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How does the drug violence really affect business and tourism in Mexico?


BY DAVID AGREN AND
JOACHIM BAMRUD
Latin Trade Magazine

Despite the high number of casualties in President Felipe Calderon’s five-year-old war on Mexico’s drug cartels, business executives and most experts say the country remains safe overall.

“For businessmen who are flying into the main cities, or tourists flying into the resort destinations, they wouldn’t have any reason to be concerned about the violence,” says Trip Barrett, vice president of brand management in Latin America for Starwood Hotels and Resorts. “Unless you’re involved in narco trade or driving across the border, it’s not an issue.”

The facts bear him out. “The innocent civilians still account for only a fraction of the deaths,” says Sergio E. Díaz, managing director of the Mexico office of Kroll.

Díaz estimates they account for only 2 percent to 3 percent of the more than 36,000 deaths so far in Mexico’s drug war.  Another 7 percent were law enforcement officers or soldiers, while 90 percent were members of drug gangs fighting for turf, officials and experts say.

“The drug cartels are not political,” says John Price, managing director of Americas Market Intelligence. “They do not go out of their way to target foreigners.” Most of Mexico’s drug violence is concentrated in a few cities, mainly along the border with the United States.“That’s where most of the money is to be made,” Price says.

The most affected cities are Ciudad Juárez on the U.S. border, by far the most violent single city in Mexico; Tijuana, bordering California; and Culiacán, capital of Sinaloa state, according to IHS Janes, which is based in the United Kingdom.

“The greatest amount of drug-related violence takes part in areas where two or more criminal groups are struggling for control for the lucrative trafficking routes into the United States,” says Anna Gilmour, a senior analyst on organized crime at IHS Janes.

The problems are particularly acute in, although not exclusive to, the northern states of Sinaloa, Sonora, Baja California, Tamaulipas, Coahuila, Durango and Chihuahua, and the Pacific seaboard states of Guerrero and Michoacán, Gilmour says.

“Mexican civil society operates largely in the same way it did prior to the government’s push to dismantle organized crime,” the American Chamber of Commerce in Mexico said in a report called Foreign Direct Investment in Mexico: Is Your Investment Safe? “Mexico is not in the midst of a civil war or on the verge of collapse. Mexicans go to work and school every day, factories and service providers continue to operate, financial institutions are functioning, property is bought and sold, regulators issue permits, and the list goes on.”

Says Leonardo Rodriguez, president for Latin America for U.S.-based Emerson, which has large operations in the country: “Mexico is not a failed state.”

Overall, Mexico ranks as the sixth-most-dangerous country in Latin America for foreign multinational executives, according to the 2011 Latin Security Index from Latin Business Chronicle and FTI Consulting. The index analyses various factors, including murder and kidnappings, and includes polls among FTI’s Fortune 500 clients in Latin America.

The index rates Haiti and Venezuela as the most dangerous countries in Latin America, while Costa Rica, Chile and Uruguay are considered the safest.

CIUDAD JUAREZ

Outsiders often think of violence when Ciudad Juarez is mentioned. Bob Cook, who promotes manufacturing and maquiladora development in the region, thinks opportunity.

A growing number of companies are thinking the same and sinking money into the border town, which is considered ideal for its infrastructure and location opposite El Paso, Texas, but one marred by organized-crime violence and a murder rate of 230 people per 100,000 inhabitants — the highest rate in the hemisphere.

Figures from the El Paso Economic Development Corporation, also known as REDco, show a strong turnaround in Ciudad Juarez, which has gained 26,065 maquiladora jobs from June 2009 — when REDco says the manufacturing sector touched bottom — to February 2011. REDCo also reported that northbound commercial truck traffic through the Ciudad Juárez border increased by 14 percent in 2010. “We see a lot of existing companies going through expansions,” says Ken Morris, president of the Crossborder Group Inc., a consultancy operating in both San Diego and Tijuana. The latter city has enjoyed a boom manufacturing medical devices, he says.

Growth in manufacturing has been impressive along the border — more so in Chihuahua and northeastern Mexico, mainly because of the auto sector, Morris says. He adds that much of the renewed interest in Mexico comes from a combination of geography, workforce expertise and the increasing challenges and costs — mainly in labor and transport — of doing business in China.

