India maintains an edge over Latin America's emerging giant Mexico, but it still falls short of becoming the next China, according to an Oxford Economic Research Briefing. Multinationals face increasing pressure to diversify and de-risk their supply chains, moving away from over-concentrated networks and long-standing dependence on China.

The UK-based research body utilised an in-house tool to assess India and Mexico's attractiveness as alternatives to China for production hubs, evaluating strengths and weaknesses across five key dimensions.

The ‘Market Compass’ tool results highlight that there is no single "next China" capable of replicating all the advantages that propelled China to its status as a global manufacturing powerhouse. China thus retains its top spot, significantly ahead of 40 other competitors.

However, opportunities exist in other regions. India performs well, ranking third overall, just behind Singapore and ahead of the United States. Conversely, Mexico takes 36th place out of 41 countries.

“We find that neither India nor Mexico can beat China in the quality of its infrastructure, or the sheer abundance of qualified labour and size of its domestic market” the economic advisory firm covering over 200 countries says. The report claims that overall, though, “both manage to outscore or come quite close to it in two of the five dimensions (Oxford Economics) analysed: riskiness and the business environment.”

China's appeal as a manufacturing hub is being hampered by its heightened exposure to external risks. One factor in this evaluation is how countries might be affected by adverse geopolitical or economic events, such as a swift trade and technological decoupling between the West and China or sustained high interest rates in the US and globally.

India and Mexico, meanwhile, are relatively insulated from the ramifications of increased tensions between China and Taiwan.

That said, in terms of their broader risk exposure, India appears to be a safer alternative to China. Mexico's closer trade and financial ties with the US make it particularly vulnerable to a scenario of prolonged inflation and higher interest rates in the north.

Additionally, Mexico's poorer security situation, especially in northern states near the US border where multiple manufacturing plants are located, affects its performance in the risk index. Urban violence in these areas can lead to outward migration, causing companies to struggle with talent attraction and retention. In turn this can resulting in labour shortages and increased labour costs, negating what is otherwise one of Mexico's main advantages.

Beyond global risk exposure and domestic security concerns, currency stability is a critical risk factor for businesses operating in Mexico. The Mexican peso is one of the most liquid and frequently traded currencies worldwide, but this liquidity is often used by investors as a proxy for emerging market sentiment, leading to high volatility. In the past two months, the peso has lost 10% of its value against the US dollar, partly due to the left-wing Morena party securing an unprecedented supermajority in the general elections.

“Our economists believe the depreciation of the peso is permanent because it reflects risks of institutional erosion in the upcoming Claudia Scheinbaum administration” Oxford Economics adds. 

India's currency, on the other hand, has demonstrated remarkable stability in recent months and years compared to other emerging market economies, and this broad stability is forecast to continue.

Oxford Economics attributes this to the rising appeal of Indian assets to global investors, reduced macroeconomic and political volatility, and targeted central bank interventions. Unlike Mexico, where political developments have caused currency fluctuations, the BJP's narrower-than-expected victory in recent elections suggests that Prime Minister Narendra Modi and his party will face more checks and balances, limiting radical policy proposals and the consolidation of one-party rule.

“Another key element holding China back and giving India and Mexico an edge is labour cost,” Oxford Economics continues. “After three decades of relentless economic progress, average wages measured in US dollars are now higher in China than in Mexico or India. China is no longer a synonym [for] cheap labour, and the gap is likely to widen during the next five years. India's edge on labour costs over China is only comparable to that of Vietnam and Indonesia, and cannot be matched by Mexico.” 

India may offer cheaper labour than Mexico, but Mexico has at least one unique advantage that neither India nor China can match: its superior trade openness and integration with the world's largest consumer market – the United States. Mexico is the most open economy in the Americas and the US's biggest individual trade partner. While its domestic market of 120mn people may not be impressive on its own, the USMCA trade deal allows companies based in Mexico to benefit from its competitive business environment and access the affluent and vast consumer market of the US, the largest in the world and twice the size of India's and China's combined.

Back in India, the subcontinent is often seen as a candidate for being the "next China" due to its status as the only country that can match China in terms of population size, with around 1.4bn people. This demographic advantage is significant, especially considering India's young population. In 2023, India's median age was 28, compared to 30 in Mexico and 39 in China.

In this regard Mexico ranks 33^rd, as it cannot offer a workforce as large or productive as higher-ranking countries. Indeed, in the Oxford Economics workforce index, Mexico only outperforms India in terms of education – a proxy for labour quality – and job growth prospects in manufacturing, driven by nearshoring. However, both India and Mexico are forecast to underperform China in productivity growth over the next five years.

The Oxford Economics analysis thus highlights that “China maintains significant advantages over other production hubs in terms of workforce, infrastructure and domestic market potential.” The analysis also says that “China's exposure to risk, particularly geopolitical, should be balanced with other factors. Equally, its business and cost environment is under increasing pressure given the rapid increase in wages over the past decade relative to other emerging economies, a trend we broadly expect to continue.”

A closer look at India and Mexico as alternatives reveals that India holds the edge.

India outperforms Mexico in all five categories on the Oxford Economics manufacturing attractiveness index: workforce, infrastructure, market potential, business environment and risk exposure scales.

Examining risk factors therefore highlights India's advantages over Mexico in areas such as currency stability, security and exposure to geopolitical risks and higher interest rates.

Mexico only surpasses India in political stability and trade credit risk but India has significantly upgraded its infrastructure, which now surpasses Mexico's in both scale and quality.