Renewable Energy, Water Keys for Mexico to Reach Nearshoring Potential

As supply chains continue to shift in favor of regional and local sourcing, Mexico is in a prime moment for a nearshoring windfall.

The announcement of a long-anticipated Tesla gigafactory is the flagship foreign investment in what Mexico hopes will be a successful shift to next-generation auto manufacturing.

Although announced by the federal government as a $5 billion plant that could create 5,000-6,000 jobs, the governor of the state of Nuevo Leon said the investment amount could be tripled once all suppliers are accounted for.

However, water and renewable energy are two key elements. “It used to be that companies talked more about location, but now energy and water are key,” says Emmanuel Loo, Nuevo Leon’s undersecretary of economy and foreign investment. 

The reversal from the free-market energy reforms during the past federal government of Peña Nieto to the current focus of the López Obrador Admin. on energy independence and state control has been a contentious issue for both energy companies and their users. According to Luis Manuel Hernández, president of the National Council of the Maquiladora and Export Manufacturing Industries (INDEX for its acronym in Spanish), a lack of available electricity has led to the recent migration of nine unnamed auto supplier plants from Mexico to states including Arizona and Texas. He also thinks development of the Tesla plant will await the resolution of a pending dispute on energy involving a U.S.-Mexico-Canada Agreement panel.

Although the Tesla plant construction was announced in March of this year, CEO Elon Musk later said in a Q3 earnings call that he would not be ready to go “full tilt” until interest rates recede.  

However, state officials remain optimistic construction will remain on schedule. Nuevo Leon’s Loo says permits and site preparation are advancing at a “record pace,” adding that the initial timeline of feasibility and environmental impact studies are advancing about twice as fast as similar processes did in Germany and China. He says site preparation such as ground leveling and access roads will be ready by early next year.

Although Nuevo Leon is facing a shortage of potable water, which has been partly resolved with the inauguration of a new aqueduct this year, the state government says it has a surplus of industrial water, as well as available electricity for manufacturing plants.

The auto industry prefers the central Bajío region because it generally provides a more stable labor force than the border region and has a developed transportation system to move goods to and from port cities and the U.S. border. However, it is also arid.

As part of a package of legislation targeting the mining industry, the federal government passed a law for water usage in May that affects all industries in the country. It specifies that household water use has priority over industrial use. In the case of household water shortages, existing industrial water concessions could be reduced or even canceled. Mexico’s Minister of the Economy Raquel Buenrosto told the local press at the time that new water permits would require presidential approval and no new permits would be awarded in arid zones, specifically singling out the auto industry, inviting them to invest in water treatment and desalinization plants.

Kia is taking note and investing $4 million in its own water treatment system at its Pesquería plant in Monterrey, where it makes its Forte and K3 sedans and hatchbacks. The South Korean automaker says it will be able to reduce its consumption of industrial water from the mainline system by 60% once the plant is online in mid-2025, as well as an 80% reduction of waste discharge, and the cost savings should pay for the investment within three to five years.

Government officials in Nuevo Leon are using the plant as a model for future industrial development in the region and even the world.

To meet its renewable energy RE100 targets of totally renewable energy consumption by 2030, Kia expects to rely on IREC green bonds. The company says it could easily produce up to 6% of its energy consumption with solar panels. However, the CRE energy regulatory agency currently has a freeze on the necessary permits for the generation of renewable energy, even when used for self-consumption. 

INDEX’s Hernández says it’s urgent to restart permits for renewable energy. However, he is more concerned about distribution of electricity that is currently available on Mexico’s national grid.

A May report by Morgan Stanley concurs, calculating that nearshoring could boost the growth of Mexican manufacturing exports to the U.S. from $455 billion to over $609 billion in the next five years, with an over $100 billion increase from traditional auto and electronics manufacturing, as well as “a second wave driven by increased manufacture of IT hardware and new opportunities related to the electric vehicle supply chain and other clean technologies.”  

However, it adds that energy infrastructure “remains a key potential limiting factor,” and says the country needs to invest about $40 billion to increase grid capacity to meet nearshoring demand.