Tesla Model 2 launch delayed for 2025 as its Gigafactory in Mexico faces union labor cost challenges

On last count, Tesla was supposed to finish its new Gigafactory in the Mexican state of Nuevo León next summer, replicating the breakneck pace it built Giga Shanghai with. Tesla's Gigafactory in Mexico is going to be one of its largest as it is scheduled to make 2 million of Tesla's cheapest Model 2 cars annually when fully operational.

That sheer scale, however, has now led to launch delays, both of Giga Mexico and, by extension, of the Model 2. According to Chinese supply chain sources, Tesla is now going to cut the ribbon of its Mexican factory in the first quarter of 2025, rather than next summer, which is a delay of about six months.

Mexican media previously reported that the plant is ultimately going to cost US$10 billion to build on 4,200 acres, and will employ 7,000 people. Tesla, however, "underestimated the difficulty of building a factory in Mexico," tip Chinese part makers. About 95% of the components that go in a Shanghai-made Model 3 are sourced locally, and Tesla wants to replicate that same supply chain in Mexico for the Model 2.

It is now urging suppliers to move to Mexico just on the promise of giant future orders, without actually giving them any additional subsidies or enticements. Insiders report that already 20 of Tesla's component makers in China have either expanded production there, or vowed to do so, despite the increased capital expenditures. Mexico doesn't have nearly the logistics chain of Shanghai where every part is sourced from a few hundred miles tops, and Tesla's warehouse is actually the fleet of delivery trucks. That efficiency allowed Giga Shanghai to produce north of 700,000 vehicles last year, and Giga Mexico will be tasked with tripling that number.

For Tesla's Chinese suppliers that sheer amount of potential orders is apparently more than enough to compensate for the less efficient logistics and laborers in Mexico that raise the workforce costs by 10% compared to China. Local workers will need more training, and are paid $4.8/hour instead of the $4.5/hour average of their Chinese counterparts. Moreover, the stronger unions in Mexico result in huge overtime outlays for manufacturers as they have to budget 200% of the hourly wage for 2 hours of overtime, and 300% for 4 hours. That's in contrast to the shifts in Giga Shanghai that can be up to 12 hours regardless, so in Mexico Tesla's suppliers will be trying to automate as many of the manufacturing tasks as possible.

Still, Tesla allegedly approached them with purchase prices that are up to 20% higher in Mexico than in China, while they calculated that their cost would only increase 15%, so they could pocket 3%-5% extra profits if they venture to North America. Moreover, copying its Chinese supply chain in Mexico will allow Tesla to qualify for the full $7,500 of new EV subsidy amount that the Inflation Reduction Act stipulates.

Given that the price of a Model 2 coming from Giga Mexico is now forecast to be 175,000 yuan, or about US$25,000, the American government's incentive will knock it down below US$20,000, making the Model 2 Tesla's first true mass market EV. Unfortunately, it looks increasingly likely that the Model 2 will be released in 2025 instead of next year as previously reported.

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