Tesla’s Newly Announced “Gigafactory” in Northern Mexico Already Has a Serious Problem: Water Scarcity

The nearshoring trend is triggering a significant influx of global companies, including Tesla and many of its suppliers, to Northern Mexico, particularly the state of Nuevo León. But is there enough water to go round?

More good news this week for Mexico’s automotive sector, whose exports grew by a whopping 65% year over year in 2022. At his morning press conference on Tuesday, Mexico’s president Andres Manuel Lopez Obrador (AMLO for short) announced that US electric carmaker Tesla had agreed to build its sixth gigafactory in Santa Catarina, a small city on the outskirts of Monterrey, in the northern state of Nuevo León. The initial investment is said to be worth around $5 billion and is expected to create up to 6,000 new jobs. But there are major concerns about the added strain Tesla’s operations will place on the region’s already stretched water resources.

A Once-in-a-Generation Drought

Nuevo León last year suffered its worst drought in 30 years. By early spring two of the city’s reservoirs had run dry, supermarket shelves were stripped of bottled water amid fits of panic buying and local authorities had begun limiting access to water to six hours a day. The drought affected 38 of the state’s 51 municipalities, including large swathes of Monterrey, Mexico’s second largest city and biggest industrial hub. Demonstrators blocked roads to protest the water shortages. The federal government declared the water crisis a matter of national security and seized temporary control of “private” water well concessions.

This year is not looking much better, according to Juan Ignacio Barragán, the director of the Monterrey Water and Drainage Company:

“The aquifers are low, the rains were not enough to replenish them, we have spent several years with very little rain, the aquifers keep going down and down, just like the reservoirs. In some cases…, all the wells are going down, it is part of the problem we are experiencing”.

Nuevo León’s business-friendly state governor, Samuel García, blames the water shortages on climate change while trying to attract as many foreign companies as possible to his state. But as Jacobin’s Kurt Hackbarth notes, while climate change is certainly playing an important part in Mexico’s growing water crisis, there is much more to this story:

Monterrey is also home to the nation’s soft-drink and beer industry, whose factories — much to the anger of local residents — have not ceased pumping millions of gallons of water throughout the crisis. In fact, fifteen of the largest water hogs (including the steel giant Ternium and two subsidiaries of Coca-Cola) are based in the city and account, alone, for 11.8 billion gallons annually — more than forty times the amount assigned for domestic use.

In the nearby countryside, luxury ranches boast of private dams and artificial lakes filled with water deviated from nearby rivers. And while Governor García engages in quixotic attempts to seed clouds for rain, he also found time to attend the kickoff ceremony of another deep well for Heineken, another top water hog, which bought out Mexico’s emblematic Cuauhtémoc beer company in 2010. All of this goes a long way toward explaining why local activists have adopted the following slogan on the source of the crisis: No es sequía, es saqueo (It’s not drought, it’s plunder).

Nearshoring Pressures

Agriculture is also, of course, a huge water hog, accounting for around 70% of total consumption. But in the coming years, industry’s water consumption in Nuevo León is expected to grow significantly as more and more US, European and other global companies relocate part or all of their China-based operations to northern Mexico as part of the nearshoring trend. Much of this trend is being driven by the tax credits the US government’s Inflation Reduction Act (IRA) offers on electric cars produced with components that are entirely sourced and manufactured in North America.

Now, Tesla will also be tapping into Nuevo Leon’s increasingly tight water supplies while benefiting from the US government’s succulent tax credits. Interestingly, AMLO says he spoke to Elon Musk about the possibility of setting up a lithium battery plant in Mexico. Readers may recall that Mexico is home to significant lithium deposits, which AMLO’s government nationalized last year. But AMLO said Tesla’s thirst for government subsidies was prohibitively expensive:

“If the company invests a peso, the government must provide a 1.5 pesos. So, that’s not possible, not with a subsidy like that; we couldn’t grant it.

3,000 Liters of Water Per Vehicle

To build one car, Tesla uses around 3,000 liters of water, which is actually somewhat below the industry average. In the Tesla Impact 2021 report, Elon Musk’s company claimed that it extracted less water per vehicle produced at its manufacturing facilities than most established automakers.

