Tesla plant gets green light in northern Mexico

MEXICO CITY, Feb 28 (Reuters) - Tesla Inc will build a new assembly plant in northern Mexico, the country's president said on Tuesday, marking a push by the electric vehicle maker to broaden operations outside the U.S. in a deal said by a source to be worth at least $1 billion.

President Andres Manuel Lopez Obrador said "the whole Tesla company" was coming to Mexico to build a "very big" automotive plant, noting that potential investment in batteries was still pending. He did not reveal what models it would produce.

One Mexican official said the plant would be a Tesla "Gigafactory" that could produce the Semi truck, Roadster sports car, and potentially other vehicles. Another official said the plant could produce a kind of sport utility vehicle (SUV). The Model Y is Tesla's best-selling SUV. Tesla will likely give details of its plans on Wednesday, Mexico's government said.

Lopez Obrador's announcement of the plant in the Monterrey metropolitan area dispelled recent concerns that he could upend the investment by imposing conditions on the company due to problems over a lack of water in the arid border region.

"This will represent a considerable investment and many, many jobs," Lopez Obrador told reporters, saying Chief Executive Elon Musk had been receptive to Mexico's concerns and made commitments on how to address the shortage of water.

That would in part involve Tesla recycling water used in the assembly process, the president said.

The initial investment will be worth around $1 billion and further phases could bring total spending to $10 billion, according to a Mexican source with knowledge of the matter.

Tesla did not reply to a request for comment.

The company has car factories in the U.S. states of California and Texas as well as in Berlin and Shanghai.

Musk has said for months that the EV maker will announce a new factory, and he is set to discuss expansion plans, next-generation vehicle platforms and other topics at an "Investor Day" event on Wednesday. The company is also expected to give details of a new, cheaper model of vehicle at the event.

The news is a boost for Mexico, which is working to establish itself as a hub for the so-called nearshoring of investment - capitalizing on geopolitical tensions and supply- chain disruptions caused by the COVID-19 pandemic by luring manufacturing capacity to North America, and away from Asia.

Lopez Obrador said Mexico and Tesla had reached agreement after a call with Musk on Monday, following a separate conversation he said the two held late last week.

The plant will be built in Santa Catarina in the greater Monterrey area, said the municipality's mayor, Jesus Nava, echoing reports that have circulated for weeks.

"Santa Catarina will have the eyes of the world," he said on Instagram. In another video, captioned "10 billion dollars" in bright red, Nava said Tesla's investment would be five times the private investment in the municipality over the past decade.

Mexican Foreign Minister Marcelo Ebrard hailed the news on Twitter, calling it the result of 14 months of "patient labor."

Mexican-made electric cars shipped to the United States qualify for subsidies provided by the Biden administration to boost EV adoption, according to industry officials.

The call between Musk and the Mexican president took place after Lopez Obrador had on Friday stirred fears he might block the investment in Monterrey if water was too scarce there.

Lopez Obrador said he had told Musk Mexico would not be granting subsidies to make batteries or semiconductors.

The discussions around Tesla have been a major test of how investors respond to Lopez Obrador's resource nationalism and how he influences the decision-making process on investments, which have sparked misgivings among business groups.

Lopez Obrador has put a stop to billions of dollars' worth of investments using referendums, and some Mexican media portrayed his decision to back the Tesla plant as a concession to Musk.

Antonio Ocaranza, head of consulting group Oca Reputacion, said the president ultimately showed common sense in allowing such a major deal, which should attract further investment.

"The president knows how far to push it," he said. "Behind (his) rhetoric and ideological zeal, there's pragmatism."

Speculation about Tesla going to Mexico has circulated for months, and the plant promises to be one of the major investments of the Lopez Obrador administration.

Mexico recorded its highest foreign direct investment for years in 2022, as businesses took advantage of a lower-cost and skilled work force as well as its free trade deal with the U.S. that has made the country a global center of the car industry.

However, overall investment has been held back by companies unsettled by Lopez Obrador's efforts to strengthen state control of the energy market at the expense of private capital.