Mexico sees its lithium deposits as central to its goal of playing a major role in the production of batteries for electric cars and other technology. Image Credit: Supplied

American electric car maker Tesla will invest about $5 billion in a massive new factory in the northern Mexican city of Monterrey, a senior government official said Tuesday.

The move, which has yet to be confirmed by Tesla, would be a major boost to Mexico's hopes of benefiting from US companies choosing nearby countries over Asia for their manufacturing operations.

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"We brought to Mexico an investment of more or less $5 billion for the construction of the largest electric vehicle plant in the world," Martha Delgado, undersecretary for multilateral affairs and human rights, said in a video posted on Twitter.

"I'm going to Austin, Texas, to witness the announcement @Telsa CEO @elonmusk will make about their investments in 2023," she added in a text accompanying a video from the Mexico City airport.

Earlier Tuesday, Mexican President Andres Manuel Lopez Obrador announced that Tesla was going to open a plant in Monterrey, northern Mexico, about 200 kilometers (120 miles) from the US border. The factory was expected to be "very big" and would bring "a considerable investment and many jobs," he said.

Lopez Obrador said Tesla would give more details on Wednesday, including addressing the problem of water scarcity in Monterrey, an industrial powerhouse home to transnational firms.

In discussions with Elon Musk, the Tesla chief "was very receptive, understanding our concerns," with measures expected to include the use of recycled water, the president said.

Mexico declared a drought emergency in July last year and authorities in parts of the country, including Monterrey, were forced to ration water use due to depleted reservoirs. Tesla, which already has plants in China and Germany as well as the United States, is due to hold its 2023 Investor Day on Wednesday, live-streamed from its gigafactory in Texas.

Tesla faces increasing competition in the electric vehicle sector, with a growing number of Chinese makers as well as traditional auto firms such as General Motors and Volkswagen. Mexico sees its lithium deposits as central to its goal of playing a major role in the production of batteries for electric cars and other technology.

Last year, lawmakers approved a plan to put exploration and mining of the metal under state control.

The auto industry is already a key pillar of the Mexican economy - the second-largest in Latin America behind Brazil - home to US, European and Asian manufacturers.

Mexico is the world's seventh-largest automobile producer, having produced three million vehicles in 2021, according to the latest available figures from the Mexican Automotive Industry Association. The automotive industry represented 3.5 percent of gross domestic product (GDP) and 930,000 jobs in 2021, with foreign investment in the sector amounting to $5.3 billion that year, according to the organization

German manufacturer BMW recently announced a $870 million investment to produce electric cars in Mexico.