Nearshoring, Cartel Activity and the Near-Future State of Mexico
One of the many realities exposed during the pandemic was the world’s reliance on China as a manufacturing hub. Movement restrictions within the country, city-wide lockdowns, increased labor costs, deteriorating US-China relations, and production disruptions prompted governments to reassess their business exposure to one country with a new sense of urgency.
The renewed focus has been welcomed in many circles, and rightfully so. The US in particular continues to demonstrate interest in its neighbor south of the border. Mexico enjoys a free trade agreement with the US and Canada, has a large pool of workers that can fill factories and production centers at a fraction of the costs found elsewhere, and does not require lengthy transoceanic voyages to reach US markets.
Although these benefits rightfully make Mexico a competitive destination for production, doing businesses in the country is not without risk. Mexico remains a major production and transit center for illegal drugs, which are controlled by Mexican cartels. Ongoing violence between these cartels for control of trafficking corridors, attacks on government forces and innocent bystanders, criminal business diversification beyond drugs, and the Mexican President’s overarching strategy of “hugs not bullets” have produced an increasingly dangerous and hostile environment for travelers, locals, and businesses alike.
We assess that this expansion of foreign business activity within Mexico over the next few years will almost certainly lead to an acceleration in cartel diversification in terms of what they prioritize and how and where they operate and new extortion tactics. Cartel-related violence associated with rivalries and retaliations will likely increase at a steady pace, with significant spikes around potential government strategy changes, particularly in the first year of the new administration in 2025.
Mexican Government Intervention Strategies
Each of the three successive leaders of Mexico for the past seventeen years have battled cartels, with various degrees of success. The current Mexican administration of Andres Manuel López Obrador (AMLO) assumed power in late 2018. To date, he has expanded the military’s role in law enforcement[i][ii] and civilian functions[iii], despite running for office on the promise of returning the military to the barracks.[iv] His approach differs from previous administrations in that he has chosen to target the social conditions that allow the criminal groups to thrive[v] rather than engage in an all-out war against these groups, the theory being if the groups are left to their own devices, the violence will subside as territorial disputes are settled.[vi] The record levels of homicides and civilian-related deaths at the hands of cartels and law enforcement within the country under AMLO’s leadership have many questioning the effectiveness of this approach.[vii][viii][ix][x]
Previous strategies employed by AMLO’s predecessors to target cartels, particularly the focus on going after cartel leadership, resulted in the few cartels fragmenting around 2008 into dozens and eventually hundreds of groups.[xi][xii] While the major players are well-known (Cartel Jalisco Nuevo Generacion (CJNG), Sinaloa Cartel, Los Zetas, Gulf Cartel) and continue to operate in and control certain regions, the emergence of smaller groups have led to not only to an increase in confrontations, but an increase in business diversification beyond drug production and human trafficking. Some of these smaller criminal groups can specialize in just one illegal business.[xiii]
Regardless of who is elected to the leadership following AMLO’s term, cartel activity—particularly diversification outside of drugs and regional expansion within Mexico—will almost certainly accelerate in the years ahead. Although there is some debate as to why cartels diversify (because of growth or because of reduced profits from drugs due to enforcement actions)[xiv], the diversification strategy into new industries and businesses will continue as long as the cartels can benefit in some way. The mining, logging, fishing, and agricultural sectors are already heavily infiltrated by the cartels, who skim proceeds on a per ton basis, extort growers, dictate prices[xv], or trade endangered goods for precursor chemicals needed in drug production.[xvi]At their core cartels are businesses, and even they must recognize that throwing all their weight behind one industry presents existential risks.
Although arguments can be made both in favor and against AMLO’s hands off strategy, left untouched and without significant consequences for their actions, cartels will continue to branch out geographically and into new industries and businesses to bring in income. Could this result in cartels and criminal groups influencing and affecting more local and international businesses beyond the established hotspots and industries? There is strong possibility that this will be the case.
The Nearshoring Race Begins
Western businesses’ renewed focus on Mexico came to light because of a confluence of factors, and western businesses are not the only ones who will benefit from this increased attention. Mexico’s factories shrank for more than two and a half years due to the economic fallout of the pandemic.[xvii] Since the pandemic, the economy has bounced between periods of growth and contraction.[xviii] The manufacturing migration from China and overseas to Mexico will lead to job creation, increased appetite for Mexican-produced goods, and sustained economic growth for the country. All will benefit the Mexican state, its inhabitants, and local industries.
