to build a bigger factory when you can’t even sell what you’re already producing?”

According to the analyst, Tesla has sold fewer cars than it has produced in seven of the last eight quarters, meaning they are selling only 75% of their inventory. Also, the competitive advantages the company had during its boom in 2021, such as the ability to produce faster than its competitors, have faded now that the auto market has stabilized after the pandemic. And, as if that were not enough, BYD has become a global EV giant in the last year.

Gómez Leautaud agrees. “There is a scenario in which, even if they build everything Musk wants, the plan could have been halted for multiple reasons”, he says. “He is known to be a very fickle businessman and the company is not going through its best months. Although there is an obvious responsibility on the part of the state government in that they have yet to deliver what they had committed to delivering, I think it is beyond them.”

‘Unsustainable’ investment

Compelling reasons remain for Musk to continue with his Mexico plans, although the company’s lack of communication on the subject is fueling speculation of its cancellation. For Aguilar, the Udem professor, even if Tesla abandons the project, someone else would take his place.

“The fact that they’re building all this infrastructure for the factory and that the government has given in to all the demands that Tesla made, that is an opportunity served on a silver platter for any foreign capital,” says Aguilar. If the federal government adopts a colder attitude towards investment, states like Nuevo León could be more proactive to take advantage of the moment. In fact, Nuevo León is the State that is receiving the most foreign investment.

“There is constant promotion to attract more and more and more investment, without acknowledging or prioritizing the biotic conditions of the metropolitan area, such as the water crisis, greater greenhouse gas emissions and greater road congestion,” the academic says. “Direct foreign investment under current conditions is totally unsustainable and that is not being said,” he concludes.

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