Tesla's plans in Mexico are deflating (but not dying)

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Eduardo Aguilar has a front-row seat to Mexico's most talked-about investment. The professor travels almost daily along the road where the land that Tesla, one of the most valuable companies in the world, bought to build its gigafactory in Santa Catarina (Nuevo León) is located. Contrary to rumors that the plan is dead, and despite the fact that little has been done since its announcement a year ago, Aguilar assures that the work is progressing. “The land is the same as it was a year ago, that is without a doubt, but all the Government works around what will be the plant have already begun,” says the academic, who teaches the subject of Economic Policy at the University of Monterrey (Udem). , whose campus is located 30 kilometers from the place. “The machinery and signs indicate that the expansion of access and stormwater infrastructure that the State had promised has already begun,” he adds. Unlike many in Nuevo León, Aguilar opposes the popular project for environmental reasons (the State suffers from a shortage of water, high pollution and serious road congestion), but those are not the reasons why the project, which was promoted as the investment of the year, has deflated. Much has changed at Tesla since its CEO, the unpredictable and capricious Elon Musk, announced a $4.5 billion investment in Mexico in March of last year. In January, China's BYD surpassed Tesla as the leading electric vehicle maker. in the world, with a cheaper car offer than Tesla. 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 electric vehicle (EV) market has slowed and the company reported its quarterly sales in April lowest since 2022 and its first annual drop since 2020. Tesla announced the dismissal of 10% of its workforce and, according to a national media in Mexico, the job offers it had in Nuevo León disappeared from its page.A BYD car showroom in Perisur, one of Mexico City's main shopping centers, in October 2023.Mariceu Erthal (Bloomberg)The story of Tesla's investment, which has not been (and which many speculate, is not will be), runs parallel to the failure of the governor of Nuevo León, Samuel García, for not starting on time the facilities and incentives that he promised to Musk. The panoramas that adorn the northern city with the Tesla logo are a reminder of how García managed, briefly, to ride the inertia generated by the announcement of the investment to pursue a candidacy for the presidency. This did not last long, as García was unable to negotiate his replacement as governor with the opposition in Congress. It was also unable to convince the Federation to send resources for the works promised to Tesla. The 'nearshoring' Since the announcement made by Tesla, other investments have been announced that have not generated even a fraction of the media impact that the automaker achieved. In June, the Argentine steel company Ternium announced that it would invest 3.2 billion dollars 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 an investment even larger than Tesla's, of $5 billion through its computing services subsidiary AWS. What brings these companies to Mexico is the trade fight that the United States has raised against China. The trend among companies that want to continue selling to the North American country is to leave the Asian country to locate in countries “allied” to the United States and few countries are in a better place than Mexico. The big beneficiaries have been the northern and central states, better positioned to receive companies, which is why President Andrés Manuel López Obrador fought because the Tesla plant, which was supposed to assemble the firm's cheapest model, was did in southern Mexico.López Obrador during a meeting with Tesla executives at the National Palace, on March 8, 2023.López Obrador during a meeting with Tesla executives at the National Palace, on March 8, 2023. Presidency “It is a very good example of what is being consolidated as the history of nearshoring under the López Obrador period,” says Matías Gómez Léautaud , an analyst for the political-economic consulting firm Eurasia Group in Mexico City, “the federal government has taken an attitude that investment will come because the country is attractive and it does not believe it has to do anything exceptional to attract it.”Tesla indirectly imposed its conditions by not being willing to send the project to the south of the country as the Federal Government wanted, adds Gómez Léautaud «and that most likely caused some sting within the López Obrador Administration, which said 'it's okay, go there, but you scratch with your own nails,'” says the analyst. 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 is the company that does not have the cash flow you had a year ago. “In the most recent quarter, they burned through $2.5 billion of free cash flow, an all-time record cash burn,” says Gordon Johnson, market strategist and founder of GJL Research. Johnson is famous in Wall Street circles. Street for his skepticism towards 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 Mexico plant announcement was made in March of last year, at a time when the stock Tesla fell and Johnson believes that Musk went ahead to announce the project without having a concrete plan in the hope that it would boost the stock. “That didn't happen,” says Johnson, on the phone from New York, “because how the hell are you going to build a bigger factory when you can't sell what you're producing?” Johnson questions in his characteristic flowery language.Gordon Johnson in New York, in 2017.Gordon Johnson in New York, in 2017.Christopher Goodney (Bloomberg)According to the analyst, Tesla has sold fewer cars than it has produced in seven of the last eight quarters, which means that they are selling only 75% of their inventory . Additionally, 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 normalized after the pandemic. And, if that were not enough, BYD has become a global electric vehicle giant in the last year. “There is a scenario in which, even though they had built everything Musk wanted, the plan could have been slowed down for multiple reasons,” agrees Gómez Léautaud, from Eurasia. “It is known that he is a very capricious businessman and at this moment the company is not having its best months. Although there is an obvious responsibility on the part of the State Government in that they did not manage to deliver what they had committed to deliver, I believe that it does go beyond them. 'Unsustainable' investment There remain compelling reasons for Musk to continue with the plan in Mexico, although the company's little 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. “That they have adapted all this infrastructure for the installation of the factory and that the government has also given in to all the demands that Tesla made, That is an opportunity 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. Nuevo León is precisely the State that is receiving the most foreign investment.The property acquired by Tesla in Nuevo León, on March 3, 2023.The property acquired by Tesla in Nuevo León, on March 3, 2023.DANIEL BECERRIL (REUTERS) “There is a constant promotion in order to attract more and more and more, without observing or prioritizing the biotic conditions of the metropolitan area , such as the water crisis, greater greenhouse gas emissions and greater road congestion,” says the academic. “Direct foreign investment in the territory with current conditions is totally unsustainable and that is not being said,” he concludes. Subscribe to the EL PAÍS México newsletter and the WhatsApp channel and receive all the key information on current events in this country .