In a shifting geopolitical landscape, many companies are ‘nearshoring’ or ‘friendshoring’ to reduce exposure to sanctions, volatile supply chains, and changing operating environments.
India and Mexico are two jurisdictions increasingly benefitting from this trend, with both signalled out by the US as integral partners in boosting US supply chain resilience. According to the US Commerce Department, in 2023, Mexico overtook China as the country’s largest import source, amounting to over USD 475 billion in imports relative to China’s USD 427.2 billion. India, meanwhile, has seen US foreign investment in the country rise from around USD 500 million in 2013 to USD 6 billion in 2023, according to India’s Reserve Bank.
Despite significant optimism over these countries’ investment potential, recently concluded elections in both jurisdictions in May/June 2024 have resulted in political outcomes that could impact their near/friendshoring attractiveness.”
Despite significant optimism over these countries’ investment potential, recently concluded elections in both jurisdictions in May/June 2024 have resulted in political outcomes that could impact their investment attractiveness. In Mexico, newly elected President Claudia Sheinbaum and an emboldened Movimiento de Regeneración Nacional (Morena) party appears set to pursue controversial constitutional reforms, which will challenge transparency and the rule of law in Mexico’s commercial environment. And, in India, Prime Minister Narendra Modi’s need to rely on coalition partners for the first time could impede India’s pro-business reform momentum.
Mexico under Sheinbaum – Change or continuity?
Since 2022, Mexico has become a serious contender for companies looking to consolidate their supply chains, especially for US companies in the manufacturing and services sectors. Benefitting from US President Joe Biden’s strategy to promote resilient supply chains, businesses with a large US customer base have leveraged Mexico’s proximity to the US border, moving production closer to end-consumers to reduce transport timelines and costs. Mexico’s trade agreements with 50 countries – including the US and Canada (USMCA) which enables tax and duty-free imports to the US on certain items – have also promoted the country as a safe and regulated investment option. But, despite this optimism, notable challenges remain.
Powerful cartels continue to operate with near impunity in Mexico and have targeted logistics operations in extortion and cargo hijacking, while fresh cargo exporters run the risk of cartels using their operations for drug smuggling. Ailing energy and port infrastructure drive logistical delays (and associated cost increases) at strategic ports like Lazaro Cardenas, particularly impacting the automotive industry, while widespread water scarcity has affected sectors like manufacturing, agriculture, and hospitality. In northern border states like Nuevo León, Chihuahua, and Baja California, in particular, firms in industrial parks report unreliable electricity provision and water shortages. Labour costs are also increasing. In January 2024, minimum wage increased from approximately USD 18.20 to USD 21.80 per day in the northern free trade zone, and from USD 12 to 14.50 in rest of the country. Meanwhile, costs of commercial property and construction materials are similarly on the rise amid a growing demand for space and buildings as companies look to access the market.
Morena and its allies’ new supermajority in the lower house, and majority in the Senate, gives the party a strong mandate to push through controversial constitutional reforms.”
With elections now concluded, President Claudia Sheinbaum – as candidate for the incumbent leftist Morena party – will proceed with many of former President Andrés Manuel López Obrador’s (AMLO) policies. However, Morena and its allies’ new supermajority in the lower house, and majority in the Senate, gives the party a strong mandate to push through controversial constitutional reforms. If implemented, these reforms – first proposed in February 2024 – could see judicial independence limited and rule of law compromised, while other reforms could trigger the dissolution of many independent regulatory bodies responsible for ensuring transparency and economic competition. Separately, Sheinbaum’s intended changes to the National Water Law will likely see decreased prioritisation of water provision to large companies which, given water insecurity in the country, could exacerbate existing issues for firms. Meanwhile, plans for sustained yearly minimum wage increases to above inflation could dissuade companies looking to Mexico for lower labour costs. And, amid a growing fiscal deficit due to recent government spending on infrastructure and welfare, the need for raised taxes or subsidy cuts may also increase costs to companies or promote destabilising unrest among dissatisfied voters.
Furthermore, as the US looks to protect its electric vehicle and other industries, it has imposed tariffs on several imports manufactured in China, and threatened further restrictions to prevent China from leveraging Latin America as a springboard into US markets. While Sheinbaum intends to strengthen the US-Mexico partnership, Chinese companies too have increased investment into Mexico and the new president will need to manage these dynamics. This will be no easy act, with efforts to appease Washington and maintain good relations ahead of the US election having already prompted Mexico to apply provisional tariffs.
