Dean Barber

Money and Mayhem: Why Mexico Remains a Hotspot for FDI

In Uncategorized on August 14, 2011 at 9:29 am

.It’s easy to be wrong. So easy. In life and in business, we make decisions, do things, say things, write things based on assumptions and biases that are simply wrong.

I do it. You do it. All God’s children do it. You see, being wrong is part of our DNA. We can never fully escape it, even when we strive for accuracy and truth.

My blog is essentially opinion. I do spend considerable time on it in terms of research. I try not to make too many flippant remarks but rather provide some in-depth analysis based on facts and my real world experience. Some of you agree, and some of you disagree. And that’s fine.

As a matter of fact, I enjoy reading diverse opinions and contrary views, which I invite. But you may notice that I no longer respond.  That’s because this not talk radio and I’m not here to argue or change minds.

If anything, I’m merely trying to shed light on certain subject matters of importance to business and the economy, while occasionally challenging conventional thinking. I don’t write this blog to promote my consulting business per se, although I will admit that I hope that it demonstrates that I’m a thinking man who might be worthy of turning to for help.  That’s what consultants are supposed to do, right?

Most of my readership comes from LinkedIn and Facebook, people who are generally educated and well informed. But even smart people can be boobs at time. While I cannot attest to my intelligence, I can affirm that I do have my boobish moments.

If there is one thing that bothers me, it is when someone launches an attack based on a bogus premise. Either I didn’t say what they said I said, or they’re essentially repeating a point that I made, but don’t know it because they didn’t read the blog or at least didn’t read it carefully.

So they’re just essentially mouthing off, showing that they, too, can have their boobish moments. We will all be wrong at times.

Where Mayhem Reins Supreme

And so it has been with me on the subject of Mexico. My gut, my first reaction, would be – dangerous place, a narco state where corruption and violence rein supreme. And that opinion would be based on considerable newspaper stories that I have been reading and collecting for some time now about all the mayhem south of our border.

And there is mayhem there, as about half of Mexico’s estimated 2,000 communities have reported drug violence, according to Mexican intelligence officials.

Since December 2006, more than 35,000 people have been killed in drug violence, much of it along the Texas-Mexico border. Thousands of businesses have closed in areas with the worst violence, leading to a steady migration of Mexico’s middle class to places like Dallas, where I live.

More than 400 communities across Mexico now operate without a police force after officers quit in fear – or traded their jobs for cartel employment. Earlier this month, the entire 20-man police force of the town of Ascension resigned after a series of attacks  that killed the police chief and five officers.

One of the most gruesome stories broke in April when authorities discovered what to date has been the largest mass grave found in Mexico. Most of the 177 bodies pulled from deep pits near San Fernando had been bludgeoned to death by sledgehammer. As many of 122 of the victims were dragged off buses at drug cartel roadblocks on the major highway to the United States.

Now after providing you with all this downright chilling information, you would expect me to say to stay the heck away from Mexico. As a site selection consultant, the question presents itself as to whether I could in good conscious advise that an industrial client consider Mexico for future operations.  Things like mass decapitations and bodies hanging from bridges do give one pause.

The Blog I thought I Would Right

Avoiding Mexico was the blog that I was expecting to write until earlier this week when I had telephone conversation with a Mexican developer of industrial parks, who provided me with some valuable insight. Then I started scratching the surface even more.

Yes, I could build a strong case against Mexico. But it would not be the whole story. It would not be the whole truth.

The fact of the matter is, and this might surprise you, that despite the violence in certain parts of the country, Mexico remains a hotspot for foreign direct investment, as wages and materials rise in price in other outsourcing capitals like China. In short, cheap labor and proximity to the huge U.S. market are overriding concerns about security.

One government report last month showed that seven states where most drug-related murders take place are receiving greater percentages of the country’s foreign direct investment than they were before the drug war began in 2006.

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The Financial Times reported that Monterrey, the business capital turned narco playground, raked in $2 billion last year in FDI, compared to $1.4 billion in 2008, before the global recession. And National Public Radio said that the murder capital Ciudad Juarez (more than 3,000 people killed in Juarez last year.) is sending record exports to the United States,  thanks mostly to multinationals and not local businesses.

Indeed, it would appear that many local family-owned businesses in Mexico along the border are closing up shop and moving into safe havens into Texas.

Business leaders say that for the most part, violence from the drug war hasn’t affected the maquiladoras, duty-free factories in Mexico along the U.S. border. Raw materials can enter the maquiladoras from the United States without facing import or export taxes. Finished products then leave the factories and enter the U.S. again without being taxed by either country.

The drug gangs may be leaving the factories alone because the maquiladoras are an important source of income for much of the population. Also, the factories don’t have much cash on hand or products that could be easily resold on the black market.

El Bajio is the Place

Still, it would appear that the largest new investments are moving into central Mexico, a region known as El Bajio, and away from border areas. Mazda, Bombardier, Honda,  Volkswagen, and Eurocopter plants are among the new projects setting up shop in places like Guanajuato, Queretaro, and Puebla.

On Friday, Honda announced that it will build a new $800 million auto assembly plant in Guanajuato, the same region where Mazda Motor Corp plans to build a new assembly plant. Honda said its plant will open in 2014, with the capacity to produce 200,000 vehicles annually. Toyota has confirmed that it is also targeting Guanajuato to build its second plant in the country. Eurocopter, the world’s largest civil helicopter maker, announced in March that will open a $550 million plant in the nearby state of Queretaro.

According to an AlixPartners survey published in April, 63 percent of senior executives chose Mexico as the most attractive locale for re-sourcing manufacturing operations closer to the U.S. market, compared with just 19 percent who would re-source to the United States.

I have to figure that $10-a-day wages at the maquiladoras are the overriding factor in the thinking for many of the surveyed executives.

“While safety and security in Mexico are certainly issues to be taken very seriously, our survey suggests that many companies believe these issues can be effectively dealt with,” said Foster Finley, managing director at AlixPartners and head of its Logistics & Distribution Practice.

“As companies think about near-shoring production that was previously off-shored – to respond to rising labor costs overseas, exchange-rate changes, etc. – Mexico is obviously high on their lists.”

So there you have it. Money trumps security. International companies have their concerns about safety (the developer of industrial parks in Mexico told me that it is typically the first question asked about by international companies), but they are willing to spend money and take measures on security in their risk management plans. Mexico, on the doorstep of the United States, is just too tempting to overlook.

So would I advise a client not to consider Mexico? While I love my country and would hope that manufacturing investment in the U.S. sustains a major comeback with new jobs created, I learned a long time ago not to argue with a client.

You see, this is not talk radio. This is business.

Dean Barber is  the president/CEO of Barber Business Advisors, LLC, a site selection and  economic development consulting firm in Red Oak, Texas — www.barberadvisors.com  You can reach him at dbarber@barberadvisors.com  or at 972-890-3733.

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  1. I did read your blog and I agree that there is significant investment in Mexico. Significant numbers of companies are adding capacity to existing facilities and as you mentioned, there are many in the auto industry adding new investments.

    Two questions I would pose.
    First, how much investment do you think there WOULD BE if we quit shipping guns and money down to Mexico and they quit shipping drugs North?
    Second, when your client decides to start up a new operation, will you go there to assist.

    At this point, I do not plan to go to Mexico, whether on business or pleasure, I just do not feel safe enough for the risk (whether perceived or real).

    • Tim, I trust you as a thoughtful fellow, so thanks for your response. I’m not particularly good at answering questions like this, but let me take a stab at it.
      Answer to question one: A lot.
      Answer to question two: Yes, if it were in central Mexico, and because I’m a desperate man.

  2. Dean, you make some excellent points that really do resonate with me. As a San Diego, CA resident, I am very much aware of the narco-violence happening in Mexico. The violence on the Baja California peninsula isn’t quite as intense as along your stretch of the border, but it is enough that I am hesitant to do the random exploring of the desert and surf spots like I did in my high school days in the 80s. That being said, I have gone into Tijuana a couple of times recently and not encountered anything more dangerous than Mexican drivers. San Diego’s border region is home to many maquiladoras, and (up until recently) there had been regular activity in establishing/expanding operations on both sides of the border. The wages are low enough that it frees up funding for security operations, and as you correctly noted, money trumps security.

    I am a land use planner and real estate developer, but given the state of our economy I am attempting to utilize my background to foster economic development. In terms of economic attractiveness, Mexico certainly has its advantages. The security issue is a complication, but conceptually probably not as burdensome as some of the policy and regulatory hurdles businesses in the US (California in particular) face. Given that the maquiladoras don’t typically deal with retail goods or with components that are easily sold on the black market, they probably are under less direct threat than other parts of Mexico. Frankly, at this stage of the global economy anyone who is actively looking to engage in economic expansion deserves any and all assistance and guidance that can be provided. If Mexico makes economic sense (factoring in the security issue), I would definitely encourage development there.

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