Why foreign manufacturers shrug off Mexico’s security issues

While families in the Mexican industrial city of Monterrey were celebrating their beloved madres during Mother’s Day on May 10 this year, local authorities were engaged in a less agreeable activity beside a highway outside of town: searching for clues at a roadside scene where 49 headless bodies had been dumped in the pre-dawn hours. The “Mother’s Day Massacre” was just the latest in a series of atrocities in northeast Mexico, where drugs cartels are waging all-out war against each other.

Photo: Bloomberg via Getty Images

Monterrey is one of the nation’s busiest industrial hubs and many of its factories, about 1,800 of them, are U.S.-run. Despite the unspeakable violence around them, few if any are talking about relocating outside of Mexico or even slowing down operations. The incentives, including low labor costs, ready-to-use infrastructure, a close-to-home supply chain and a sterling rating on the ease-of-doing-business scale, are just too great.

“Most of the firms that are suffering from extortion or kidnapping are smaller service firms like restaurants and local retailers that can be easily intimidated,” explains Rodrigo Aguilera, an economist at the Economist Intelligence Unit. “Foreign firms are not immune, but they are usually spared from the violence because they are larger.”

In fact, most are expanding operations, says Kenn Morris, CEO of the Crossborder Group. “We did a survey of our clients, and 90% of them say they expect to increase their investment in Mexico,” he says.

The pitch of firms like Crossborder, consultants for would-be Mexico transplants, is that the shocking carnage is all criminal-on-criminal. “The violence in the headlines somehow gets extrapolated to the whole country,” says Morris. “What’s happening is happening in specific areas.” There are a dozen separate manufacturing centers around the country, including more than 5,000 maquiladoras, as Mexico’s foreign-run assembly and industrial processing plants are called. “Currently, only about three or four of them are having security problems,” Morris says.

True, even with the lurid headlines, it’s hard to find a foreign company complaining about conditions there. Most operate in secure industrial parks, and managers often leave their families in the safety of Houston, El Paso or Mexico City.

Even in Monterrey itself, where the hostilities between Los Zetas and two rivals, the Sinaloa and Gulf Cartels, have made it one of Mexico’s current hotspots, the violence appears to have little effect on daily life.  “I was in a restaurant in Monterrey the other night,” says Mark Lerman, vice president of The Steel Warehouse, which runs a steel processing plant in Monterrey. “If I took a snapshot of what I saw there, you wouldn’t know if it was in Mexico or Dallas or anyplace else.”

Mr. Lerman lives in South Bend, Indiana, near his corporate headquarters, but he travels to Monterrey, about 140 miles away from Texas, every four to six weeks to keep track of his company’s temper mill there. The plant, with 65 employees, processes production-ready steel for use by Mexican builders in high-rise construction or bridge replacement, he says.

“I just go about my business,” Lerman says. “I’ve never feared for my life.”

While the vast majority of the maquiladoras are U.S.-owned, European, Asian and Canadian companies are also making large investments in Mexico.  The burgeoning automobile and aeronautics industries have drawn big-name companies like Honda, Toyota, Bombardier, Safran and Fokker. Like their U.S. counterparts, these companies enjoy the proximity to the U.S. market and low-cost labor. “In France, labor would account for about 30% of the cost of production on an item like this,” an official from French-owned Manoir Aerospace told the Washington Times recently. “Here, it’s roughly 10%, and we’re closer to the market we’re trying to reach.” No mention of security problems.

The Taiwanese electronics company Foxconn is operating one of Mexico’s largest industrial complexes in San Jeronimo, a once-seedy town near Ciudad Juarez. The electronics manufacturer, which has invested $230 million there, employs 7,000 now, with plans to expand to 20,000 within a few years. The growth of the Foxconn complex, with its newly paved access roads and street lighting, has contributed to a reduction in crime in the area, Mexican officials say. “Security is one of the key issues for our investors,” says Foxconn Latin America director Francisco Uranga.

Of course, there’s often an element of boosterism to foreign managers’ comments about security in Mexico. While they themselves rarely see the violence around them, many innocent people have gotten caught up in it. Among the estimated 50,000 who have died since President Felipe Calderon declared war on the cartels six years ago were many innocent victims who became “collateral damage,” authorities say.

Foreign companies operating in Mexico still occasionally get hit by sporadic violence. On May 26, Sabritas, Pepsico’s local snack food company, was hit by a series of arson fires that destroyed trucks and damaged five of its warehouses in the western state of Michoacan. Although no one was injured, Reuters said it “appeared to be the first attack on a global brand in Mexico’s bloody war on drug cartels.” There have also been some losses of shipments from truck hijackings along the Monterrey-to-Laredo highway.

But, aside from the random murder victims, experts say, it’s small and medium-sized Mexican-owned businesses that are suffering the worst of the spillover from organized crime.  Many smaller business owners in areas like Monterrey endure kidnap threats and extortion demands from criminal elements taking advantage of the disarray from the drug wars, says Eric Olson, senior associate at the Mexico Institute in Washington, D.C.

Such attacks often go unreported, Olson adds. “Studies have shown that probably one in four or one in five are reported to the police,” he says.

The crime waves tend to reach a crescendo in one region and then fall off, only to make a strong showing in another. For example, the crime wave that shook Tijuana, south of San Diego, four or five years ago dissipated after leaders of the Tijuana Cartel were tried and convicted on drug trafficking charges in the U.S. Crime has dropped dramatically there, though some journalists attribute this to a pact between the Tijuana group and the Sinaloa Cartel. Crime is also dropping in Ciudad Juarez, across the border from El Paso, which two years ago was a cauldron of cartel violence, with, among other things, a 27% drop in homicides in Chihuahua, Juarez’ parent state, for the first six months of 2012.

The worst threats are now in Tamaulipas and Nuevo Leon, the two easternmost border states, Olson says. Monterrey veterans say they expect, with continued military pressure, that the epidemic of violence there will fade in three years or so.

All told, the violence has contributed to an estimated average annual loss of 1% of GDP since 2006, according to a BBVA Bancomer analysis published in the Brookings Institute report, “Latin American Perspectives. ‘Altogether Now: The Challenge of Regional Integration’”.

In the meantime, foreign businesses hunker down and rake in the profits. While the gangsters murder each other nearby, Lerman’s plant is thriving. Sales were up 15% last year and better than 3% so far this year. Last year, The Steel Warehouse expanded with new laser-cutting machinery and a fully equipped production bay and, says Lerman, it’s moving forward aggressively to corral new customers.

“Many foreign manufacturers are doing quite well and a lot of Japanese firms are planning to expand into Mexico,” explains Aguilera.  He believes Mexico’s weak peso, low transport costs to the U.S. and its relative ease of doing business gives it a “significant” advantage over other Latin American countries. “The benefits outweigh the crime situation, which is a relatively small cost of doing business.”