Northern Mexico preparing for EV production

Tesla's plans to build a gigafactory in Nuevo León state in northern Mexico will mark an unprecedented change in the local economy and the automotive industry, but the state automotive cluster (Claut), a civil association formed by manufacturers, academic institutions and government agencies to promote the competitiveness of the sector, sees many challenges due to the country's lack of experience in producing electric vehicles (EVs).

Even though Tesla intends to start operations this year, the local automotive industry ecosystem is still completely unaware of its start-up plan or requirements.

However, Manuel Montoya Ortega, general director of Claut, tells BNamericas in this interview that he is confident that the state will be able to adapt.

BNamericas: It's been two months since US EV maker Tesla confirmed that it will build a US$5bn plant in Nuevo León state as part of the nearshoring phenomenon. How have you received the news and how are you preparing?

Montoya: Nearshoring itself has to do with stopping imports from Asia and mainly from China due to the tariffs that the United States imposed on 6,000 Chinese products. The concept was created a few years ago and consists of bringing production here to Mexico so that it’s closer to the US market.

The trend in the automotive industry began in 2019, but due to the new free trade agreement between Mexico, the United States and Canada [USMCA], there’s an obligation to include regional content. 

Before, it was 62.5% and it will now be 75%. It was done in a staggered way, starting in 2019. It was raised from 62.5% to 66%, then from 69% to 72% and now in June it will reach 75%. So, what is happening? This is forcing vehicle manufacturers to increase their production of components in North America.

The most important rule of the USMCA is not so much that, but rather that auto part manufacturers now have to prove that 75% of those parts are made here [North America]. So, that is what’s obliging component manufacturers to come to Mexico or seek suppliers in Mexico. 

This first phenomenon of the USMCA has caused the automotive industry to greatly accelerate regional integration, so much so that we calculated that from 2019 to 2022 the North American content in vehicles increased by 8%. Before, North American content was US$24,000 per vehicle on average. Now, it’s around US$29,000 and the USMCA is motivating that.

BNamericas: What does this acceleration mean for the companies that are already established here?

Montoya: Obviously, the existing automakers are going to try to reconvert their factories, such as revamping the Cuautitlán Izcalli plant in Mexico state, which is already a very old plant, where they‘re manufacturing the electric Ford Mustang. They're adapting it to make their electric vehicle. 

At the same time, new players like Tesla are setting up plants with this megafactory concept and we're going to start to see a movement of new industries that are going to be emerging and which will be looking at where to establish themselves. Mexico is a good place. Obviously, Nuevo León is the place to start fastest. 

I think that little by little this is going to spread to other regions – not just the northeast because right now it's very concentrated in Nuevo León and with some in Coahuila, but it's going to expand to other areas because it's also beginning to become saturated here.

BNamericas: The governor of Nuevo León announced that the Tesla gigafactory in Santa Catarina municipality could be built and finished this year. Do you expect the arrival of more companies in the state?

Montoya: To begin with, I think that Tesla has been very concise in its statements and that's how they are. We don't have any more information from the company, but we do have the ecosystem. We know that we already have about 20-25 Tesla suppliers established here in the state, supplying the Tesla plant in Austin, Texas. We're now seeing the arrival of lots of suppliers like those that are already here and working for Tesla.

BNamericas: What about the workforce? Is there enough talent for Tesla to train new employees?

Montoya: We're also working with universities and schools to identify the required talent. We haven't identified that yet, but we're working on it and it could take a while. 

As a cluster, we're trying to support the state ministry of economy and the labor ministry to guide this. Will people come from other places? I don't know, it all depends on the requirements. Tesla's manufacturing processes are highly automated, so it's not cheap labor; it's specialized labor, which is very good for us.

BNamericas: Does Nuevo León have experience with electric vehicles?

Montoya: Electric vehicles are something new. No one is more of an expert than Tesla and some Chinese firms, but the automakers are just learning. So to say that Nuevo León is already an expert, well, no. We are in the process. There are local companies that are working on electromobility issues and foreign investment is arriving in this area – the investments are here. It's going to take them this whole decade to migrate from gasoline vehicles to electric vehicles.

We're not prepared nor do we have a plan to do that, and considering infrastructure, charging stations, power generation capacity, yes there are some challenges that we still don't know how we're going to solve, but we're going to do that.

BNamericas: President Andrés Manuel López Obrador initially didn't want Tesla to go to Nuevo León due to the lack of water. In fact, the state had one of its biggest water crises in 2022. What solution did the company offer to ensure its supply of water without affecting the city of Monterrey?

Montoya: Tesla would have to say what it will do, but the truth is that it hasn't provided any information about that.

BNamericas: What about the energy supply? Would Tesla supply itself? 

Montoya: What I do know is that Nuevo León is currently self-sufficient. It even generates enough electrical energy to export to other states. With growth, I think it will require more energy generation and especially green energy. It wouldn't make sense to make electric cars with dirty energy.

BNamericas: The Ministry of Economy invited a delegation of Taiwanese businessmen to visit Mexico this week to convince them to open plants in the country to manufacture semiconductors, which are also required for the production of electric vehicles. What do you think about that?

Montoya: Semiconductors aren't made in Mexico, nor have investments of this kind arrived up to now because they're very large investments. It's not the type of investment that's happening [in Mexico] at the moment, but it is happening in the southern United States.

BNamericas: What are the issues that matter most to members of the automotive sector in Nuevo León state at present?

Montoya: There are lots of issues, but I think the one that negatively affects us the most is [the appreciation of the peso against the dollar] because everything is dollarized and we make a living from exports. Because the exchange rate is very low, companies' purchasing power is being lost, so this nearshoring opportunity could slow down because the Mexican businesspeople can't make money.