Tesla's Secret To A $25,000 Model 2? Strategic Investments In Mexico, China, Morgan Stanley Says

Morgan Stanley on Monday issued two notes on Tesla Inc TSLA evaluating Tesla's strategic investments in Mexico and China, highlighting the potential benefits and challenges of the decisions.

Morgan Stanley has an In-Line rating on Tesla with a $220 price target.

Mexico's Newest Resident: Morgan Stanley’s Adam Jonas said Tesla's latest investment in Nuevo Leon, Mexico, signifies a strategic move to diversify its supply chain and capitalize on proximity to its home market, access to cheap labor and supplier network. Recent visits to the region reveal potential tailwinds for Tesla in labor, capital and infrastructure, but political risks remain, the analyst said. 

The Nuevo Leon region boasts a strong familiarity with the auto supply chain, as over 100 auto suppliers already operate there, meaning there would be a minimal need for retraining the labor force, he said. 

The quality of human capital is also impressive, with Mexico producing 120,000 new engineering graduates annually, and about 50% of Tesla's engineers having been professionally trained in the country, Jonas said. 

Nuevo Leon offers significantly lower labor costs compared to both the U.S. and China, providing Tesla with a competitive edge in production expenses, the analyst said. 

A low-cost Model 2 could be on the horizon, Morgan Stanley said, with Tesla's innovative approach to vehicle manufacturing, coupled with Mexico's strategic advantages, contributing to achieving the much-awaited $25,000 price point.

Megapacks In China: In China, Jonas said Tesla's planned 40GWh Megapack plant in Shanghai may signal an excess in battery cell supply and a strategic hedge between the U.S. and the Xi Xinping-led country.

As cell supply exceeds EV demand, Tesla could potentially execute a two-pronged supply chain, building a fully independent battery "industrial complex" in both regions, the analyst said. 

With scale, cost and tech advantages, Tesla aims to expand rapidly and establish cost leadership, Jonas said.

The analyst said Elon Musk recognizes the risk of excess industry price deflation and potentially lower margins, but the company's aggressive capacity expansion highlights its commitment to maintaining a competitive edge.

Morgan Stanley noted that investors remain divided on this approach, questioning the long-term impact of pushing for industry price deflation.

TSLA Price Action: Shares of Tesla are trading 1.12% lower to $182.98 Monday afternoon, according to data from Benzinga Pro.

Photo courtesy of Tesla.