The Biggest Factory in the World

You may have heard about the Tesla factory in Monterrey, Mexico, but you might not realize just how big it is. The piece of land is huge, covering over 4,000 acres. The factory will create 7,000 direct jobs and some 40,000–50,000 indirect jobs.

Approximately 30 suppliers, including Taiwanese firm Quanta Computer and French windshield maker Saint-Gobain, are flocking to the new factory.

The factory will be located 124 miles from the U.S. border and about 350 miles from Tesla’s headquarters in Austin, Texas.

Mexico Beats China

One of my investment themes for the next five years is deglobalization, or nearshoring. The COVID supply chain disruptions showed that just-in-time inventory and an overreliance on China could devastate a business.

Add in the benefits of the new United States-Mexico-Canada Agreement, and it's cheaper and more reliable to have your factory in Mexico if you're going to sell products in the U.S.

Here are 10 reasons to build a Tesla factory in Mexico instead of China:

1. Tariffs are much lower or nonexistent.
2. Wages are about the same.
3. Patent rights are protected.
4. There is no CCP-driven censorship.
5. There is no technological cold war.
6. There is no threat of a hot war.
7. The working population is increasing.
8. There are a number of top-tier universities.
9. Shipping is much cheaper.
10. Energy is cheap and plentiful.

There are over 400 companies looking to build plants in Mexico or expand the plants they already have. Despite headlines about the cartels, Mexico is on the upswing.

Check out this chart below of Walmart (NYSE: WMT), represented by the black line, versus Walmart de Mexico (OTC: WMMVY), represented by the gold line. 

As you can see, Walmart de Mexico has outperformed its sister. The stock has grown by 75% compared with WMT's 20%. Furthermore, the Mexican Walmart pays a 3.39% dividend versus the U.S. Walmart, which only pays out 1.63%.

The Mexican stock is cheaper, with a P/E of 26 versus WMT's P/E of 32. As an investor, you would obviously rather own Walmart de Mexico than the one north of the border.

According to Daily Times:

Mexico’s economy expanded 3.1% in 2022, according to figures released by its national statistics agency INEGI. The figure came slightly higher than the market expectation of a 3% expansion.

The gross domestic product (GDP) rose 0.5% in the fourth quarter of last year, compared to the previous quarter, also coming slightly higher than the market estimate of a 0.4% increase. At an annual rate, the GDP increased 3.7% in the fourth quarter of 2022, according to INEGI. That figure also came higher than the market expectation of a 3.5% increase.

Inflation Dropping

Inflation is coming down. Mexico's CPI dropped more than expected to 8.29% in February.

Mexican core inflation is expected to remain sticky, with U.S. pundits expecting it to fall to about 7% in the second quarter and 5.0% by the end of the year.

The key difference between the U.S. and Mexico is that the Bank of Mexico's interest rate is at 11.00% — well above the inflation rate. In the U.S., the fed funds rate is at 4.75, while inflation is at 6.0%.

History says inflation won’t come down unless the central bank rate is higher than the inflation rate.

As far as currency is concerned, the Mexican peso has been holding steady at roughly 18 pesos to US$1 since 2016. That’s more stable than the euro.

No matter how you look at it, China's loss is Mexico’s gain. Mexico is already the U.S.’s biggest trading partner, and this relationship will only expand.

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All the best,

Christian DeHaemer

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Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.