Analysis: Tesla's search for Mexico location shows bumps on nearshoring road

Quanta Computer

17/02/2023 18:36

By Daina Beth Solomon and Diego Oré
       MEXICO CITY, Feb 17 (Reuters) - Tesla Inc's  TSLA.O 
quest to build its first factory in Mexico reveals some of the
shaky underpinnings of the country's rise as a nearshoring
darling, with proximity to U.S. buyers weighed down by concerns
over power supply and political interference.
    Mexican President Andres Manuel Lopez Obrador said Nuevo
Leon at the U.S. border and Hidalgo in central Mexico are the
two states leading the race for the coveted investment, and his
foreign minister said on Friday that the electric vehicle maker
led by billionaire Elon Musk was close to announcing expansion
plans in Mexico.
    Nuevo Leon - which recent reports suggest is now the most
likely destination - boasts quick access to the United States, a
skilled workforce and comfortable living for executives.
    Hidalgo, just outside Mexico City, is hundreds of miles from
the border yet land and labor costs are lower. 
    In either place, Tesla will depend on the federal government
to tap in to Mexico's strained energy supply and face
difficulties securing substantial power from renewable sources. 
    That puts the Austin, Texas-based company - and any other
major investor looking to build factories in Mexico - at the
mercy of political forces mostly dictated by Lopez Obrador. The
nationalist leader has prioritized Mexico's state power utility,
CFE, despite criticism that its fossil fuel turbines pollute and
that it crowds out private enterprise.
    The United States and Canada have formally entered a trade
dispute over Mexico's energy policy.
    Many analysts also say the federal government appears to
have tried to tip the scales in Hidalgo's favor, as the state
government is aligned with Lopez Obrador's MORENA party and it
is near one of the administration's flagship projects, the
Felipe Angeles International Airport.
    "The political issues right now are very important to take
into consideration and this is a perfect example," said Claudio
Rodriguez, a lawyer at Holland & Knight who specializes in
energy. "The Nuevo Leon/Hidalgo issue is 100% political."
    Tesla and a spokesman for Lopez Obrador did not immediately
reply to requests for comment.
    It remains unclear exactly what Tesla's investment in Mexico
will look like and what the company plans to produce in the
country.
    RECENT DEALS
    Musk's interest in plunking a large investment into Mexico
comes as the country is increasingly seen as a hotspot for
nearshoring – the trend to move production closer to North
American buyers and away from Asia, where supply-chain snarls
during the pandemic overshadowed the region's low-cost
advantage. 
    With its low costs and location next to the U.S. market,
Mexico emerged as an attractive alternative that is gradually
luring manufacturing in sectors including autos, electronics and
furniture. 
    Many deals have landed near Monterrey, Nuevo Leon's wealthy
capital, including for Tesla suppliers. Those deals include the
first plant outside Asia for Taiwanese electronics company
Quanta Computer  2382.TW  and an expansion for Italian brakes
maker Brembo  BRBI.MI .
    In another recently announced deal, Germany's BMW  BMWG.DE 
will invest near $870 million in the central state of San Luis
Potosi to produce high-voltage batteries and electric cars. 
    Foreign direct investment in Mexico rose 12% last year to
reach $35.3 billion, according to preliminary data, another sign
that nearshoring is building momentum, analysts say.
    Across the border, in another sign of the trend, U.S.
manufacturing imports from Mexico rose 7% in 2021 versus 2019,
the fastest pace in a decade.
    Yet Mexico's capacity for a nearshoring boom has been held
back by Lopez Obrador, particularly his energy policies,
analysts said. The federal government holds the keys to Mexico's
electricity supply, with the ability to speed up or delay
requests to connect to the grid. 
    Lopez Obrador has rolled back a reform under his predecessor
that he argues was too generous in opening up the energy market
to private capital. He has suspended self-supply power
generation permits, which allowed companies to arrange their own
electricity supplies, and also hampered attempts by private
companies to connect their power production to the national
grid.    
    "Imagine what it would be like if you had profitable
investment policy, energy efficiency ... we would be flying at
30,000 feet and having endless investments," said Juan Francisco
Torres, an attorney at Hogan Lovells. "That is not happening."
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Tesla's Musk to hold call with Mexico president, factory
announcement imminent     urn:newsml:reuters.com:*:nL1N34X1NH
Tesla's Musk eyes potential investment in Mexican border state
-sources      urn:newsml:reuters.com:*:nL1N31P1TJ
Tesla considering plant near Mexico City's new airport, Mexican
official says     urn:newsml:reuters.com:*:nL1N34G1QC
EXPLAINER-What's known about Tesla's "Project Highland"?   
 urn:newsml:reuters.com:*:nL1N34W0G4
FACTBOX-Tesla CEO Musk signals Part 3 of Master Plan is ready   
  urn:newsml:reuters.com:*:nL4N34P2JV
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Reporting by Diego Ore and Daina Beth Solomonin Mexico City
Additional reporting by Kylie Madry in Mexico City
Editing by Stephen Eisenhammer and Matthew Lewis)
 ((daina.solomon@thomsonreuters.com))