Overall, Sheinbaum has sought to assure foreign businesses by emphasising a moderate approach, stating that reforms must be openly debated among various stakeholders. She has also shown intent to continue leveraging momentum around nearshoring”
Overall, Sheinbaum has sought to assure foreign businesses by emphasising a moderate approach, stating that reforms must be openly debated among various stakeholders. She has also shown intent to continue leveraging momentum around being an attractive hub, pledging to reduce investment barriers through bureaucratic streamlining and digitisation, upgrade critical infrastructure, and promote renewable energy – including through encouraging private investment. However, while Sheinbaum’s has presented a more business-friendly posturing than her predecessor, she will need to carefully balance efforts to maintain and strengthen an investor-friendly climate, alongside ensuring that domestic economic and social needs (and campaign promises) are met.
India’s post-election investor conundrum
With approximately 60 percent of the world’s population living in Asia, companies with a global or expanding footprint understand the importance of operating within the region to access its fast-growing market. As investment patterns shift amid changing geopolitical dynamics, Vietnam, Indonesia, and Philippines are seen as increasingly attractive. But amid a fracturing global economy, India, a strategic US ally, is emerging as a prime location for moving. India offers foreign companies a large pool of skilled workers at competitive wages; access to a middle-class consumer market of over 500 million people; favourable government incentives which include reduced corporate taxes and grants, and a strategic location which connects Europe with Asia.
India’s trade barriers are equally high – according to the World Trade Organization, India had among the highest import duties globally in 2022 at a rate of 18.1 percent, compared to China at 7.5 percent”
Yet India is not without its challenges. Logistics costs are about 14 to 18 percent of GDP, and extensive investment is necessary to modernise highways, rail links, and ports to be competitive with other Asian locations, where logistics costs amount to only 9 percent of the country's GDP. India’s trade barriers are equally high – according to the World Trade Organization, India had among the highest import duties globally in 2022 at a rate of 18.1 percent, compared to China at 7.5 percent, and Mexico at 6.9 percent. This is a critical challenge as India does not host a large production ecosystem, and manufacturers often need to import parts, adding to the cost of finished products. India’s federal system has also come under scrutiny. Decentralised power has led to state level differences in political leadership, regulations, taxation, and labour laws, making dispute resolution lengthy and raising the complexity of operating across state within India. Despite these obstacles, foreign investor interest in India has grown on the back of incremental and effective reforms that have considerably improved – and are expected to continually enhance – India’s business operating environment.
Following India’s general elections which concluded on 1 June, Modi’s ability to sustain and continue enacting pro-business reforms has come into question”
Efforts by Modi and his predecessors have facilitated India’s economic ascent over the past decade, setting the country firmly in the sights of international investors. However, following India’s general elections which concluded on 1 June, Modi’s ability to sustain and continue enacting pro-business reforms has come into question. For the first time since 2014, Modi’s Bharatiya Janata Party (BJP) was unable to secure a majority in the lower house of parliament, which has been a crucial factor in the party’s ability to pass important, and at times unpopular, reforms geared towards improving India’s business environment. While the BJP remains the largest party in parliament, it must now rely on smaller parties from the National Democratic Alliance (NDA) to secure a parliamentary majority, and to forward its national economic agenda.
Voters and investors desire decisive and effective governance, which can be challenging to deliver in a coalition setup. To maintain coalition support, Modi may need to make policy compromises which could dilute key economic or social policies, making it harder to implement comprehensive reforms. In particular, the diverse and conflicting interests of coalition partners may challenge the BJP’s ability to deliver unpopular amendments to stringent land and labour laws, which are necessary to unlock India’s manufacturing potential. The election outcome will deliver a temporary setback to investment momentum in India as investors wait to see if Modi can build a durable coalition government with the ability to build on India’s positive reform trajectory.
In search of stability
For companies looking to relocate operations for cost-saving, supply-chain stability and a seemingly friendlier political climate, betting on the ideal location amid often unpredictable political, economic and social conditions is no easy feat. While optimism surrounding Mexico and India remains, they will continue to face existing and emerging challenges to their investor attractiveness. For investors, while the first half of 2024 meant eagerly awaiting Mexico and India’s election outcomes, the remainder of the year will offer insight into the nature of their trajectory as investment destinations.
