The electric vehicle company, Tesla, currently dominates the list of the “most American automobile manufacturers.” For some drivers, this is a major reason they are willing to part with some major cash to buy a Tesla. But in February 2023, the President of Mexico revealed that he has green-lit a massive Tesla factory.

Tesla is opening a factory in Mexico

At the time of writing, Tesla has not released any details on its new Mexico factory. In addition, some sources in Mexico’s federal and local governments appear to contradict one another. Here’s what we know for sure.

Tesla’s Mexico factory will be located in the city of Santa Catarina in the greater Monterrey metropolitan area. Monterrey is the capital of the northern state of Nuevo León and is the second-largest city in Mexico.

Tesla Monterrey will join Tesla’s existing factories in Fremont (California), Austin (Texas), Grünhide (Germany), and Shanghai (China).

Electrek.co reported that Tesla “dominates” the list of the most “American-made” cars. Considering that all of the Detroit Three source many components–and some entire vehicles–from other countries, Tesla’s decision to establish its first factory in California caught the attention of many U.S. shoppers. We’ll have to wait and see how many of Tesla’s U.S.-market vehicles come from its Mexican factory and how consumers react.

What went into the deal

According to Yahoo Finance, Mexican Foreign Minister Marcelo Ebrard said Tesla’s deal with the Mexican government took 14 months of “patient labor.”

Mexico’s Deputy Foreign Minister, Martha Delgado, added that the factory will produce one million vehicles annually. All of Tesla’s current factories assemble a combined 1.9 million vehicles annually. Tesla has announced a 20 million vehicle annual target. But we can expect it to take several years for Tesla Monterrey to ramp up to these levels.

Another Mexican source revealed that Tesla plans to invest $1 billion to establish the plant and may spend up to $10 billion improving it. The mayor of Santa Catarina put those numbers into perspective: $10 billion would be five times the total of the private investments his municipality has enjoyed over the past decade.

Perhaps this is why President Lopez Obrador, traditionally a hard-liner on deals with foreign companies, was happy to announce the plant on February 28th, 2023. One sticking point was the scarcity of water in the region. For Tesla’s part, the automaker has pledged to recycle any water it uses in manufacturing.

Why is Tesla opening a Mexico factory?

Tesla is likely to open a factory in Mexico to keep its costs down. Mexico is home to a skilled production workforce, partly due to the many U.S. automakers with plants there. It also has a comparatively inexpensive labor rate.

One Mexican official claimed the plant would be a “gigafactory” to build the Tesla semi truck, roadster, and other vehicles. Someone else said it would make SUVs (perhaps the Tesla Model X). But there’s a distinct possibility that Tesla Monterrey will build an all-new vehicle.

Elon Musk has long said that he plans to eventually release a $25,000 Tesla vehicle, making EVs accessible to millions more Americans. His very first plan for Tesla included releasing a six-figure sports car, then an upmarket luxury car, and finally an entry-level EV. In Tesla’s March 1st, 2023, investor day, it even showed a slide with the outlines of future models on its next-generation platform, which included one that appears smaller than anything in the company’s current lineup. But he may be unable to build a car–even a small one– at $25k in California or Texas.

If Tesla Monterrey is set to build the company’s first entry-level EV, it makes sense that it will target one million units per year. Obviously, this would be a much less likely output of, say, semi trucks.

There’s a second reason Tesla is moving some production to Mexico. Over the past two years, global supply chain issues have crippled the automotive industry. The COVID epidemic and sanctions surrounding the war in Ukraine have pushed companies such as Tesla to consider “nearshoring.” This means keeping as much of their supply chain in North America as possible.

The final reason for Tesla’s choice to open a Mexico factory may be purely political: Mexican-built Teslas shipped to the U.S. could conceivably qualify for the Biden administration’s revised EV tax credit. This new tax credit includes stipulations for where an EV was built, where its battery was sourced, and even a cap on its price, which disqualifies much of Tesla’s current lineup.

Next, find out which ‘American’ pickup truck is built in Mexico or watch the broadcast of Tesla’s March 1st Investor Day event in the video below: