Arranged PR events aside, the
systemic faults and likely failure modes of the New Panama Canal are an example
of the combined impacts of Amigocracy, Kleptocracy, and Bureaucratic Oligarchy.
Our experience is that this trio forms a common pattern. Find one, expect to find the
The purist Amigocracy I have
seen in the Americas is Chile where the elites appear to exhibit but one skill
– that of asking for, or providing access to, a favor. All else is left to
underlings. Deprived of an aristocratic or ‘old boy’ status they would be
…The idea of an “amigocracy” [faces] two problems, one of a
fundamental nature, the other of a factual: it only works if all are friends, and it only works at a
relatively small scale. Since friendship, albeit selective, is not necessarily
exclusive, it is possible that within a small group of people everybody is
everybody’s friend or at least a friend of a friend, but this means that, if we
are talking about the polity, the visions of the common good of the people
involved must be the same or, if different, compatible, which is the case, for
example, if the common good is, precisely, the “running of the res publica in a
good manner” (this explains the proximity with republicanism). It also means
that, in practical terms, an “amigocracy” can only be an effective form of
government if the number of people involved is limited, either because only a
small section of the population participates in the polity or because the
society in question is small.
With respect to the first, “amigocracy” understood as “rule by a group
of friends” or “rule by a friendly network” is, when it is limited in number,
i.e. when the group of friends does not coincide with the dèmos, a form of aristocracy. Any form of aristocracy is
fundamentally anti-democratic, not so much because it is government by an elite
–that in itself can be the outcome of democratic procedure-, but because the
real political question at stake here, the question who decides who is an
aristocrat is answered by the aristoi
themselves: aristocracy is a form of self-appointed government, and, when
continued over time, cooptation by definition, and this is what any dèmos rightly fears when they perceive
friendly relations between those in power. To be sure, there are inevitable
elements of co-optation in representative government, too: the leading groups
within political parties, for example, are also largely self-appointed. But in
that case, the dèmos can at least
have the idea that such elites can be sent home by means of elections.
With respect to the second, it is not accidental that friendship was
regarded as an important political concept within the context of relatively
small and surveyable city-states like Athens or the Roman republic, and, later,
Italian and other city-republics. Supra-national polities such as the European
Union sometimes appear as amigocracies when the leaders of the governments of
the member states get along very well, but while this may be effective at the
level of the polity itself, the problem is immediately perceptible: these
government leaders represent democratic polities, the dèmoi of which are being disempowered by being excluded from this
friendship. Amigocracy and democracy are compatible only if the group of
friends is the dèmos. To the extent
to which friendship is ‘an affair of the few’, it is understandable that ‘some
forms of democratic sentiment are naturally hostile to it.’25
Nothing is harder to beat that an old boys’ network, and since the old boys
started out like college or university friends, it is impossible to become an
old boy. If, in large democratic polities, friendship is looked upon with
hostility by the dèmos, in
authoritarian polities it is looked upon with suspicion by those in power,
because a group of friends can be –and historically has often been- the
beginning of a conspiracy or rebellion, ‘a pocket of potential resistance.’26
This is why both democratic and totalitarian regimes in our age tend to make
friendship [a] private, not a public affair. It this connection then, it is or
becomes political when it crosses the border between the private and the public
There is an obvious tension between the idea of networks-of-friends
and the formal character of the juridico-political order. Old friends’ networks
are essentially anti-democratic and anti-republican, yet probably essential for
a working economic and political society under liberal-democratic conditions.
Moreover, if politics takes place, first and foremost, in the spheres of the
polity –the state, the government- and of political society –the part of civil
society oriented towards the polity-, then it is clear that both offer, like in
fact any societal sphere, opportunities for individuals to develop relations of
friendship… Friendship is a spontaneous process: one is struck positively by
someone else’s opinions, observations, ideas, habits, or moral stance, and one
spontaneously develops sympathetic feelings. Becoming friends with someone [is]
often [a] liberating event, and the place of politics, like the work-place, is
a place in which the relief of finding somebody who relates in the same manner
to other people or events can be very great: at last one finds somebody who
perceives things the same way. At the same time –as in the work-place- business
goes on, too, and a relation of friendship [is] at odds with a professional and
neutral approach. Only if all people
involved would be friends, things would go smoothly and, perhaps, optimally…
Amigocracy is difficult to
separate from Kleptocracy as the temptation to the elites is huge and the risk
is small to nil. Two items illustrate:
Private note to colleague,Wed
that the intersection of kleptocracy and amigocracy is Latin America, I don’t
see corruption doing anything rash against its interests. I regard corruption
as a societal tax in the countries that it permeates. Not specifically holding
the Latinos poorly; all the “Cans” worldwide named after Trashcanistan live
well and wide at the top. One reason that they are happier with the Chinese is
that the PRC will be their protector in international tribunals, they and the
DPRK will provide security assets and thugs to protect, and be their private
banker beyond US reach.
Mexican side of US/EU supply chains are corrupted and/or paying coercion monies
to stay alive and in business. The US/EU OEMs and Tier ones are still unaware
of, or willfully ignoring, the risks in their tiers. Defense, energy and mining
understand the cost and demands of security, but few others outside that fence.
