Investor Appetite Remains Robust Despite Cartel Mayhem in Mexico

Foreign investors are so dead set on their Mexican bets that not even explosions of cartel violence are enough to scare them into running away from the table, chips in hand.  

Mexico began 2023 under the international spotlight when Culiacan, capital city of the state of Sinaloa, turned into a war zone after Ovidio Guzman, son of drug kingpin Joaquin “El Chapo” Guzman, was captured by Mexican authorities. The Sinaloa cartel wasted no time after “El Chapito” was arrested. It blocked roads, burned vehicles and even shot at airplanes, among other tactics to raise hell and spread terror through the city.

The outburst of cartel violence was a sour reminder of Mexico’s dire security problems. For decades, local and federal authorities have been unable –and, in the eyes of some, unwilling– to clamp down on criminal gangs, which seem to grow in power and boldness with each administration.

Running gun battles between security forces and Sinaloa Cartel gunmen broke out on January 5 in Culiacán, Sinaloa, with the recapture of Ovidio Guzmán López, son of El Chapo

In today's #CriminalThreads we explain the importance of Ovidio and his brothers, known as the Chapitos🧵 pic.twitter.com/0Leo9hSDuB

— InSight Crime (@InSightCrime) January 10, 2023

The latest terrors in Culiacan happened during a crucial time for the Mexican government, which has been coordinating with US and Canadian authorities to consolidate nearshoring initiatives. Those will hopefully translate into stronger flows of FDI for Mexico, who could use some shielding against the threat of an economically tumultuous year.

National and international observers have pointed to violence and rampant crime as a major deterrents for foreign investment. Nevertheless, industry consultants have yet to see significant signs of alarm among foreign investors. 

The fact is that Mexico has for long been an attractive investment destination, especially for the US. The supply chain crunches, talent shortages and the White House’s increasing squabbles with China have made the country even more attractive in the eyes of investors seeking to put their capital in the right place.

“I don’t see that event or even others of cartel violence in Mexico being factors that might scare away international investors or even operators in the country”, David Robillard, SVP for Latin America and the Caribbean at First Advantage-MultiLatin, commented. “Most businesses that have already invested in the country or that are considering investment take a multitude of factors into account.”

The same situation was described by Eduardo Ordoñez, a consultant of political risk and strategic intelligence. 

“I haven’t seen at the moment any company that has decided not to enter the country due to insecurity,” he assured.

Regulation, energy availability and workforce are also taken into consideration when companies evaluate their investment options, explained Robbilard. If the overall package is appealing enough, they see no reason to walk away when a single component fails, even if the failure is massive.

“In Mexico, due to its geographical location, the pros outweigh the cons when it comes to investment,” Robillard explained. 

The numbers tell the tale. Between January and September of 2022, Mexico drew record numbers of FDI, this in spite of having some of the bloodiest couple years in its history. Arrivals of business travelers have also seen a healthy increase, doubling the volume for all of 2021 before 2022 ended. This even when the US government has cautioned against traveling to any part of the country, effectively.

Concerned, But Not Alarmed

Though foreign investors might not be fleeing in panic from Mexico, that doesn’t mean that they’re unfazed by extreme events such as the one seen in Culiacan, aptly known now as “Culiacanazo 2.0”.

“There’s an important impact, indeed. You can’t hide from the media bombardment,” commented Guillermo Mendoza, Director for Risk and Political Analysis at consulting firm Ansley.

Mendoza told NSAM that, after Cuiliacanazo 2.0, he noticed an uptick in concern among some of his clients, especially cargo and agro companies. One agro company in particular, which has nearshoring plans, asked his firm for a “much deeper analysis on the country’s security conditions”.

Benjamin Huerta, president of Jalisco’s tech cluster, commented that the response within the sector was “negative [and] quite sad”. Nevertheless, he added, companies saw Ovidio Guzman’s capture as a positive sign, which “has helped to put things into perspective”. 

Businesses do more than worrying, though. Robillard, Mendoza and Orduñez pointed out that increases in security expenses are a common response from companies that notice an uptick in crime in their areas of operation.

From anti-extortion training programs to private security and more infrastructural safeguards, investors won’t hesitate to fork out resources to operate as safely as possible in territories where they have a financial stake. Even when the costs pile up quickly.

“What happens is that they can end up spending up to 6% of their profits on security measures. But they keep operating and making profits,” Ordoñez pointed out.

Tech Companies

While high levels of crime and insecurity can be of concern to tech service providers, they tend to worry a lot less than companies which rely more directly on the integrity of transport infrastructure and supply chain flows. 

There’s no shortage of instances of tech companies plowing ahead even when faced with chaos in the streets. TCS made a point of it in an interview with NSAM. In a territory like Latin America, where socio-political and security risks abound, but where the potential for growth is strong, businesses with enough resources opt to hang on to their bets.  

A major concern which has proven difficult to solve for tech providers in the regions is cybersecurity.

“Their concern is of a different order. It’s related to the response capacity of local authorities [to cybersecurity attacks], which, in Mexico’s case, is still in diapers,” Ordoñez explained.

Comments made by other security analysts echo Ordoñez’s. Regional authorities have yet to build a regulatory framework that will provide rapid and effective response mechanisms to cybercrime. The issue is exhacerbated by a shortage of cybersecurity experts beyond the tech industry itself. Knowledgeable lawyers, entrepreneurs and policy makers are in short stock.

As one administration follows another, questions remain about the Mexican government’s capabilities to solve its insecurity crisis. For now, the public and private sectors are aware of the strenght of their pitch to foreign investors, cartel violence and all.

The nearshoring buzz will add to that appeal, giving businesses a stronger incentive to adapt to the circumstances, even in extreme cases.