Bottlenecks from supply chain issues in 2020, particularly in key industries, along with the US-Mexico-Canada Agreement (USMCA) entering into force in mid-2020 that called for more production and content to be sourced from the region if it was being exported to the US[xix], and lower wages in Mexico[xx] continue to be drivers behind this expansion. Mexico’s economy is reliant on its robust manufacturing; of the $32.1 billion dollars of foreign direct investment in the first nine months of 2022, $11.6 billion was in manufacturing.[xxi] The move to nearshore business in Mexico could spur annual economic growth that has not been seen since the 1950s and 1960s.[xxii] Mexican officials have expressed a goal of substituting at least 25 percent of Asian imports with products produced in North America in the coming years.[xxiii] Mexican border cities appear to be the “hot” spots for relocation, given their proximity to the US[xxiv][xxv]; however, industries that are already well established in Mexico (automotive, medical, aerospace and defense, and electronics)[xxvi] will continue to expand within existing hubs, such as Central Mexico’s Bajio and in Monterey.[xxvii]
Available manufacturing space is already tight[xxviii], particularly along the border. In the state of Baja, only around two percent of space is available.[xxix] Construction is underway in hubs across the country to expand this capacity to appease US and foreign manufacturers.[xxx][xxxi][xxxii] Mexican states that are not seen as traditional locales for manufacturing may look to incentivize manufacturers to open operations in an effort to boost their economies and provide for their people. As this manufacturing capacity expands, so will the opportunities for cartels and criminal groups to capitalize on this expansion and break into new sectors.
The US Biden administration and Elon Musk have received an oversize share of the attention to manufacture south of the border in recent months, even though others have announced plans or are considering such plans. [xxxiii][xxxiv][xxxv][xxxvi][xxxvii] The Biden administration is looking to enlist Mexico into boosting semiconductor production, while Elon Musk is looking to follow other car makers into expanding zero emission vehicle production.[xxxviii] The heightened global interest in these industries and their perceived importance to the economies of the world could herald more concentrated efforts by the cartels to break into and control all aspects of these industries within Mexico. The increased profit margins behind more advanced manufacturing are also strong inducements for the cartels to make these industries and the businesses and manufacturers that support these industries priority areas.
If the successor to AMLO chooses a more confrontational strategy for combating the cartels (either alone or with US assistance), the cartels and criminal groups—at least the more established ones—will likely push back against this increased pressure to maintain control of what they’ve acquired. Smaller groups may even develop informal agreements and alliances with other cartels to form a united front that can collectively resist efforts to subdue them. Each of the scenarios will likely lead to a period of heightened aggression and increased violence.
What the Future May Hold
Extortion
Mexican government policies, the mass influx of businesses and interest within the country, and cartels emboldened by the Mexican government’s apparent disinterest to directly confront the cartels will have ramifications for the Mexican government, western businesses, the cartels.
Levels of extortion and violence, currently a significant problem and concern for locals and businesses alike, will almost certainly escalate in frequency and severity not only through the administration’s remaining time in power but into subsequent Mexican administrations as well. Extortion remains a low risk, high reward crime, which is why it is often employed by cartels and criminal groups. The current extortion numbers for Mexico totaled 11,041 in 2022, a five-year high[xxxix] and a 60 percent increase from 2018[xl], the final year of the previous administration’s time in office.[1] It is important to note that these reported victims of extortion (as categorized on government documents) reflect those that are reported. The true number of extortions is likely considerably higher (by some estimates 90 percent of extortion acts go unreported).[xli]
As the cartels and criminal groups diversify into new sectors, industries, and geographic areas, both new and old extortion tactics will likely be brought to bear against businesses and employees. Extortion is transferable to a number of victims across all of Mexico’s major industries, so as new businesses open, extortion will follow. The cartels and criminal groups behind extortion crimes are highly resilient and have shown a knack for adapting to economic changes by employing new techniques and strategies.[xlii] Some of these tactics could involve cartels threatening to impede the completion or shipment of vehicles or other merchandise by enticing employees to stage demonstrations around key production months or dates or by blocking highways to prevent the movement of goods unless payments are made. Other tactics could involve threats to disrupt the supply of electricity and services and raw materials and components that are essential to production unless payments are made, or certain companies being “awarded” bids to supply manufacturers. Cyclical industries such as semiconductors could be particularly exposed and vulnerable to such activity if the expansion of such industries comes to fruition. [xliii]
Violence and the threat of delayed shipments might not be the only consequences of extortion efforts. Cartels and criminal groups could threaten to disclose sensitive information that could affect the reputation of a company or industries operating within Mexico unless payments are made. As one example, a cartel could threaten to disclose the working conditions for local employees in Mexico that run counter to the image the company is projecting in the US. The groups could also use their inside knowledge to leak information that could affect company stock prices, or even facilitate trades on the stock market that work to their advantage. Extortion attempts will also likely continue against Mexican employees, who may be “encouraged” to divert some of their income to cartels and local groups as a tax or a payment for protection or some other service.
No company is immune from extortion; however, local Mexican companies and employees that supply the larger international businesses and Tier 1 suppliers with products and services will likely bear the brunt of targeting efforts. The rationale may be that larger organizations and businesses have more clout with connected local, state, and federal authorities, all of whom stand to benefit from foreign businesses and their renewed attention to diversify and expand into the country. Larger organizations also have the resources to pay for the increased security costs that come with operating in Mexico. These costs have increased by some estimates to eight percent of total expenses[xliv], which can likely be passed off to customers in some form.
In addition to the smaller local sub-suppliers being targeted with greater frequency, a percentage of them will likely concede and voluntarily make payments as an accepted cost for doing business. After all, these groups and cartels often provide some basic measure of protection or service—something that local police forces struggle to accomplish. US businesses leaders should recognize that such payments, even if offered by distant suppliers, could lead to severe financial and even criminal penalties for violating the Foreign Corrupt Practices Act (FCPA).
While it is difficult to predict the exact time, place, and method of extortion, there are certain actions that may increase the likelihood of businesses or their suppliers being singled out for such crimes. Businesses that choose to establish sites outside of large multinational government-sponsored manufacturing hubs likely face an increased risk of being singled out for extortion. These hubs and the businesses that operate these hubs provide an additional layer of protection between the businesses and cartels looking to extort these businesses. Another action that could increase the likelihood of extortion attempts is a reliance on a sole supplier to supply goods, particularly if the sole supplier is local or family run. As companies expand operations, they should consider diversifying contracts amongst multiple suppliers, particularly those that can meet future quotas immediately. Any signs of expansion by smaller suppliers could invite increased cartel scrutiny, which in turn could lead to extortion threats for this increased business volume. Local and family run businesses that appear to be thriving (when compared with other local competitors) could be a sign of cartel influence and involvement, which in turn should trigger the need for enhanced due diligence prior to agreements being signed. Lastly, companies should refrain from paying any reoccurring fees and opaque service charges without scrutinizing the nature of these charges. The payment of such fees, even if they are small, open the possibility for payments and demands increasing.
Diversification
The current Mexican administration’s strategy of avoiding direct conflict with the cartels will likely continue to embolden the cartels to aggressively diversify and entrench themselves more deeply into the Mexican economy and regions and industries that have previously not experienced significant cartel activity.
The cartels already supply endangered animal products in exchange for precursor chemicals needed to drug production.[xlv] Might this relationship evolve at some point to include intelligence surrounding western production figures in Mexico? Cartels are likely already aware of these figures as part of their extortion efforts. As global supply chains evolve and have less of a focus on China, could the cartels also (at the request of middlemen or Chinese competitors with ties back to China) deliberately delay precursor materials and supplies destined for western manufacturing industries in Mexico so that parent companies re-establish relationships with “favored” Chinese providers or local Chinese subsidiaries to meet production schedules? What if requests involve the placement of infected files in production equipment or computers used to store sensitive Intellectual Property (IP), or even the physical placement of an asset (insider) within an organization? An employee could be easily bribed by cartels to carry out such actions in lieu of their monthly payment to cartels. As long as precursor chemical shipments continue unabated, does it matter to the cartels what is requested in return?
