Planning around shifting production is company-specific and complex

Photo: Tesla

Reshoring and nearshoring are complex businesses, requiring significant levels of planning, with the drivers for each company differing on supply chains for raw materials, production requirements and proximity to consumers, among other things.

Tesla, in its deliberations over a plant to be built in Mexico, considered all these pros and cons before it gave the go-ahead to build its new factory, I will outline these considerations here.

First of all, let’s be clear about something: Tesla is not closing a factory in the US to build a new one in Mexico. While nearshoring is a reality and Latin America as a whole will play a relevant role in providing the American market with different products and goods, it’s crucial to take a deeper look into why exactly Tesla is doing what it is doing.

The announced plans to invest approximately $800m in Mexico to build a new production facility are not saying that the production capacity in the US will be reduced. Instead, Tesla aims to build a new plant on Mexican soil to increase its general production capacity and meet the worldwide growing demand for electric vehicles.

Relocating production facilities closer to the region where products will be consumed is not a new concept, especially when we are talking about reducing costs as a part of an overall pricing strategy. Over the past few decades, several companies shifted their manufacturing operations to countries with lower labour and production costs.

The most well-known example is that many US-based companies outsourced their production to China, which had, and currently has, lower labour costs as well as a vast pool of skilled workers.

So, going back to the original question, Tesla’s production capacity is limited by the capacity of its existing plants, which means it can only produce a certain number of cars each year. Besides trying to keep up with its financial obligations, the company has to really think about the logistics of a global operation, which isn’t easy.

The capacity constraint is a result of various factors, including limited physical space, availability of raw materials and supplies and manufacturing processes. To overcome these limitations, Tesla is focused on making long-term investments that will enable it to increase its production capacity.

One of the reasons to affirm this is reflected in its pricing strategy. Historically, the company has adjusted its prices based on supply chain issues and demand. For example, if the cost of raw materials increases, the company may raise its prices to maintain profitability. Conversely, if demand for its cars is weak, Tesla may lower prices to stimulate sales.

However, in recent years, Tesla has been cutting prices to maintain the volume of car production. This strategy aims to maximise utilisation of its production capacity to ensure the company is not left with excess inventory.

By cutting prices, the company hopes to attract more customers and increase its market share.

The market is not like it used to be, five or more years ago. New competitors are lurking and trying to dethrone Tesla from the EV podium.

If Tesla can fulfil its production plans and continue to grow its business, it will eventually need to build new plants. But building new plants is a major investment, and Tesla will need to carefully manage its finances and resources to ensure that it can do so without jeopardising its long-term viability.

The new plant in Mexico, which will produce batteries, powertrains and vehicles, will take several years to build and start production. And, even if it is expected to create thousands of jobs and contribute to the local economy, the decision to invest in Mexico is not without risks.

The country has a complex regulatory environment, and the political situation can be unstable at times. But this is a risk Tesla is willing to take in order to fulfil its long-term strategy.

The same goes for the new batteries plan Tesla has announced in Shanghai. Some will say this is a bigger risk than the Mexico project. Geopolitical tensions between China and the US continue and a step in the wrong direction could jeopardise the company’s efforts. Tesla’s latest moves will define its future as the leader in EV mobility.

They express the company’s commitment to building a sustainable business, as well as its goal to become the most relevant player in different markets. With more electrical vehicle brands increasing capacity and fighting for market share, Tesla is trying to play its cards in the most strategic way possible. And logistics and production planning will take the upper hand.