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

MEXICO CITY, Feb 17 (Reuters) – Tesla Inc’s (TSLA.O) quest to construct its first manufacturing unit in Mexico reveals a number of the shaky underpinnings of the nation’s rise as a nearshoring darling, with proximity to U.S. patrons weighed down by issues over energy provide and political interference.

Mexican President Andres Manuel Lopez Obrador mentioned Nuevo Leon on the U.S. border and Hidalgo in central Mexico are the 2 states leading the race for the coveted funding, and his overseas minister said on Friday that the electrical automobile maker led by billionaire Elon Musk was near saying growth plans in Mexico.

Nuevo Leon – which latest experiences recommend is now the probably vacation spot – boasts fast entry to the US, a talented workforce and comfy residing for executives.

Hidalgo, simply exterior Mexico Metropolis, is a whole bunch of miles from the border but land and labor prices are decrease.

In both place, Tesla will depend upon the federal authorities to faucet in to Mexico’s strained vitality provide and face difficulties securing substantial energy from renewable sources.

That places the Austin, Texas-based firm – and another main investor seeking to construct factories in Mexico – on the mercy of political forces largely dictated by Lopez Obrador. The nationalist chief has prioritized Mexico’s state energy utility, CFE, regardless of criticism that its fossil gasoline generators pollute and that it crowds out personal enterprise.

America and Canada have formally entered a trade dispute over Mexico’s vitality coverage.

Many analysts additionally say the federal authorities seems to have tried to tip the scales in Hidalgo’s favor, because the state authorities is aligned with Lopez Obrador’s MORENA get together and it’s close to one of many administration’s flagship tasks, the Felipe Angeles International Airport.

“The political points proper now are crucial to take into accounts and it is a good instance,” mentioned Claudio Rodriguez, a lawyer at Holland & Knight who makes a speciality of vitality. “The Nuevo Leon/Hidalgo situation is 100% political.”

Tesla and a spokesman for Lopez Obrador didn’t instantly reply to requests for remark.

It stays unclear precisely what Tesla’s funding in Mexico will seem like and what the corporate plans to provide within the nation.

RECENT DEALS

Musk’s curiosity in plunking a big funding into Mexico comes because the nation is more and more seen as a hotspot for nearshoring – the development to maneuver manufacturing nearer to North American patrons and away from Asia, the place supply-chain snarls through the pandemic overshadowed the area’s low-cost benefit.

With its low prices and placement subsequent to the U.S. market, Mexico emerged as a pretty various that’s steadily luring manufacturing in sectors together with autos, electronics and furnishings.

Many offers have landed close to Monterrey, Nuevo Leon’s rich capital, together with for Tesla suppliers. These offers embrace the primary plant exterior Asia for Taiwanese electronics firm Quanta Laptop (2382.TW) and an growth for Italian brakes maker Brembo (BRBI.MI).

In one other not too long ago introduced deal, Germany’s BMW (BMWG.DE) will make investments close to $870 million within the central state of San Luis Potosi to provide high-voltage batteries and electrical automobiles.

Overseas direct funding in Mexico rose 12% final 12 months to achieve $35.3 billion, based on preliminary information, one other signal that nearshoring is constructing momentum, analysts say.

Throughout the border, in one other signal of the development, U.S. manufacturing imports from Mexico rose 7% in 2021 versus 2019, the quickest tempo in a decade.

But Mexico’s capability for a nearshoring growth has been held again by Lopez Obrador, notably his vitality insurance policies, analysts mentioned. The federal authorities holds the keys to Mexico’s electrical energy provide, with the flexibility to hurry up or delay requests to hook up with the grid.

Lopez Obrador has rolled again a reform beneath his predecessor that he argues was too beneficiant in opening up the vitality market to personal capital. He has suspended self-supply energy era permits, which allowed corporations to rearrange their very own electrical energy provides, and in addition hampered makes an attempt by personal corporations to attach their energy manufacturing to the nationwide grid.

“Think about what it might be like for those who had worthwhile funding coverage, vitality effectivity … we’d be flying at 30,000 ft and having infinite investments,” mentioned Juan Francisco Torres, an legal professional at Hogan Lovells. “That isn’t taking place.”

Reporting by Diego Ore and Daina Beth Solomonin Mexico Metropolis
Further reporting by Kylie Madry in Mexico Metropolis
Enhancing by Stephen Eisenhammer and Matthew Lewis

Our Requirements: The Thomson Reuters Trust Principles.