Be that as it may, it doesn’t change the fact that Nuevo Léon’s water resources are already dangerously overstretched, as reports Wired magazine’s Spanish language edition:

Nuevo León is supplied by three dams and only one is more than half full. These are El Cuchillo, Cerro Prieto and La Boca, which together have more than 528 million cubic meters of capacity…

[A]ccording to the daily report on the storage dams issued by the Rio Bravo Basin Agency of the National Water Commission, as of February 26 the El Cuchillo dam was at 46% of its capacity, Cerro Prieto, 4.1%, and Boca, 58.84%.

Just over a week ago, it seemed that concerns over the local water supply would end up derailing the deal. AMLO’s government was pressuring Musk to locate the Tesla plant in one of Mexico’s south-eastern states where access to water is far less of a problem. AMLO’s government has been trying to spread business activity more evenly across the country by encouraging both domestic and foreign manufacturers to relocate some of their operations from the wealthy northern regions to the poorer states in the south.

But Musk has his heart set on Santa Catarina, in large part due to its proximity to Austin, Texas, TESLA’s global headquarters and US manufacturing base. Also, Tesla’s largest supplier of aluminium is already based in the region, which will make logistics easier.

But the wrangling continued until just one day before Tesla’s all-important Investor’s Day (March 1). AMLO even said Tesla would be denied permits to build a plant in Nuevo Léon if water in the region is scarce, which it clearly is.

This was not, I believe, an idle threat: in March 2020, the inhabitants of the northern city of Mexicali voted in a citizen consultation against the construction of a manufacturing plant by US beverage giant Constellation Brands over fears about the impact it would have on the region’s water supplies. In the end, the company, with a little nudging from the AMLO government, decided to set up shop close to the south-eastern port city of Veracruz.

“If there is no water, the permits [for the Tesla plant] will not be issued. It is not feasible,” AMLO said last week. At issue, he said, is not just the water needed for the plants: “The problem is that every big investment requires more population, more services, more water, roads, sewerage, public transport”.

But those comments sparked a backlash from analysts and investors who lambasted the government for undermining Mexico’s potential as a nearshoring destination serving the U.S. market. The investment would also be a significant step in Mexico’s transition into a manufacturing base for electric vehicles. Some critics argued that the president’s opposition was largely politically motivated. What he really wanted was to steer Tesla’s investments to a state governed by his own Morena party, such as Michoacán or Veracruz.

Then, Tesla began talking about setting up in Indonesia instead. Eventually, AMLO backed down. In a video conference earlier this week Musk gave him assurances that Tesla will exclusively use treated waste water, recycle it thoroughly and adhere to a series of other commitments to address water scarcity. The company certainly has plenty of experience producing vehicles in arid areas like Nuevo León, given that its factories in the US are located in places with limited water resources, such as Texas, Nevada and California.

Lessons from Germany

But this is not the first time that concerns have been raised about the impact of Tesla’s manufacturing operations on already strained local water supplies. As Fortune magazine reported last year, problems with the local water supply were largely behind the long delay in completing construction of the company’s first European factory, in Brandenburg, Germany:

When Elon Musk was asked last year whether the factory Tesla Inc. was constructing in Germany would deplete the area’s water supply, he broke out in bellowing laughter and called the notion “completely wrong.”

Six months later, water is one of the primary reasons the plant still isn’t producing vehicles.

While Musk in August flippantly pointed to water “everywhere” around Berlin, the region is suffering from falling groundwater levels and prolonged droughts due to climate change. That’s sparked a legal challenge that will go to court next week and an acknowledgement from local authorities that supplies won’t suffice once Tesla ramps up the plant. The issue has the potential to further delay or even stop the 5 billion-euro ($5.7 billion) project in what could turn into a costly setback to the carmaker’s expansion.

“Tesla will increase the problem for sure,” said Irina Engelhardt, who heads the hydrogeology department at Berlin’s Technical University. “There might not be enough water for everyone.”

