US Businesses Reluctant to Open in Mexico

Dozens of Mattel Inc. employees were on their way to another day of work making Power Wheels in Mexico’s industrial heartland when gunshots erupted around them and a grenade ripped into one of their buses, killing one worker and wounding five.

The battle between drug traffickers and the army near the city of Monterrey last week was the sort of violence that is frightening U.S. companies away from new investments south of the border, where organized criminals are increasingly turning to kidnappings, extortion and cargo thefts despite a government offensive against drug cartels.

“These acts of violence are not happening in a vacuum; they’re happening in the street that could be right out in front of your building. Bullets get shot and they have to stop somewhere,” said Dan Burges, a senior director at Freightwatch Inc., an Austin-based cargo security firm.

As a result, only half of the U.S. firms surveyed recently by the U.S.-Mexico Chamber of Commerce said they would go ahead with new investment plans in Mexico and several companies, including Whirlpool Corp., have recently announced they would put new factories elsewhere citing concerns about safety.

More than 35,000 people have died in drug-related violence since President Felipe Calderon deployed thousands of federal security forces four years ago to fight traffickers. In recent months, nearly 400 bodies have been pulled from mass graves in the northern states of Tamaulipas and Durango. There are near-daily reports of drug-gang executions, kidnappings and extortion.

The army said the Mattel workers were apparently caught in crossfire on May 6 when attackers believed to be working for the Zetas cartel assaulted a military convoy with guns and a grenade launcher from a highway overpass on the outskirts of Monterrey.

“The people of Mattel were shocked and incredibly saddened” by the attack, the company said in a statement released by spokesman Jules Andres.

But battles between government and cartel forces are increasingly common, and companies and their workers are inevitably affected.

One out of 10 companies reported kidnappings and 60 percent said their employees were beaten or threatened in 2010, according to the U.S.-Mexico Chamber of Commerce.

And cargo thefts from trucks and trains are rampant and soaring.

Cargo thefts cost businesses about $700 million last year, a 40 percent increase over the past three years, according to the National Multimodal Transport Alliance.

Entire trailer-loads of newly built cars were stolen this year along major highways in the states of Tamaulipas, Nuevo Leon, Morelos and Sinaloa. Some truck drivers refuse to drive through dangerous areas including Ciudad Juarez, where officials say criminals typically extort about $70 to pass without harm.

Increasingly, cargo thieves are stealing selectively, things like industrial chemicals or specially processed metals, at the request of specific clients, according to Mexico’s Freight and Auto Transport Association.

Businesses in Mexico factor in payments to organized crime syndicates as part of the cost of doing business. “It’s a well-known practice that many Mexican producers and shippers pay a certain percentage so they can get their goods through parts of Mexico without having them ripped off,” said a senior US official in Mexico, speaking on condition of anonymity because of security concerns.

Armed security escorts can now be seen rumbling en masse on Mexico’s northbound toll highways, some privately hired by corporations, others -as in Coahuila state – provided at no charge by the government. At the Panasonic plant in Tijuana, armed escorts stand by for daily deliveries, a 20 minute trip to the U.S. border.

So many steel rolls, steel plates, aluminum and copper have been stolen on the Monclova-Monterrey highway this year that some insurance companies are suspending insurance, according to Freightwatch. Despite the losses, most U.S. companies already operating in Mexico say they have no plans to leave a place with $3 an hour labor, lax environmental standards, tax incentives and a location conveniently close to the U.S. market.

“People think that everything in Mexico is a constant shootout, but that’s not the case,” said Keith Patridge, who promotes businesses on both sides of the border from the McAllen Foreign Trade Zone in the southernmost region of Texas.

Indeed, every day more than $1 billion worth of imports and exports cross the border, fueling hundreds of thousands of U.S. and Mexican jobs. More than 18,000 U.S. companies have operations in Mexico, including most of the Fortune 500.

But those figures could be higher, says Gabriel Casillas, J.P. Morgan’s chief economist for Mexico, who estimates that drug cartel-related crime lost Mexico $4 billion in foreign direct investment in 2010.

Patridge glances out his office window at three large flags of Mexico, Canada and the USA. Beyond them, across the street, the Department of Homeland Security’s new offices hold a weapon-packed armory, bulletproofed vehicles, lockers of seized drugs and holding cells filled with Mexicans who have been caught sneaking across the Rio Grande River. The border, for thousands of federal agents, is a barrier to be constantly protected and defended.

But for Patridge, and most business leaders in the area, the border is a river, fence or wall wending its way through what feels like a single community.

“We’re a city, a metropolitan area, that happens to span the border. The south side of our city happens to have labor that is among the most competitive in the world. The north side of town is the largest market in the world,” he says.

Years ago, Patridge helped between 20 and 30 U.S. firms a year set up manufacturing operations in Mexico. Last year he had five.

In El Paso, Texas, Bob Cooke runs a similar cross border chamber of commerce, promoting businesses in the U.S. and investment across the bridge in Ciudad Juarez, the most violent city in Mexico. But he said only one U.S. company opened up shop in Ciudad Juarez last year.

“We’re clearly not arguing that it’s business as usual, but it’s not as bad as the global perception either,” he said, complaining that because of the image, “We can’t even get companies to look there anymore.”

Security costs U.S. firms in Mexico as much as 2 percent of overall operating costs, according to the U.S.-Mexico Chamber of Commerce. But that is still a bargain compared to 7 percent in the U.S.

A.O.Smith, one of the world’s largest manufacturers of water heaters, has three plants in Mexico including one in Ciudad Juarez, and it has no plans to leave, said Kathy Neal, the company’s director of trade compliance.

“We have taken additional security precautions where warranted, as have most businesses operating in Mexico,” she said. “Many of our employees have been personally impacted by violence and crime in various ways. Mexico is a vibrant country with many talented and hardworking citizens. The current situation is tragic and we hope it will end soon.”

Indeed the more common businesses fleeing Mexico are the Mexican ones.

Thousands of south Texans used to meander over the 85-year-old McAllenHidalgoReynosa International Bridge spanning the Rio Grande to enjoy northern Mexico’s regional specialties: tender cabrito goat steaks, roasted wild bird, bowls of spicy chistora sausage floating in melted cheese.

Last year that changed when the dusty, cracked streets of Reynosa just south of McAllen, Texas, became a war zone for the Gulf and Zeta cartels. La Fogata restaurant owner Erasmo Vargas said customers stopped coming.

“Mexicans who live in Reynosa won’t go out after 6 p.m. and our customers, 85 percent of whom are Americans, won’t cross the border anymore,” said Vargas. “Our restaurant was safe, we’ve had no problems, but the community has become too violent.”

This month he opened a new La Fogata restaurant a few miles north, in McAllen, following about a dozen other popular restaurants into the area. On a recent afternoon, his posh Texas dining room was filled with well dressed Spanish-speaking customers dining on his famous roasted meats.

“It’s actually not all that different here,” said Vargas. “We can buy everything we need on this side of the border. It’s just more expensive.”