Enterprising cartels and criminal groups may look to set up their own “legitimate” businesses or front locals the money to set up businesses that cater to the influx of foreign manufacturers in some way. Cartel connections with local and state officials can expedite and approve business applications. Furthermore, it would not be a stretch for certain cartels to use their connections and control over ports and other areas to arrange for the shipment of raw materials to their own businesses. Given cartels’ business sense, they will likely choose businesses and materials that are less regulated in Mexico and the US, and thus less likely to attract unwanted attention and scrutiny.
Cartel diversification efforts could reach a point where they control or have some level of influence over a majority of business and manufacturing in Mexico, with cartels and groups sharing control and oversight of certain industries, transportation corridors, and access to government officials. This possibility is increasingly likely given AMLOS’s push to have the military more involved in state projects[xlvi], where there is more opportunity for bribery and favoritism that benefits certain groups. The major cartels will continue to control their areas and core interests (e.g., drugs, human trafficking); however, the diversification push into much smaller businesses and geographic areas could reach a point where cartels come to an agreement and cooperate with more localized groups when interests align.
As one example, La Familia Michoacana currently controls the port of Lazaro Cardenas on Mexico’s west coast.[xlvii] This is established and understood by others. Another cartel or an offshoot is then responsible for the shipment of goods within certain geographic areas that lead to manufacturing locations, while yet another group controls the last-mile delivery to the final manufacturing location. The more diversified cartels become, the less likely one disruption or a change in strategy by law enforcement will lead to significant financial disruptions. Moreover, the more embedded cartels and criminal groups become in legitimate businesses and the Mexican economy, the greater the potential for economic repercussions following a major police initiative to dismantle such operations, which in turn could disincentivize government forces from taking significant action.
All industries and businesses are at risk of some level of cartel involvement; however, those that we assess will be particularly vulnerable are the companies whose products carry the greatest profit margins and those that are relatively easy to resell in secondary markets. This could be semiconductors and their associated components, batteries, and electronics that have dual civilian-military capabilities. Industries that do not have a strong presence or are just breaking into the Mexican market will also likely be ripe for targeting, as cartels will look to gain some measure of control over an industry or business that has not already been “claimed”.
Violence
This is not to say that the cartels and criminal groups will move beyond flighting for control of territory, industries, and key shipment routes. Competition will lead to increasingly violent encounters, particularly around control of the newer industries that are looking to establish operations and footholds in Mexico. These short duration engagements will likely mirror what is current being seen around border cities.[xlviii] The current Mexican administration also appears to only periodically engage the cartels en force. When there are confrontations, they are generally spurred by government and military efforts to capture or kill high-level drug leaders.[xlix][l] Prolonged battles and infighting can backfire. Lost production from factory and business closures not only affects businesses, employees, and locals, but the cartels as well. It is in their interest to keep the level of fighting and disruption below the thresholds that will drive business away or lead to a substantial change in government strategy to target the cartels themselves.
This latter point could change the nature of conflict between cartels and the government. Any sustained efforts on the part of the Mexican government to bring cartels under control or significantly degrade their ability to operate within Mexico will almost certainly lead to significant and widespread violence. This violence could manifest itself in ways that have not been seen. When survival is at risk, both larger cartels and smaller groups will likely show less restraint toward the innocent. Some smaller factions may even choose to lay low and sit out confrontations and fill whatever void appears when the dust settles.
Business Considerations
By no means is this to suggest that US and western companies avoid this manufacturing drive to Mexico. Quite the contrary. The takeaway however should be that moving or expanding manufacturing operations within the country comes with significant risk, not only for the companies but for leadership as well. Those in leadership positions should remain hyper-focused and involved in all aspects of operations—from vetting suppliers, production and shipping companies, and employees, to auditing internal business processes and paperwork and ensuring employees and local management are safe and have outlets for reporting safety concerns. Sales and the drive to increase business and profits at all costs should not come at the expense of neglected security and due diligence. The consequences of such actions can lead to significant financial and criminal penalties for the companies and for leadership. Unfortunately, we assess that the renewed drive to manufacture in Mexico will also lead to an increase in fines and prosecutions for companies and leadership that violate US laws for failing to properly vet companies in regulated industries or disclose anomalous or suspicious behaviors in a timely manner.
In addition to increasing the level of scrutiny, oversight, and due diligence, businesses should also develop contingency plans around business disruptions, threats, and environmental issues early in the planning, expansion, and construction phases. These contingency plans should not be deferred and adopted at some future time once operations are in full swing. They should be debated, established, stress-tested, rehearsed, and implemented early.
