Will Musk's move to delay Tesla Gigafactory be a bump in the road for Mexico’s nearshoring?

The stir in Mexico caused by Tesla CEO Elon Musk's plan to wait until the US elections before deciding whether or not to establish his planned Gigafactory in Nuevo León state has revived fears about the risks to Mexico and the nearshoring phenomenon posed by Donald Trump's possible reelection.

Musk stated during a call with analysts that Trump has said he would establish tariffs on vehicles produced in Mexico, so "it doesn't make sense to invest a lot in Mexico if that's going to happen."

Tesla announced in March last year that it would build a plant in northern Mexico to produce its electric vehicles starting in 2026, with an investment of more than US$5 billion.

Although the US protectionism espoused by Trump is expected, the knock-on effects of Musk’s comments on other investors interested in Mexico have sparked fears among some analysts.

“We already knew that Trump was an obstacle to the issue of nearshoring and Mexico taking advantage of it because most of Trump’s policies and approach are very protectionist,” James Salazar, deputy director of economic analysis at CI Banco, told BNamericas.

"Elon Musk's announcement or comments make a lot of sense in that rhetoric. No one wants to get into a fight with the possible next president of the United States and, in that sense, they’re going to limit their statements, although we have to assess what will end up happening."

Meanwhile, Alfredo Coutiño, director for Latin America at Moody's, said that Musk's comments "are a negative signal for Mexico."

“This decision could be a warning signal for other large investors and could trigger new announcements of delays in investments in Mexico,” he was reported as saying by AP.

Despite the concerns, the trend of companies relocating to Mexico extends beyond US businesses considering setting up shop south of the border.

Mexico signed a new USMCA trade deal with the US and Canada in 2020 while Trump was president and, with the country’s strategic location as neighbor of the world's leading economy, it remains a highly attractive destination for many companies from other countries.

“The reality is that there are other US companies that have made announcements or which have plans to take their plants to Mexico. But the interesting thing here is that it’s not just the US. What nearshoring gives you is that they can be companies with capital from anywhere. So, it may have implications for more projects or investment announcements, but only to a certain extent, not for everything,” said Salazar.

“It doesn’t completely change the positive outlook that nearshoring has or could have at any given moment. It’s just another hurdle,” added the analyst, underscoring that Trump’s protectionist rhetoric was seen when he first became president in 2017, and even then, the investment flows continued.

President Andrés Manuel López Obrador (AMLO) said in his daily press conference on Wednesday that record levels of investment are coming to Mexico, and that the trend will continue in the coming years. In 2023, Mexico attracted record foreign direct investment (FDI) of more than US$36bn, according to official data.

“The foreign investment that’s coming to Mexico is historic, like never before. To put it very clearly, there’s nothing to worry about. Mexico has an exceptional situation and foreign investment will continue to arrive,” AMLO said when asked about Musk's controversial announcement.

Mexico’s economy ministry recently reported that a recorded 143 public announcements of FDI from the private sector in the first half of the year for some US$45.5bn.

These investments are expected to arrive in Mexico in the next two to three years and although the ministry no longer specifies whether they are linked to nearshoring, as it did previously, it is presumed that most are related to this trend.

In practice, factors such as the lack of legal certainty in Mexico and the supply of basic infrastructure that companies require to operate in the different states will be a greater determinant of how much the country will be able to take advantage of nearshoring.

“Mexico faces certain problems in issues such as crime, the rule of law, telecommunications, infrastructure, water, energy costs and electricity and gas supply. There is a series of factors that don’t help to boost this phenomenon 100% because Mexico is lagging behind in these issues, which are more internal,” added Salazar.

In a special report published in April, Grupo Financiero Base warned that the challenges inherent to nearshoring in Mexico include pressure on labor costs, increased staff turnover, rising transportation costs, the need for construction of housing and improvement of public infrastructure, as well as greater dependence on trade with the US.

“The possibility of a lack of electrical energy infrastructure is one of the main factors that slows the arrival of FDI to Mexico and limits the ability to take advantage of the nearshoring opportunity,” the financial firm said in the report.