India is winning nearshoring in Mexico
Indian investments in Mexico show how Mexico should be investing in itself.
MxPE: Mexican politics for the global business reader.
Over the past months—overshadowed by massive announcements by the usual suspects; $700 million from Nissan, 5 billion each from Tesla and Amazon—a hidden trend has diligently made its way across Mexico. Millions invested by unknown and unsexy industries have piled into the country—$11 million dollars from Ramkrishna Forgings for automotive tubing, $30 million from Rane Madras for steering components, $70 million from Brakes India Limited. The amounts are smaller than the eye catching sums that dominate headlines, but they add up and, more importantly, they collectively bolster the cohort of companies all born of the same country: India.
Arguably, India has a better investment strategy in Mexico than Mexico.
It has succeeded, not by standing up to industrial powerhouses like Ford or BYD, but by leveraging their success. Rather than competing but inserting themselves into the more complex niches along the supply chain, Indian companies have become sellers, not best selling cars but of best selling car part suppliers, not brand name pharmaceutical providers but active pharmaceutical ingredients providers for the big brands.
The talk among Mexican politicians of all stripes is that Mexico wants to transition away from low value-added assembly manufacturing (known locally as maquila). But at the same time they know that the country can’t compete with the large companies that design, build, and then assemble their goods in Mexico—cars, televisions, and the like.
There is one clear path to creating an increasingly sophisticated and valuable local industrial base: targeted specialisation. Keep attracting maquila from large multinationals but learn to offer them more and more of the parts they need to make them.
Mexico may not be able to make the thousands of chips that go in a car, but it already competitively makes the tubing, brakes, and steering components right next door to the assembly line. It needs to go deeper into these Tier 2 and 3 industries, as they are known, and sophisticate its manufacturing even further. Niches like these create and retain much more value than simply putting preexisting parts together.
The problem is that the government by and large isn’t actively helping Mexican companies make this leap. So, Indian companies are doing it for them.
Indian industry made in Mexico
Over 200 Indian companies have set up shop in Mexico with investments worth more than $3 billion dollars. But, they aren’t just any sort of companies—they are India’s hand-picked winners. Companies built to scale up the supply chain, becoming increasingly sophisticated and productive without having to come face to face with the transnational giants—yet.
Focused on auto parts, the health sector, and IT, India is opening factories and tech centres in Mexico to leverage its geographical advantages and free trade agreements with the US.
The path is well trodden by industrialising countries. It is how South Korea went from making silk stockings to Samsung smartphones in half a century. “The process of industrialization fundamentally requires the accumulation of productive capabilities,” Nicolas Lippolis, a researcher of industrial policy at Columbia University, told The Mexico Political Economist.
Nowadays, India is taking the next logical step by not limiting the expansion of its industrial base to its own borders, but rather taking the competition abroad—following the investments made by the companies it supplies wherever they may land.
A crucial factor that allowed India’s maturing industrial sector to sophisticate in this way was government policy.
Indian policy explicitly prioritised certain industries over others years ago. The Production Linked Incentives (PLI) Scheme earmarked $24 billion dollars for 14 sectors over five years in March 2020. (For reference, Tesla’s Monterrey plant is budgeted at $5 billion dollars.) The educational system was veered to specialise in and service these developing industries. And, crucially, Indian policymakers resisted pressure from industries that were left out. Steel, for instance, was deemed uncompetitive.
For its part, Mexico hasn’t been completely inactive. The problem is that the scale is woefully inadequate for the size of the task at hand. The country’s most ambitious targeted industrial development plan is Plan Sonora—a clean energy generation scheme worth $7 billion dollars. The plan hopes to create solar energy fields and a natural gas exporting hub, as well as to mine lithium in the north of Mexico. None of these schemes really lay out a long term strategic vision to sophisticate the Mexican economy.
It is a wasted opportunity. Nearshoring promises to continue to bring production to Mexico over the coming years, but its benefits will be limited if the maquila system is left unchanged.
“The problem is that, if the protagonists [of industrialisation] are foreign companies, they can just get up and leave, taking their knowledge with them,” said Lippolis.
So, the private sphere seems to be going it alone. Mexican companies are trying to adapt to the new industries and their demands. Car parts makers, like Monterrey’s Neemak, are pivoting to electric vehicle parts. However, they are facing a shortage of the qualified technical labour needed to keep up the pace. Mexico is the world’s 8th producer of engineering graduates—every year 115,000 enter the Mexican workforce—yet they often do not have the skills to help develop new industries.
The country would need a coordinated plan for universities to churn out the necessary talent with the skills to not only satisfy current demands but to also start developing new and more sophisticated industries.
In this respect, Indian companies are once again at the forefront. Tata Consultancy Services (TCS) are an Indian IT company with a strong base in Mexico. Of their 12,000-strong workforce around 1,000 employees are Indian. “To align Mexican operations with the established standards in India, it became essential to bring in specialists with extensive experience who could harmonise local activities and bolster service offerings,” TCS told The Mexico Political Economist. Though alliances with schools and universities in Mexico to teach students the latest in Generative AI or cybersecurity Mexico gains a more specialised talent pool and “TCS successfully onboards 200 new talents every month,” added Rajeev Gupta, Country Head of TCS Mexico.
Countries that effectively transition from the low-value part of the supply chain to higher rungs make the most of the presence of these sorts of specialised foreign workers to impart knowledge onto their own citizens. Firms, like TCS, already do this on a company by company basis, but it is not enough to kickstart a locally grown specialised industrial ecosystem. You need the government for that.
Mexico at an industrial crossroads
Mexico is currently resting on its laurels, assuming that the nearshoring trend will drive growth and development on its own. The government’s own figures already show that this is not the case—investment is not as impressive as the hype would have people think and the economy is already showing signs of sputtering.
And even these relatively good times will pass.
The only way to keep Mexico permanently inserted in the global supply chain is for it to become inconvenient for industry to move out of the country, and not from extraneous factors like a US trade war with China, but from homegrown strengths within the Mexican economy.
India may well have laid out a path which Mexico can follow.
Here are your main takeaways:
If you can’t beat them, join them. Tier 2 and 3 industries—those that supply the big branded multinational companies we all know—are the quickest way for an industrialising country to keep value at home.
Mexico’s already got the talent, it needs to sophisticate it by choosing what that talent should specialise in—there’s a role for both government and the private sector in this.
Even the sexiest brands are no more than the sum of their unsexiest parts. No one lines up outside a store for steering components, but your Tesla won’t run without them.
What an interesting article. I think it combines very well with the diagnosis of Rosaura Ruiz and Claudia Sheinbaum's team that proposes a boost to higher education to sustain nearshoring. They have to establish a dialogue between the industry and the educational model so that they promote development and research.
Clearly Mexico's government is highly motivated to be the manufacturing partner for large industrialized nations like the U.S. - what is stopping it from making these more strategic adjustments? Lack of political will? Lack of awarenss (I doubt that)? Too much political attention in other realms (lack of "resources")? Lack of cooperation from the private sector?
In the U.S., it is difficult to get things done at the national political level because the party system there has devolved into name-calling, performative gestures, and spiteful lack of cooperation. Are there similar dynamics at play within the Mexican national political scene?