Mexico has unique advantages that could help solidify its position in the automaking industry amid the EV transition. (UBS)

Musk did not specify what vehicles the site will produce, nor when it will open. Still, this announcement is a vote of confidence in Mexico's auto manufacturing industry and its hopes of gaining market share in the global electric vehicle (EV) space.

The timing of Tesla's announcement may have something to do with a USMCA panel ruling in favor of Mexico and Canada in December in a dispute with the US around the trade treaty’s rules of origin for automotive manufacturing. This development clears an uncertainty for North American automakers and comes on the heels of the US Inflation Reduction Act, which grants tax credits for EV purchases provided that a certain percentage of an EV and its battery components are sourced from the US or a US free-trade partner. All this supports the case for near-shoring EV production.

Mexico has unique advantages that could help solidify its position in the automaking industry amid the EV transition. The country is now the fourth-largest exporter and seventh-largest producer of cars in the world, for instance, and holds the world's tenth-largest deposits of lithium, a key component in battery production.

Yet, Mexico also faces a long road ahead. No lithium is currently being extracted in the country. In August last year, President Lopez Obrador issued a decree setting up LitioMx, a state-owned company that will be responsible for managing the exploration, mining, and refining of lithium, as well as controlling its economic value chain. The decree considers the possibility of private companies’ participation in the commercial exploitation of the mineral; however, LitioMx must hold majority stakes.

In addition, overall energy availability has been a source of concern for companies manufacturing in Mexico. The government recently announced the opening of the Puerto Peñasco solar plant, located in Sonora, the very same state with most of Mexico’s lithium resources. This is the first renewable energy project under the current administration, and is expected to be entirely government built and run. Once completed, this plant would have 1 gigawatt capacity, making it the largest photovoltaic park in Latin America.

The government intends to develop four more solar plants of similar size in Sonora, adding up to 5 gigawatts of new power capacity. This is all part of a broader scheme known as the Plan Sonora, which involves a USD 48bn investment over the next seven years, aimed at strengthening the supply chains with the US and transforming Sonora into a manufacturing hub for EV batteries.

We think this is a step in the right direction in terms of renewable energy adoption. But big questions remain about the financing of such an ambitious plan, as well as the efficiency and operational management capability of the state-owned power company to deploy an investment of such scale. Furthermore, significant additional investment is required to develop Mexico’s renewable energy sources. The energy mix is dominated by crude oil and natural gas, which account for 83% of the total.

Overall, we continue to believe that rapid demand for global renewable installations (solar and wind) and EVs will serve as a key driver in the transition to cleaner energy, and Mexico has ample room to contribute towards this end. In this context, investors can consider adding exposure to our Clean air and carbon reduction and Smart mobility long-term global investment themes.

Regarding Mexican assets, we think the Mexican peso will continue to behave well in the coming quarters. We maintain a constructive view on Mexican corporate debt and expect Mexican equities to perform in line with their emerging market peers.

Main contributors: Alejo Czerwonko and Gabriela Soni

Read the original report Mexico has a bright EV future, if it plays its cards right 2 March 2023.

This content is a product of the UBS Chief Investment Office.