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?