In the end, the court case went Tesla’s way. But as predicted, the local water supply has suffered. Last year, the Strausberg-Erkner Water Association (WSE) had to cap consumption for new customers to 105 liters per person per day, according to an article last month in Focus magazine. The average is 130 liters per person throughout Germany. In two years, the cap will apply to all private consumers:

Water was also limited at Tesla and other large consumers. But at least the Gigafactory was granted 1.8 million cubic meters of water per year by the state — as much as for a city with 30,000 to 40,000 inhabitants. Consumers have to save, but Tesla can continue to build.

The State Office for the Environment has already granted the company 19 exemptions, the article notes, including a clause allowing the company itself to classify the hazard level of ground water samples on its premises without having to submit analyses to the local water authority:

“It would have been almost unworldly not to give appropriate priority to one of the largest industrial settlements in Germany in the recent past,” says the government agency. “This is common practice.” You use your capacities “in the interests of the citizens”.

This approach not only has an impact on the environment. Brandenburg hopes to attract more residents to the structurally challenged region. Around 7,000 people are currently employed in Grünheide, with plans to increase that to 12,000.

New houses and day-care centers are also to be built for them. The problem: the water board simply has no more water to allocate. All new development plans for businesses, day-care centers or residential buildings must currently be rejected by the water association.

According to the association, the planned expansion of the Tesla plant [to include a battery factory] is also not feasible.

Back in the Mexican state of Nuevo León, the water crisis is even more severe than Brandenburg’s. Even if Tesla follows through on its commitments regarding water use, the pressures on the state’s water supply is almost certain to rise as more and more companies set up shop there.

Invest Monterrey, the state´s official investment promotion agency, is trying to lure legions of tech companies, particularly those in the electromobility sector, says Héctor Tijerina, the agency’s executive director. Invest Monterrey recently sent a delegation to Asia where it held meetings with firms from Japan, China, South Korea and other countries in the region interested in relocating to North America.

The nearshoring trend is already paying dividends. Just in the two-year period from 2021-22 the state’s total industrial area doubled in size, to 16 million square foot, according to Tijerina. But will there be enough water to meet everyone’s needs?

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  1. John R Moffett

    This again shows that money turns people’s brains to mush. Seemingly intelligent people immediately start trying to force unworkable scenarios because…. Money. Things like water for the actual people who live there aren’t even an afterthought. I suppose Musk might just say, “let them drink wine”.

    1. some guy

      One could re-phrase Wise Old Indian’s statement of warning . . . ” When the last bottle of Poland Spring is gone from the last shelf of the last Walmart, then the Modern Man will learn he can’t drink money.”

  2. The Rev Kev

    I’ve said previously that what we need is a new form of accountancy that includes all internal and external factors. Usually a manufacturing facility has a set of books but do not include all sorts of factors like pollution, infrastructure having to be built for that facility, health effects on their workers, etc. The most blatant example right now is the East Palestine crash whose health effects will not likely ever show on on that corporations books. But there is also inputs and here is a major one – water. I would guess that Tesla simply assumed that the Mexican government would build a water pipe tapping water elsewhere for their exclusive use. There comes a point, however, where there is simply no water which will force people to move – and along with them Tesla’s workforce.

    1. Piotr Berman

      Doesn’t Mexico have other locations that have plenty of water and which could use more industrial jobs, say, Vera Cruz?

      1. Mickey Hickey

        The market for most products manufactured by US companies near the US border in Mexico is the USA. Particularly high ticket items like Tesla EVs. Some of the parts used will be made in the US and Asia. Cost and reliability of the supply chain is optimised. You can rest assured that the location is not the result of throwing a dart at a map.

        1. Piotr Berman

          From that point of view, Tesla should build in Laredo or Ciudad Juarez. But extra distance within Mexico is not huge compared to distances within USA, so Mexican subsidies, that should depend on Mexicans, should take into account surpluses or deficits of resources like labor and water. Same for “attracting companies” within USA, but the role of federal government here seems small.

  3. Lex

    Here’s a weird idea. Instead of nearshoring production to Mexico we might think about reshoring that production to places like Ohio. I know, I know … crazy talk. But if I’m reading this correctly the IRA isn’t really about promoting manufacturing in the US but taking it out of China.

