The decision, which President Andres Manuel Lopez Obrador said the company will detail on Wednesday, would help Mexico build on the millions of combustion-engine vehicles the industry already supplies to the US every year. American and European manufacturers have thus far destined most of their EV factories for the US market in American states, though BMW and General Motors Co. have announced new investments in Mexico in recent months that will ramp up EV exports to the US.

The arrival of Tesla in Mexico is also a feather in the cap for Lopez Obrador, though he didn’t get his wish for the factory to be located in an economically deprived state in the south of the country. The president said he wrung environmental commitments from Tesla Chief Executive Officer Elon Musk on a phone call Monday, including using recycled water throughout the manufacturing process — a pledge Lopez Obrador sought for a region where water has become scarce.

“He was very responsive, understanding our concerns and accepting our proposals,” said AMLO, as the president is known for short. “I want to thank Mr. Elon Musk for being very respectful, attentive and understanding of the importance of addressing the problem of water scarcity.” 

Tesla holds an investor day on Wednesday, and the company is likely to detail the announcement then, Lopez Obrador said. Additional commitments will also be announced next week, he said. Nuevo Leon Governor Samuel Garcia cheered the decision in a tweet.

¡Ganó México, Ganó NL, GANAMOS TODOS!

— Samuel García (@samuel_garcias) February 28, 2023

Lopez Obrador had said as recently as last week that Tesla wouldn’t receive permits if there wasn’t enough water in the area of the factory site. Last June, authorities were forced to cut water access in Nuevo Leon, where Monterrey is located, to a maximum of seven hours, as dams were at risk of emptying entirely. The Mexican government even asked industries and farmers in Monterrey to offer part of their water to the population amid weeks of acute shortage while AMLO asked businesses in the area to cut water usage. 

Tesla had ran up against concerns about water scarcity while planning a factory in Berlin, one of the two car factories the company opened last year. While Musk laughed off a question about the issue in August 2021, it contributed to delays that kept the plant from starting production until seven months later.

Lopez Obrador didn’t specify what Tesla would build at the plant, though his comments about water in the manufacturing cycle implied that vehicle assembly and painting would take place there. A new plant in Mexico would come on top of four existing factories — in California, Texas, China and Germany — that Tesla has said have the capacity to make more than 1.9 million vehicles a year. 

In addition, the company has started pilot production of its Semi truck in Nevada at the battery factory it’s expanding as part of a $3.6 billion investment announced last month. Indonesian leaders including President Joko Widodo also have said they’re in talks with Tesla about the carmaker constructing a factory in the Southeast Asian nation home to key battery metals.

The factory would be Tesla’s first south of the US border. Lopez Obrador said that Mexico would be unable to provide subsidies for batteries or semiconductors comparable to the incentives being offered in the US. The uncertainty over the location in Mexico touched off a marketing battle between different states, whose leaders sought to promote their appeal for businesses.

The electric car industry has grown in Mexico mainly as foreign demand for the vehicles continues, with BMW announcing a new investment of €800 million in the state of San Luis Potosi. Other automakers, such as GM, have also announced that they will are expanding their electric auto production in the country.

Stellantis NV, which owns the Jeep and Ram brands, also is considering a Mexico plant for electric vehicle production, Bloomberg has reported. Ford Motor Co. has been building the Mustang Mach-E at its Cuautitlán, Mexico, plant for more than a year.

Companies have been locating their businesses in Mexico as a means to overcome the supply hurdles that emerged in the pandemic while maintaining access to the North American market. Mexico’s industrial park occupancy hit a record high last year, and banks expect this trend to boost the economy in 2023. However, Lopez Obrador’s reform of the energy sector to give the state utility priority over private electricity providers has made some companies squeamish and limited investment. Lopez Obrador has also ruffled feathers in the business world by intervening in big business decisions, including the sale of Citigroup Inc.’s local unit.

Tesla shares dropped less than 1% at 10:10 a.m. in New York. 

–With assistance from Craig Trudell.