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Private Banks Ranking > Blog > Tesla Is the Latest Company to Invest in Mexico. Can the US Industrial Sector Keep Up?

Tesla Is the Latest Company to Invest in Mexico. Can the US Industrial Sector Keep Up?

By 3 weeks ago
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Pressure on US industrial infrastructure is set to increase after Mexico’s booming manufacturing sector was given a further boost by Tesla’s plans to site a major gigafactory in the north of the country. 

The project, announced by Mexico’s President Andrés Manuel López Obrador last week and confirmed by Tesla the following day, will initially involve $5 billion in capital investment and create 5,000 jobs but those figures are expected to eventually double. The site will spread across nearly 4,200 acres in an industrial zone in the border state of Nuevo Leon – almost twice the size of Tesla’s factory site in Texas.  Construction is slated to start in three months.

Currently in an aggressive internationalization phase to meet sales demand, Tesla is one of the most prolific creators of greenfield foreign direct investment (FDI) and its projects are highly sought after by government investment promotion agencies worldwide. The cache and amplifier effect of a Telsa factory, along with the jobs created, has made it a coveted prize. Berlin and Shanghai had been the only non-US locations to win Tesla gigafactories, with Mexico set to become the third.

The Mexican government said the new gigafactory will be the largest in the world and will produce 1 million vehicles a year, a third of Tesla’s global capacity.

While undeniably positive news for Mexico and its FDI credentials – and a political victory for Obrador – the project will stoke already-booming demand for industrial space along the border and raises questions over whether US industrial sites can handle the inflow of goods expected from Mexico as more firms like Tesla set up shop in the country.

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The US is experiencing a general, significant uptick in demand for industrial space off the back of increases in e-commerce activity and manufacturing output. CRE research firm YardiMatric predicts that up to 370 million square feet of new space is needed annually in the US to meet industrial demand, totaling 1.8 billion through 2026.

Mexico’s manufacturing industry having a moment in the sun is stoking further demand. Mexico is benefitting from a widescale reorganization of supply chains as companies burned by the disruptions of Covid-19 look to minimize their reliance on China and as US companies bring operations back closer to home, a trend known as nearshoring.  Data from Tradeshift, a cloud-based platform for supply chain payments and other transactions, indicates that activity across a number of nearshoring hotspots has risen at a far faster pace than the global average, with transaction volumes in Mexico and Canada rising at the fastest pace globally.

The trend is creating a surge in new manufacturing facilities in Mexico, which in turn is fueling development of new and expanded industrial space in border towns like Laredo, El Paso and San Diego, as well as Tijuana and Tucson.

Nearshoring-related relocations and expansions accounted for half of the industrial demand in Mexico in 2022, concentrated in border areas including Monterrey, Juarez and Tijuana, the Wall Street Journal reported. 

The shift of manufacturing to Mexico is also boosting manufacturing in the US, as components for advanced equipment including electronics and medical devices are being made in Mexico and sent to factories in the US for final assembly.

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Major logistics players and investors are focused on developing warehouses along the border in Texas and California. ProLogis told WSJ demand for business in Mexico was “the highest ever” last year. It owns nearly 44M SF of industrial space in Mexico, with occupancy levels that reached 98% in Q4 2022, and broke ground last year on 4M SF of new industrial supply in Mexico.

Morgan Stanley said it is investing in industrial developments encompassing nearly 2M SF on the border. TPG, Clarion Partners and CBRE are among the CRE firms zeroing in on investments along the border, according to the WSJ report.

The question is whether Mexico’s manufacturing star will continue to rise, creating ever greater demand for nearby industrial space. China’s factory activity is ramping up again after the country’s long-awaited relaxation of stringent Covid restrictions, recording its highest manufacturing reading in more than a decade in February and suggesting it cannot be counted out as a manufacturing behemoth. China, despite its myriad Covid-related challenges and the need for companies to hedge against over-reliance on it, remains a top global FDI destination and is seeing rising inflows again. 

But the nearshoring trend is showing no sign of letting up. In the next five years, reshoring and nearshoring will relocate up to 26% of world production, according projections by the McKinsey Global Institute. And Tesla’s selection of Mexico for its most significant non-US investment in years points to no letup in Mexico’s manufacturing boom, and a continued scramble to develop industrial infrastructure to keep up with it.

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TAGGED: Company, Industrial, Invest, latest, Mexico, Sector, Tesla
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