Businesses that are looking to expand or move into Mexico need to recognize that one overarching strategy cannot be applied to the entire country. Local conditions within neighborhoods and cities, as well as those in states and regions, are extremely varied and dynamic. Politics, infrastructure, local inhabitants’ relationships with and opinions of law enforcement and cartels can all affect operating plans and the success and prosperity of business. With that in mind, it is important for companies to work with providers that have a strong local presence and understanding of local conditions within the areas of anticipated development. There will be increased costs from these relationships; however, the insights and warnings provided by local assets can help organizations plan and react to a variety of situations.
Mexico’s contribution to nearshoring will only increase as relations between the US and China continue to deteriorate. The full extent of this manufacturing push into Mexico is still up for debate, as are potential changes to US laws surrounding reporting requirements and disclosures to close gaps and loopholes and strengthen border security. What is known is the existing Mexican administration and their strategies within the country will change in near future. Whether a more direct, heavy-handed approach is adopted or not, cartel-related violence and the integration, diversification, and expansion into local and foreign businesses will continue, if not increase. Businesses and leadership that accept this possibility, proactively adopt and implement plans, make the necessarily investments, and shore up their own processes will be well-positioned to operate and succeed in Mexico.
[1] AMLO assumed office December 1, 2018.
[i] Mark Stevenson, “Mexican congress approves keeping military in police work”, AP News, October 13, 2022.
[ii] No Author, “Several violent episodes in Mexico suggest a worrying trend”, The Economist, September 1, 2022.
[iii] No Author, “Mexico’s president is giving the armed forces new powers”, The Economist, April 29, 2021
[iv] Scott Simon, “Mexico’s armed forces are becoming increasingly powerful under its president”, NPR, October 8, 2022.
[v] June Beittel, “Mexico: Organized Crime and Drug Trafficking Organizations”, Congressional Research Service, June 7, 2022.
[vi] Nathaniel Parish Flannery, “Why Is Mexico’s Security Strategy Failing?”, Forbes Magazine, September 27, 2022.
[vii] No Author, “Mexico Deepens Militarization. But Facts Show it is a Failed Strategy”, WOLA, September 2, 2022.
[viii] No Author, “Mexico: Militarization of public security will lead to more human rights violations and perpetuate impunity”, Amnesty International, September 9, 2022.
[ix] No Author, “Drug violence tests Mexico president’s ‘hugs not bullets’ strategy”, France24, September 6, 2022.
[x] Peter Appleby, Chris Dalby, Sean Doherty, Scott Mistler-Ferguson, Henry Shuldiner, “Insight Crime’s 2022 Homicide Round-Up”, Insight Crime, February 8, 2023.
[xi] Elena Reina, “Drug cartels in Mexico: How rampant violence is taking hold of the country”, El Pais, May 11, 2022.
[xii] No Author, “Several violent episodes in Mexico suggest a worrying trend”, The Economist, September 1, 2022.
[xiii] June Beittel, “Mexico: Organized Crime and Drug Trafficking Organizations”, Congressional Research Service, June 7, 2022.
[xiv] June Beittel, “Mexico: Organized Crime and Drug Trafficking Organizations”, Congressional Research Service, June 7, 2022.
[xv] Henry Shuldiner, “Lime Crisis in Mexico as Cartels Target Farmers”, InSight Crime, January 28, 2022.
[xvi] Vanda Felbab-Brown, “Something fishy: Wildlife trafficking from Mexico to China”, Brookings, March 8, 2022.
[xvii] No Author, “Mexico’s factories grow again amid sales improvement, job creation”, Reuters, December 1, 2022.
[xviii] Dave Graham, “Mexican economy shrinks for first time since pandemic rebound”, Reuters, October 29, 2021.
[xix] No Author, “Mexico’s Industrial Hub Grows as Part of Shift Toward Nearshoring”, The Wall Street Journal, February 22, 2023.
[xx] Michelle Cheng, “As China’s wages rise, Mexico beckons manufacturers”, Quartz, November 2, 2022.
[xxi] Anthony Harrup and Juan Montes, “Mexico’s Industrial Hubs Grow as Part of Trade Shift Toward Nearshoring”, The Wall Street Journal, February 1, 2023.
