By Daina Beth Solomon and Diego Oré
MEXICO CITY, Feb 17 (Reuters) – Tesla’s search for a location to build its first factory in Mexico reveals the shaky fundamentals of relocation to the country, analysts say, with proximity to the U.S. market weighing on concerns about power supply and political interference.
Since the coronavirus pandemic disrupted supply chains, the Latin American nation has been seen as the ideal destination for “nearshoring”, the practice of moving factories from the home country to a neighboring country where everything is cheaper: salaries, energy, fuels and inputs. .
Mexican President Andrés Manuel López Obrador said Nuevo León, just steps from the border with the United States, and Hidalgo, in the center of the country, are the two states leading the race for the coveted investment, and his Foreign Minister announced on Friday that the firm led by tycoon Elon Musk had chosen Mexico to increase its presence.
Nuevo León, which according to recent reports is the most likely destination, enjoys quick access to the United States, a skilled workforce and a comfortable life for executives.
Hidalgo, next to Mexico City, is hundreds of miles from the border, but land and labor costs are lower.
Either way, Tesla will depend on the government to take advantage of Mexico’s unstable electricity supply and will have difficulty obtaining substantial power from renewable sources.
This puts the Austin-based company – and all other major investors seeking to build factories in Mexico – at the mercy of political forces dictated primarily by López Obrador.
The nationalist leader has prioritized the state’s Federal Electricity Commission (FEC) despite criticism that his mostly fossil fuel-based generation is polluting and displacing private companies.
The United States and Canada have officially entered into a trade dispute over Mexico’s energy policy.
Many analysts also say the government appears to have tried to tip the scales in favor of Hidalgo, a state ruled by an ally of López Obrador and located near one of the president’s most iconic projects: the international airport. Felipe Angeles (AIFA).
“It is very important to consider political factors at this time and this is a perfect example,” said Claudio Rodríguez, energy lawyer at Holland & Knight. “The Nuevo León-Hidalgo issue is 100% political,” he added.
Tesla and a spokesperson for the Mexican presidency did not immediately respond to requests for comment. It’s unclear exactly what Tesla’s investment in Mexico will look like and what the company plans to produce in the country.
“Developing other regions that can become industrial hubs is also something that can benefit Mexico in the long run,” said Alejandra Soto of consultancy Control Risks. “But forcing someone (to settle in a certain place) is not positive.”
WASTED POTENTIAL?
Musk’s interest in investing millions of dollars in Mexico comes as the country begins to claim center stage as a nearby hotspot.
With its low costs and proximity to the US market, Mexico has emerged as an attractive alternative that is gradually attracting manufacturing in sectors such as automotive, electronics, textiles and furniture.
Many contracts have landed in Monterrey – the wealthy capital of Nuevo León – including Tesla suppliers: Taiwanese electronics company Quanta Computer’s first plant outside Asia and an expansion of Italian brake maker Brembo.
In another recent agreement, the German BMW assured that it would invest 866 million dollars in the central state of San Luis Potosí to produce batteries and electric cars.
Foreign direct investment in Mexico rose 12% last year to $35.3 billion, according to preliminary data, another sign that offshoring is gaining momentum, analysts said.
Change is also happening on the other side of the border. Imports of Mexican products from the United States increased by 7% in 2021 compared to 2019, the fastest pace in a decade.
However, López Obrador is holding back Mexico’s ability for an offshoring boom, especially with its energy policies, analysts say. The government holds the keys to Mexico’s electricity supply, with the ability to speed up or delay requests to connect to the grid.
The president canceled a reform of his predecessor which he considered too generous in opening up the energy market to private capital. It suspended self-supply power generation permits, which allowed companies to organize their own power supply, and also hampered attempts by private companies to connect their power generation to the national grid.
“It is striking to note that energy supply decisions are determined by political criteria when it should be about the opening of the market and the availability for industries to draw up their business plans in whatever suits them best,” said Juan Francisco Torres, attorney for Hogan Lovells.
“Imagine what it would be like if you had a profitable investment policy, an energy efficiency policy, with large facilities,” he added. “We would fly at 30,000 feet and have endless inversions, but that’s not happening.” (Reporting by Diego Oré and Daina Beth Solomon; Additional reporting by Kylie Madry; Editing by Stephen Eisenhammer and Ana Isabel Martínez)