MEXICO CITY (February 28) (Reuters) – The country’s president announced on Tuesday that Tesla Inc (TSLA.O) intends to build a new assembly plant in northern Mexico, in a move by the electric carmaker to expand its operations outside the United States in a deal. An official said it was worth more than $5 billion.

President Andrés Manuel López Obrador said that “the whole Tesla company” was coming to Mexico to build a “very big” car factory, noting that potential investment in batteries was still pending. He did not disclose which models he will produce.

One Mexican official said the plant would be a “megafactory” for Tesla that could produce semi-trucks, the Roadster sports car, and possibly other vehicles. Another official said that the factory could produce a kind of SUV.

The Model Y is Tesla’s best-selling SUV. Mexico’s government said Tesla will likely provide details of its plans on Wednesday.

López Obrador’s announcement of the plant in the Monterrey metropolitan area allayed recent fears that he might upset investment by imposing conditions on the company over water shortage problems in the arid border region.

“This is going to be a big investment and a lot of jobs,” López Obrador told reporters, adding that CEO Elon Musk was receptive to Mexico’s concerns and made commitments on how to address the water shortage.

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

Martha Delgado, Mexico’s deputy foreign minister, told Milenio TV that the investment is worth “more than $5 billion,” and that Tesla will produce about 1 million cars there annually for domestic and international markets.

Separately, a Mexican source familiar with the matter said the initial investment would be around $1 billion and that additional phases could bring total spending to $10 billion.

Tesla did not respond to a request for comment.

The company owns auto factories in California and Texas, as well as in Berlin and Shanghai.

Musk has said for months that the electric car maker will announce a new factory, and 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 the car at the event.

The news is a boost for Mexico, which is positioning itself as a center for so-called proximity investment — taking advantage of geopolitical tensions and supply chain disruptions caused by the COVID-19 pandemic by luring manufacturing capacity into North America, and away from Asia.

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

eyes of the world

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

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

Mexican Foreign Minister Marcelo Ebrard hailed the news on Twitter, describing it as the result of 14 months of “patient work”.

Electric vehicles made in Mexico shipped to the United States are eligible for subsidies offered by the Biden administration to boost electric vehicle adoption, according to industry officials.

The call between Musk and the Mexican president came after Lopez Obrador on Friday raised concerns that he could hinder investment in Monterrey if water is too scarce there.

López Obrador said he told Musk Mexico it would not give subsidies to make batteries or semiconductors.

The Tesla discussions have been a major test of how investors will respond to López Obrador’s nationalization of resources and how it affects his decision-making about investments, which has raised suspicions among business groups.

Lopez Obrador halted billions of dollars in investments using referendums, and some Mexican media portrayed his decision to support the Tesla factory as a concession to Musk.

Antonio Ocarranza, head of the Oca Reputacion advisory group, said the president finally showed common sense in authorizing such a large deal, which should attract more investment.

“The president knows how far to push it,” he said. “Behind his rhetoric and ideological fervor, there is a pragmatism.”

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

Mexico recorded its highest foreign direct investment in years in 2022, as companies benefited from a skilled, low-cost workforce as well as a free trade agreement with the United States that made the country a global auto hub.

However, aggregate investment has been hampered by companies that have not been stabilized by López Obrador’s efforts to consolidate state control of the energy market at the expense of private capital.

Additional reporting by Dave Graham and Dayna Beth Solomon in Mexico City; Additional reporting by Diego Orr and Kylie Madre in Mexico City, David Shepherdson in Washington, and Hyunju Jin and Peter Henderson in San Francisco. Editing by Ben Kleiman, Sharon Singleton, Matthew Lewis, and Richard Chang

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