Tesla Model 2 launch tipped for next summer as Elon Musk replicates the China supply chain in Mexico

Tesla is asking the supply chain around its largest and most efficient Gigafactory - the one in Shanghai - to expand operations or relocate to Mexico, reports local media. During Investor Day back in March, Elon Musk confirmed that Tesla is building a brand new Gigafactory in Nuevo León. The announcement came after months of rumors that Giga Mexico will be used to assemble the vast majority of the North American-made production volume of Tesla's cheapest electric car which is yet to be unveiled.

Tentatively named Model 2 - though rumors peg it as a smaller Model Y in appearance, so a Model Z would be more fitting - the first mass market EV from Tesla could be made around Monterey at a pace of 2 million units per year. The fact that Tesla wants to recreate its Chinese supply chain in Mexico comes as a tangential confirmation of that rumor, as the Shanghai Gigafactory is its largest and able to output a million cars annually.

It is also the most efficient after last year's upgrades, and Tesla has allegedly dispatched its former chief operations officer Zhu Xiaotong who led Giga Shanghai's unprecedented speed of capacity upgrades, to Mexico. Some major Tesla suppliers in China have already announced their plans for expansion to Mexico, too.

The Ningbo Xusheng Group, for instance, which makes core lightweight alloy components for Tesla's powertrain, chassis, or battery system, will be investing US$276 million in a new plant in Coahuila. That Mexican state borders both the US, and Nuevo León where the newest Tesla Gigafactory is being built. Ningbo's plant will be ready to start production next July or August, report insiders.

Coincidentally, the latest rumors are that Giga Mexico will break ground this summer. If the same people that built the Gigafactory in Shanghai in less than a year are now tasked with Giga Mexico's buildout, the Model 2 may start pilot production there as soon as next summer, too. After all, the first Model 3 got off the conveyor belts in Shanghai just 12 months after Tesla began site grading there like the one it is currently doing in Mexico. Tesla would probably announce the Model 2, Model Z, or whatever it chooses to call it earlier that that, though, perhaps after it holds a dedicated event for the Cybertruck's launch in September.

It seems that the Model 2 is already in advanced stages of development indeed, as Elon Musk dropped hints that it will be "smaller, to be clear" than the Model 3. Tesla also included its silhouette in Master Plan 3 and listed 53 kWh as the average battery size of the new category in its EV portfolio.

If Tesla manages to migrate a greater part of its Chinese supply chain to Mexico indeed, and couple it with a Shanghai-level of Gigafactory efficiency there, the Model 2 has every chance to be launched with unprecedented speed, volume, and at a very affordable price. Elon Musk already mentioned that Tesla will be aiming to halve the production costs of the Model 2 compared to the current Model 3, which at the time of peak supply chain challenges stood at about US$33,600.

With the supply chain pressures easing and the nosedive in lithium prices, as well as a redesigned Model 3 Highland on the horizon, that production cost should be much lower now, too. Moreover, Tesla will probably do its utmost to make the Model 2 in a way that makes it eligible for the full US$7,500 amount of the new EV tax credit that the government will be doling out until 2033. Tesla reportedly already talked with the White House over building a joint battery factory with its largest LFP cell supplier CATL on US soil, while CATL itself has been scouting locations for a battery factory in Mexico.

The US government's tax credits, of which Tesla is likely to receive the whopping $41 billion for the duration of the program if it plays its cards right, explain the pressure it is now applying to its Chinese suppliers to expand or relocate to Mexico. Next year, an EV sold in the US will qualify for the full $7,500 subsidy amount if at least 50% of its components, including the battery, are made in North America. A Model 2 assembled in Giga Mexico should fulfil those requirements with ease and come at a subsidized price much lower than $20,000, all the while Tesla gets to keep its record profit margins per vehicle.

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