Will Mexico's Drug Wars Hurt Business?

If the violence worsens, investors could decide to pull back from the countryat least that's the fear of local businessmen
Mexican soldiers cut marijuana plants, after a plantation was discovered at a riverbank in the center of border city Juarez, Mexico, on May 31, 2007. STR/AFP/Getty Images

President Felipe Calderón's efforts to eradicate Mexico's powerful drug cartels have unleashed a bloody turf war among competing traffickers. If the violence gets much worse it could strike at the heart of the Mexican economy as foreign and local investors think twice about risking their capital in the crossfire, industry leaders and analysts fear.

For years, Mexican drug violence was limited to sporadic outbreaks in trafficking hot spots near the U.S. border. But increasingly, deadly shootouts, highway kidnappings that end in torture and death, and gruesome revenge killings are occurring around the country. On May 8 one of the federal government's top anti-narcotics officials was shot dead in his home in Mexico City. Headless bodies and severed heads are found with warning notes pinned to them.

"If we don't let foreign investors know we can control [the violence], there will definitely be consequences in the future," said Saul García, president of the Association of Maquiladoras & Exporters in Tijuana, just south of the border from San Diego.

On the Cocaine Highway

As much as 90% of cocaine on its way to the U.S. passes through Mexico, according to the U.S. Drug Enforcement Administration. The fight between powerful drug cartels to control trafficking routes has raised fears that violence in Mexico could reach levels once seen in Colombia. Mexican traffickers are also increasing production and shipment to the U.S. of methamphetamine, a highly addictive synthetic drug.

The Mexican government said on May 23 that drug-related killings numbered 1,378 so far in the year, nearly a 50% increase over the same period in 2007. Since Calderón took office in December, 2006, and sent 25,000 troops to take on the cartels, 4,152 people, including traffickers, police, soldiers, and bystanders, have died.

In recent weeks gunmen killed seven federal police in an ambush in the northwestern state of Sinaloa; knocked off four top crime officials in Mexico City; and left four severed heads in ice chests in the northern state of Durango. The second-in-command of police in the state of Morelos, near the capital, was also found dead, along with his driver, in the trunk of a car.

Foreign Executives Facing Threats

Foreign direct investment fell by more than one-third in the first quarter of the year, to $4.2 billion, compared with the first quarter of 2007, according to Mexico's Economy Ministry. It is impossible to determine how much security concerns were to blame. But there are signs that the violence is giving business the jitters, and higher security costs are giving investors second thoughts.

Foreign executives have long faced security threats in Tijuana, which is home to 676 maquiladoras, export assembly plants that are largely foreign-owned. In 1996, Sanyo Electric paid $2 million for the release of the kidnapped Japanese president of its local operation. More recently, Tijuana was the scene of a three-hour-long gunfight between police and drug traffickers in January, and in April more than 3,000 extra soldiers and federal police were dispatched there after a shootout left 17 alleged cartel members dead.

Mario Escamilla, the president of Tijuana's business chamber, said plans to build three plants producing auto components and electronic parts, and to expand two other industrial plants in Tijuana—joint Mexico-U.S. ventures worth $38 million—were on hold partly because of security concerns. He also said six plant directors who had been based in Tijuana were now working from across the border.

Trade in goods between Mexico and the U.S. rose 4% last year, to $347.3 billion, according to the U.S. Census Bureau. Automakers are some of the biggest investors in Mexico, having moved south to cut costs. Ford (F), for example, announced at the end of May it was making a fresh investment of $3 billion in the country. Ford will expand a plant near Mexico City where it plans to start making its new subcompact Fiesta starting in 2010.

Tourists Aren't Usually Targets

Although most of the drug-related violence so far has claimed the lives of law enforcement officers and the traffickers themselves, David Robillard, managing director in Mexico for New York risk consultants Kroll, says that could change. "The business community and tourists are not targets in most of these places," he said. "Unfortunately, the settling of scores between the different organized crime groups puts others at risk from collateral damage."

Richard Sinkin, a partner at InterAmerican Group, a San Diego company that helps international firms, many of them from the U.S., set up factories in Mexico, says no clients have canceled their plans because of the upsurge in violence. But he says it is only a matter of time before the killings chill the investment climate. "At some point there's a tipping point at which it will be very, very difficult to attract long-term investment to Mexico," he says.

The Mexican government says the increased bloodshed is proof of the success of Calderðn's 18-month-old army crackdown, which it says has forced the cartels to adopt more desperate measures to survive. A bill under consideration in the U.S. Congress could give Mexico up to $400 million in aid this year to bolster its efforts against drug traffickers. "We're winning, although it might not seem like it," Attorney General Eduardo Medina Mora said in a radio interview.

Persuading Foreign Investors That It's O.K.

Businessmen hope he is right. "We need to be able to tell foreign investors "It's over, everything is O.K., now you can come, nothing will happen to you, it's all under control,'" said García of the Tijuana maquiladora association. "At the moment, the only thing we can say is that something is being done [by the government]."

While García's group waits for Calderðn to defeat the cartels, it has asked Baja California state police for something that could help some worried Tijuana businessmen feel a little safer in the short term: shooting lessons.

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