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Thursday, October 06, 2011
Perspectives

Violence Hits Mexico Business

Violence is beginning to affect consumption patterns and the labor market in Mexico.
As President Felipe Calderón’s war against the cartels drags on, violence-induced migration is accelerating, creating a new set of challenges for multinationals, the author points out. (Photo: Policia Federal)
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BY
RYAN S. BRIER

The recent headlines out of
Mexico paint a seemingly dichotomous picture: violence is at an all-time high, yet multinationals continue to pour money into the country, with over $22 billion in foreign direct investment expected this year. The implication is that the knock-on effect to multinationals from the government’s war on the drug cartels has been slight. However, this interpretation of the facts belies the impact that violence-induced migration is beginning to have on many multinationals in the country. During a recent trip to Mexico City, we heard over and over again of the many ways in which violence is changing demographic realities as workers and consumers move away from areas plagued by high levels of cartel activity.

As President Felipe Calderón’s war against the cartels drags on, violence-induced migration is accelerating, creating a new set of challenges for multinationals. States with the highest levels of violence, such as Chihuahua, Sinaloa, and Guerrero, are seeing a net loss of citizens to more peaceful states like Querétaro and Hidalgo. According to Frontier Strategy Group Expert Advisor Leon Kraig, “many companies are starting to feel the impact of white collar flight from Monterrey” finding themselves unable to find entry- and mid- level managers. “Asking employees with families to move there is very difficult, and many based in Monterrey are asking to be transferred. Companies looking at alternative locations are primarily considering Mexico City, or possibly Guadalajara or Querétaro”, says Kraig.

In addition to tightening the labor market, violence is also changing the behavior of consumer markets. It is estimated that 230,000 people have been displaced in Mexico due to cartel violence, a tragedy that is shifting the demographic composition of many cities. Additionally, consumption patterns are changing as many individuals grow reluctant to frequent public venues such as restaurants and markets that could be targeted by cartels. According to a senior executive of a major global alcohol distiller, “Nobody is going out to bars and restaurants at night, so our business is suffering significantly in Monterrey, because consumers don’t compensate by entertaining more at home.”

One of the major drivers behind the decision of many Mexicans to relocate away from violent areas is the government’s lack of any viable near-term solution for dealing with the cartels. Indeed, violence has steadily increased with each new phase of the government’s war on organized crime, with the number of homicides growing by 15% year-on-year during the first half of 2011 alone. Given that only long-term efforts to strengthen judicial and police institutions are likely to have any major impact on the security situation, an adjustment to the government’s current strategy is unlikely over the near term. Many Mexicans therefore feel unable to wait out the increased violence as they have previously.

As the violence in Mexico continues, multinationals should expect to see skilled labor markets in the northern parts of the country tighten, driving up costs for companies seeking to efficiently manage their manufacturing operations. Additionally, B2C companies must keep an eye on how the violence is affecting demographic trends and consumption patterns. It is our belief that the companies that can adapt their strategies to these changing dynamics will see the least impact from continued violence.

Ryan S. Brier is Associate Practice Leader for Latin America at Frontier Strategy Group. 

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