Sweden-based Electrolux, the world’s second-largest appliance maker — to name one company ­— announced plans last year to build a refrigerator plant in Ciudad Juárez.

In addition, Electrolux operates a facility that manufactures washers and dryers. “The laundry plant has recently added production of top-loading washers and related dryers in addition to the front-loading washer products for which the plant was created,” says Winston Merchor, general manager of Electrolux Mexico.

Meanwhile, a third plant that has operated in Ciudad Juarez for more than 20 years produces vacuum cleaners.

“Location, infrastructure and a skilled work force ... continue to make Juárez attractive for investors,” says Cook, president of REDCo in El Paso, Texas.

Violence, though concerning and potentially costly, is dissuading few companies already established in Mexico from expanding operations or making investments, business leaders say. Newcomers, meanwhile, are increasingly looking past the gory headlines of an organized-crime crackdown that has claimed more than 35,000 lives since President Felipe Calderón took office and has spread recently into previously calm states with strong foreign investment presences, such as Jalisco and San Luis Potosí.
The exact impact on business and investment of the drug violence is hard to gauge, although Central Bank Governor Agustin Carstens conceded earlier this year: “It’s a factor that could inhibit investment and economic growth.”

“Clearly, there are costs involved,” says Rosalind Wilson, CEO of Canadian Pacific Railway in Mexico and president of the Canadian Chamber of Commerce in Mexico. But “we’ve not seen anyone go home” because of insecurity, she says.

Gerardo Gutiérrez, president of the business group Coparmex, says extortion and threats of violence have affected small and medium companies the most, as they are unable to protect themselves to the same degree as larger companies can.

Johannes Hauser, managing director of the Mexican-German Chamber of Commerce and Industry, says perceptions of violence risk dissuading some smaller foreign companies from investing in Mexico. But he adds: “The companies [already] experiencing Mexico are positive and looking to expand.”
“Our biggest challenge is the distraction and disruption of the narco violence,” says Emerson’s Rodriguez. “It’s mostly psychological, but perception at times becomes reality.”

TOURISM
Tourism is one of the sectors that have been hurt the most by that perception. Foreign hotel chains report significant drops in occupancy in resort hotels, especially in top tourist cities such as Cancun and Acapulco, even with already low prices after the H1N1 virus epidemic in 2009.

“Tourist areas have traditionally experienced lower levels of drug-related crime, with the greater threat emanating from tourist-focused crime, such as petty theft,” Gilmour says. “This is not so much due to the greater efficiency of police forces in the areas as [because of] a lack of conflict between drug groups.”
However, there have been some high-profile incidents of violence in both Acapulco and Cancun, such as when 13 people — five of them police officers — were killed in Acapulco in March 2010.

“This suggests that drug violence is increasingly spilling over into Acapulco, although still at lower levels than the northern border states,” Gilmour says. “The area around Acapulco is largely controlled by the La Familia cartel, which suffered a number of blows in late 2010, such as the killing of its leader. This may encourage both security forces and rival gangs to target La Familia and attempt to gain territory from them, potentially spilling over into greater violence on the street.”

Cancun also has had incidents of drug-related violence, such as the killing of eight people in August 2010 when gasoline bombs were thrown into a bar outside the tourist zone, Gilmour says.
“Despite this violence, tourists do not appear to be specifically targeted in either Cancun or Acapulco,” she says. “There is little strategic reason for drug cartels to target tourists, as this only serves to further antagonize security forces and does not gain them any territorial benefit. In addition, carrying out attacks on tourists would quickly serve to deter tourists from visiting the area and would reduce revenue for the drug gangs, which gain some funding from extorting local businesses.”

OVERCOMING PROBLEMS
Bob Cook says he meets the problems — mainly those of perception — head-on when promoting Ciudad Juárez and El Paso by providing companies with complete information. He says the results come back positive in nearly every situation.

“Everyone, with one exception, has said ‘Yes,’ ” Cook says.

This article originally appeared in the May/June issue of Latin Trade magazine.

 

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