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Electric-car maker Tesla will build a factory in the northern Mexican city of Monterrey, ending doubts over whether the investment could be cancelled over conditions imposed by the government.

Mexico’s president Andrés Manuel López Obrador announced the new plant on Tuesday after conversations with Tesla chief executive Elon Musk, suggesting he had dropped earlier calls to redirect the investment to less industrialised parts of the country.

“It’s good news, yes, the company Tesla is coming,” the populist president said in his morning news conference. “The battery part is still on hold but [its] the whole auto plant, which I understand will be very big.”

“He [Musk] was very receptive, understanding our concerns and accepting our proposals which will be known from tomorrow,” he added.

Tesla did not immediately respond to a request for comment but is expected to outline more details of the project at an investors’ day on Wednesday. The value of the deal was not immediately disclosed.

Tesla’s investment is the latest in electric vehicles in Mexico after the country was included in billions of dollars’ worth of green subsidies under Washington’s Inflation Reduction act. US president Joe Biden’s legislation has caused tension with Europe, which argues they could unfairly draw investment away from the region.

“Without IRA I doubt it would have happened,” said Carlos Serrano, chief economist at bank BBVA Mexico, adding that the legislation meant the US, Mexico or Canada were the best options for Tesla. “Between those Mexico has advantages in competitiveness, a qualified workforce and a sophisticated industry of suppliers.”

While López Obrador’s government aims to establish Mexico as a hub for the “nearshoring” of investment, he has also tried to influence the investment decisions of large companies in ways the private sector says has dented confidence in the economy. He imposed significant conditions on Citigroup’s sale of its Mexican retail bank and has cancelled permits and projects that he disagrees with.

His supporters say he is cleaning up suspected corruption in investments approved by previous governments and trying to make development more sustainable. The government has vowed to increase investment in poorer southern states to address vast regional inequalities, and pressed companies to relocate.

López Obrador last week suggested he might not award Tesla permits if it pressed ahead with plans for a plant in Monterrey because of the city’s acute water shortage problems. But on Tuesday he said the company had committed to using recycled water at the new plant.

The northern half of the country’s proximity to the US, educated workforce and superior infrastructure mean it has attracted the lion’s share of industrial investment. Since 2005, the population of the Monterrey metropolitan area has grown more than 40 per cent.

“Mexico won, NL [Nuevo León] won, we all won!” Samuel García, the governor of Nuevo León state where Monterrey is located, tweeted on Tuesday.

Tesla’s investment cements Mexico’s position as a key beneficiary of companies building factories closer to the US amid supply chain disruptions and trade tensions with China.

Biden’s $369bn IRA legislation allows electric cars assembled in Mexico and Canada to qualify for US subsidies. Tax credits are also available for EV battery sourcing and critical minerals for Mexican companies.

Earlier this month German carmaker BMW said it would invest €800mn in Mexico to expand electric vehicle production.

A plant in Monterrey, a few hours’ drive from the Texas border, would be Tesla’s first in Latin America. The company has four US factories and one each in China and in Germany.

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