Recently, we reported that Elon asked twitter if Giga Texas (a Tesla gigafactory in Texas) made sense. With Tesla’s aggressive global goals to expand auto production an order of magnitude within 5 years, I added to the discussion that Giga Mexico might be worth considering, since they need to start thinking about markets beyond the US, Europe, and Asia.
Giga Texas?
— Elon Musk (@elonmusk) February 5, 2020
I think the Carolinas would make more sense. NC maybe. But I did call Giga Texas a few weeks ago.
— Jose Luis Feliciano (@luismen1991) February 5, 2020
But Mexico has tariff-free access to Mercosur countries in South America. Texas does not. OTOH, Fremont alone isn't big enough for the US market. Texas and Mexico solve different problems.
— Daniel Cincunegui (@danielcincu) February 5, 2020
Plenty of people can afford $30k range cars in the region. Effective tariffs are much higher than you realize, basically doubling the price of imports. A US-made base model 3, if sold, would cost at least $75K in Brazil. Also, Tesla will drop prices over time.
— Daniel Cincunegui (@danielcincu) February 5, 2020
This led me to do a little research into Mexico’s ability to export into the South American market. I found that Mexico has more free trade agreements than any other country in the world! The newly negotiated USMCA gives Mexico the same access to the US and Canadian market as a gigafactory in Texas would provide, but Mexico’s trade agreements with Central and South America would give Tesla tariff-free access to some large and growing markets that a Texas factory can’t touch. The agreement with Brazil is especially valuable due to the size of the market and high tariffs that make exporting autos prohibitively expensive without a way around the tariffs.
The same day as this series of tweets, this article on the Mercedes-Benz factory built in Mexico in 2018 was published. They mention that the factory will have capacity for 300,000 cars a year by 2021.
The Latin American auto market size of 5.72 million units a year in 2019 is about a third the size of the US market, but a US factory can only access the 1.32 million sales in Mexico and misses the other 4.4 million sales potential in the rest of Central and South America, including about 3 million sales a year in Brazil.
Tesla already has 3 large factories based in the US (Nevada, Fremont, and Buffalo). I’m not saying that we don’t need a fourth large factory, but building one in Texas doesn’t give Tesla access to any new markets.
Engineering Talent In Latin America
As Elon recently mentioned, the limit to their growth isn’t money, but engineering talent. With immigration restrictions in the US preventing many talented engineers from working in the US, and the current administration and powerful lobbying interests making immigration liberalization a long shot in the short run, Tesla could tap into Mexico’s talent pool to find the engineers it can’t get in the US. Tesla also may be able to recruit talent from other Latin American countries to Mexico if they can get work Mexican work permits but not US work permits.
Conclusion
I agree with many that Texas would be a great place to build another Gigafactory to meet the manufacturing needs for coming vehicles planned by Tesla. The question I am raising in this article is, can Tesla get most the advantages of the Texas factory — and more — with a factory in Mexico?
Tesla will have a lot of difficulty entering the South American markets without a local factory. But a South American factory would not be able to sell into the US and Canada with current trade agreements. The one place that would give Tesla new access to the South American market and give the company additional capacity to satisfy the demand in the North American market is Mexico. Access to additional manufacturing and engineering talent pools is another bonus to be evaluated.
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