  4. jackiebass63

    We as a country continue to do stupid things that cause problems or will lead to future problems. It is a fools journey to think we can live in and develop a desert. Eventually there won’t be enough water.Probably it will happen sooner than people think.Then these stupid people will be pleading for others to help them out of their problems. I believe it is time for the rest of us to say you are on your own.

    1. Sue inSoCal

      Bingo, jackiebass. I couldn’t agree more. When the various western water districts predicted that water would be gone sooner than anticipated (NYT magazine in depth report a number of years ago. I tried to find it), there heaved a collective sigh of “meh”. And it’s here. Where there is water, it’s polluted, and I don’t expect any active environmental protections other than for appearance.

      As for Elon, gee, it’s good to be King…but it’s a little late. I don’t believe EVs will save us. And rather than underwriting these manufacturers’ extortion, make them pay the full costs to the environment. (Like him or hate him, that was an ancient Michael Moore idea.)

      1. some guy

        And also, as harsh as this sounds, let them pass those full costs on to the consumer, so the consumer can also pay the full costs of his consumption.

    2. JCC

      Two good books to read regarding the water situation in general here in the southwest, Mexico included, are Cadillac Desert for facts and The Water knife as a reasonable projection of the future, if these droughts continue.

      The Water Knife is a “fun” sort of science fiction that will scare anyone living in Texas, New Mexico, Arizona, Nevada, California, and northern Mexico. Based on projecting the facts presented in Cadillac Desert, it has pretty much convinced me to get out of SoCal ASAP and move back to the Finger Lakes region of Upstate NY.

  5. Phenix

    For an industrial policy, it makes sense to keep Tesla in the North. Can Mexico use incentives to move the alcohol industry to the South?

    1. Piotr Berman

      Mind you, beer could be moved reliably and with no traffic issues by a pipeline. I read that there are technology for switching a pipeline from one product to another.

      1. some guy

        After having used a pipeline to move oil, ammonia, chemicals, etc., could that pipeline ever be cleaned enough to make any beer moved through it to come out being safe to drink?

  6. Sun Muerte

    I’m not sure if I buy the cause and effect relationship. The reality is that industrial manufacturing, even Tesla’s autos, uses an infinitesimal amount of water compared to agriculture. If you want to reduce water consumption, move it to a place with more water, which parts of Mexico have in abundance. The article seems to lack an assessment of the use of water usage of the plant versus the water usage of the equivalent economic output for agricultural land nearby.

    1. c_heale

      Since the area is also home to the soft drinks and beer industries (as stated in the article), I think a cause and effect relationship is more than likely.

  7. Puerto Germanico

    “Consumers have to save, but Tesla can continue to build.”

    Europe experiencing the first steps of puertoricofication. Set up to plunder and inflict pain on inhabitants. Nice!

  8. PlutoniumKun

    Just as an aside to this, a year or so ago I had a conversation with an Irish government researcher who was looking at industrial relocations. He said they did a survey of US biomedical companies locating in Ireland and had asked them to list the prime reasons. He said the no.1 reason surprised them. It was water. Most had primary plants in the US Mid-west and west and saw having secondary plants on north-western continental fringes as a good hedge in case of water stresses.

    One positive from having high tech industrial users plugged into water supplies is that they tend to be much more focused on water quality than agriculture or domestic users. Intels big Fab in Ireland uses water from the upper Liffey catchment. After an unfortunate incident caused by idiot road engineers (using ammonia instead of salt for de-icing) Intel have been very proactive in water protection, including things like funding volunteer groups who do water protection work in the uplands. Its marketed as being environmental good neighbours, but really they do it to ensure they can keep a very close eye on whats going on with the water supply. Its worked well at keeping the local government and water bodies on their toes.

  9. Kyle

    Just increase the price of water. Why isn’t anyone doing that. Genuinely confused.

    There’s a market-based solution here. Make any large consumer pay based on supply and demand.

    Or am I missing something?

  10. Jim Tunnell

    I really think what is being missed is not trying to relocate industry to areas of water abundance but to learn how to stop so much waste that happens because we are always trying to increase GDP. The real truth is we do not have enough resources anywhere for long term sustainability at the current massive growth of these technology industries that require such high resources. Not in my lifetime but later these decisions will be devastating for the average citizen. I doubt any changes will happen soon.

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