[xxii] No Author, “Carlos Slim predicts strong GDP growth as nearshoring increases”, Mexico News Daily, November 10, 2022.
[xxiii] Jose Sevilla-Macip, “Mexico’s nearshoring potential likely to grow as alignment with US increases”, S&P Global, January 20, 2023.
[xxiv] No Author, “Industrial Hubs in Mexico Expand as a Result of Trade Shift Toward Nearshoring”, Co-Production International, February 3, 2023.
[xxv] Maya Averbuch, “Mexico’s Border Bonanza Shows U.S. Importers Looking Outside China”, Bloomberg, April 5, 2022.
[xxvi] No Author, “Industries”, IVEMSA, No Date.
[xxvii] No Author, “Manufacturing in Mexico”, NAPS, No Date.
[xxviii] Juan Pablo Spinetto, “New Tesla Gigafactory Mark’s Mexico’s Manufacturing Golden Moment”, Bloomberg, March 7, 2023.
[xxix] No Author, “Industrial Hubs in Mexico Expand as a Result of Trade Shift Toward Nearshoring”, Co-Production International, February 3, 2023.
[xxx] No Author, “Real estate developers will invest US$635 million in Tijuana”, Mexico Now, February 16, 2023.
[xxxi] No Author, “Over 10 Mexican states competing for Tesla’s new plant”, BNA Americas, February 23, 2023.
[xxxii] Kosuke Shimizu, Yusuke Hinata, “Chinese factories flock to Mexico, crossing U.S. border to avoid tariffs”, Nikkei Asia, August 17, 2022.
[xxxiii] No Author, “FACE SHEET: Key Deliverables for the 2023 North American Leaders’ Summit”, The White House, January 10, 2023.
[xxxiv] Kirsten Korosec, “Tesla’s next factory will be in Mexico, president confirms”, Tech Crunch, February 28, 2023.
[xxxv] No Author, “2 foreign-owned manufacturing facilities open in northern Mexico”, Mexico News Daily, December 2, 2022.
[xxxvi] No Author, “Phillips Industries Announces Plans to Move Manufacturing to Mexico in 2023”, Transport Topics, February 27, 2023.
[xxxvii] No Author, “ZF Group announces construction of new plant in Queretaro”, Mexico Now, February 23, 2023.
[xxxviii] No Author, “Tesla to build new factory in Mexico”, BBC News, March 1, 2023.
[xxxix] No Author, “Víctimas de Delitos del Fuero Común 2022”, Secretariado Ejecutivo del Sistema Nacional de Seguridad Pública, February 20, 2023.
[xl] No Author, “Víctimas de Delitos del Fuero Común 2018”, Secretariado Ejecutivo del Sistema Nacional de Seguridad Pública, February 20, 2023
[xli] Luis Miguel Gonzalez, “Extorsión, ese depredador que acecha a las empresas”, El Economista, July 6, 2022.
[xlii] Karina Suarez, “Cobro por derecho de piso, robo de identidad y amenazas telefónicas: las extorsiones en México alcanzan cifras récord en 2021”, El Pais, February 2, 2022.
[xliii] Josh Wingrove, Akayla Gardner, “President Biden really wants to boost chip manufacturing and he needs Mexico’s help to do it”, Fortune, January 10, 2023.
[xliv] Lilia Gonzalez, “Inseguridad ha encarecido el costo de hacer negocios en México para las empresas de EU: Larry Rubin”, El Economista, June 27, 2022.
[xlv] Vanda Felbab-Brown, “Something fishy: Wildlife trafficking from Mexico to China”, Brookings, March 8, 2022.
[xlvi] No Author, “Mexico’s president is giving the armed forces new powers”, The Economist, April 29, 2021
[xlvii] Peter Appleby, “3 Takeaways From Return of the Familia Michoacana”, Insight Crime, January 6, 2023.
[xlviii] Anders Hagstrom, “Rival drug cartels open fire on each other with .50 cal weapons just miles from Texas border”, Fox News, October 17, 2022.
[xlix] No Author, Drug gangs unleash violence in northern Mexican cities”, NPR, August 13, 2022.
[l] Darinka Rodriguez, “Delincuentes queman tiendas y vehículos en Jalisco y Guanajuato por el intento de capturar a un líder criminal”, El Pais, August 10, 2022.
