Tesla's Mexico Gigafactory is still a key piece of the company's future

Tesla's Mexico Gigafactory appears to be on hold, but it can still play a key role in the company's future.

• A Mexico Gigafactory could help boost Tesla's profit margins, but plans to build it are slow going.
• Manufacturing in Mexico is still important if Tesla wants to keep costs down.
• This article is part of "The Future of Supply-Chain Management," a series on companies' manufacturing and distribution strategies.

Tesla's Mexico Gigafactory is taking longer to come online than expected, but building south of the US border is still likely to be a key part of the company's future.

An assembly plant in Mexico, where workers are typically paid less than in the US and which is closer to Tesla's Texas Gigafactory, may offer a cheaper manufacturing hub in North America that can still supply major markets like the US with more inexpensive vehicles.

Efforts like the Mexico Gigafactory are part of a trend toward "nearshoring," described as moving production closer to consumers to reduce costs and logistical complications.

That's especially important as Tesla aims to keep its costs down to protect its profit margins at a time when customers are more price-conscious and more likely to consider hybrids over electric vehicles.

Importing cars from China could create significant headaches for American consumers as the US rolls out stricter manufacturing requirements for getting the $7,500 electric-vehicle tax credit.

Tesla is starting to feel the heat of a nearly yearlong slowdown in the electric-vehicle market. The company this month reported its lowest quarterly sales since 2022 and its first year-over-year quarterly decline since 2020.

The results reflect the extent to which Elon Musk's plan to slash the prices of his most popular vehicles can work in a changing EV market. Shoppers today are looking for more practical green-car options, gravitating more toward legacy brands and hybrids than pure electric vehicles — the only type of car Tesla sells.

Tesla's 'genius move'

During an investor presentation in March 2023, Tesla announced plans to start manufacturing in Mexico.

At the time, Sandy Munro, an automotive-manufacturing expert, called it a "genius move" and speculated that a long-awaited $25,000 Tesla would be built at the factory. Musk later said the affordable Tesla would first be built in Texas and could move to Mexico in the future.

Despite Musk's reassurance this week that an affordable Tesla is still on the way, he emphasized that it would be built on an existing assembly line, not a new one. That leaves Mexico in an even bigger state of flux without a product or a target opening date.

Musk has been increasingly aloof about plans for the Mexico factory, saying last fall that he wasn't ready to go "full tilt" on a Mexico Gigafactory in a more uncertain economy.

Still, Musk appears to be laying the groundwork for a manufacturing ecosystem in Mexico. Bloomberg reported in February that the automotive CEO had invited some of Tesla's Chinese suppliers of its Shanghai plant to Mexico.