Oligarchy killed and skinned democracy in Mexico
decades ago but is fond of wearing that skinned hide in any public facing event,
domestic and foreign. Peña Nieto is merely the head upon the hide.
This extends past the PRI to include the
Amigocracy network that runs business and guides politicians. Others might call
it a Kleptocracy.
We choose to accept it because we have far more
pressing issues elsewhere. There is no significant US political capital
available to pursue the goals and necessary changes you posit.
While there are severe threats to Mexican
nationals and companies, criminal elements have comparatively restrained their
predations on foreign firms and permitted them to function without significant
(A flag is up on the recent attacks on newly
arrived US shale oil-related suppliers in Tamaulipas that are being tested for
the extortion payments that their Mexican peers pay to remain operational.)
US/EU OEMs are looking for stable, skilled, low
cost (lower cost) labor, especially now that Mexico has been included in the
Backshoring “US local” category along with Canada. If foreign business gets
that, along with its lessened logistics costs, they will tolerate the charade.
Mexico is one of many states that pretend to be
free and democratic and we pretend to agree. All that I read of your work tells
me that you are attuned to ground truth but are hoping for something more.
Iron Law of Oligarchy
The iron law of oligarchy as political
theory was proposed by the German sociologist Robert Michels who claimed that
rule by an elite, or oligarchy, is inevitable as an "iron law" within
any democratic organization as part of the "tactical and technical
necessities" of organization.
At the time Michels
formulated his Law, he was an anarcho-syndicalist. He later gave up his
socialist convictions to become an important ideologue of fascist Benito
Mexican Risk Identification and Remediation By
Gordon Housworth Intellectual
Capital Group LLC
Capital Group LLC (ICG) predicted the disruption and criminalization of Mexico
in late 2006 and made this outlook public in 2007.Seen as alarmist -- even unbelievable -- at
that time the projection was vindicated by 2010 updates that reported
accelerated criminal activity. ICG flagged extortion as Mexican business supply
chain risk in 2010.Mexican entities'
consistent denials of this risk are not supported by facts on the ground.
headlong industrial investment into Mexico by OEMs and large tier one and tier
two suppliers belies real and growing supply disruption.In fact OEMs and upper tier suppliers already
have unidentified risks in their Mexican supply chains.
Unremediated risk rises from
information gaps between
a corporate investment or sourcing decision and on-the-ground local
consequences for affected companies in Mexico. Examples:
Fearing retribution Mexican firms and their
management deny or underreport violence. Maquiladora plants and their employees
have long been victims of robbery, extortion and abduction
yet underreport for fear of criminal retribution and upper tier de-sourcing.
Firms with extensive Mexican operations
quietly curtail movement of visiting and expat personnel.An OEM client asked a tier one electrical
supplier to accompany its staff on a multi-facility benchmarking effort
including Mexican facilities.The
supplier declined noting that they no longer send US staff to Mexico due to
risk of criminal harm.
operations can suffer reduced quality and/or increased costs as long as these under-reported risks remain unresolved. There are solutions that mitigate
these risks but these remedies must be tailored and monitored to be
effective.A one-size-fits-all approach
would be needlessly expensive and cumbersome and would overlook site-specific
risks to plants and personnel.
protective responses that adapt to emerging and changing threats exist and are
best performed early, even at the supplier/site selection stage. Protective
responses performed at a later date will have to accommodate legacy risks in
site selection, hiring, and contractor selection. While the second condition is
the industry norm, in all cases a cost-effective preemptive security response
(Assess value of the facility, process, personnel to be protected which is
needed to estimate an appropriate cost of protection. If the protective cost is
too high or the target is too vulnerable the function may have to be
Assessment (Specific nature and scope of the threat(s) which is essential to
design the minimum effective protective response.)
Assessment (Assess vulnerability of the target(s) to attack.)
Assessment (Assess risk from each threat actor or group, the likelihood of
attack and the likely damage of an attack.)
Management (Continuous management of pertinent threats and appropriate
Mexico's Low Cost
Country (LCC) Position
has long recognized Mexico is a low cost country (LCC) in terms of total chain
cost, as opposed to many Asian piece part costs that are not low cost when
total chain costs are considered. While this view is vindicated by the
inclusion of Mexico in backshoring (repatriating
manufacturing) to the "US local" region (defined as the US, Canada and Mexico),
conditions on the ground in
Mexico have deteriorated to the point that even the industrial heart of Mexico is at
risk. Disruptions in Nuevo Leon (Monterrey) are proof that all of Mexico faces
these risks. Investor optimism
regarding crime as a temporary problem is unsupported by the Mexican trade and popular press.
firms often conceal risk for a variety of reasons such as extortion threats to
Mexican employees and their families, desire to keep the parent firm from
pressing organizational changes at the Mexican firm, or to shield local
Mexico's Rising Cost
only a few years ago, small and medium-sized companies "operating in and around
Monterrey in 2011 were spending 5 percent of cash flow on security." From If Monterrey falls,
Even if manufacturing is showing some
resilience, security costs are growing, while moving goods up to the U.S.
border and to neighboring states is getting riskier.
Small and medium-sized companies operating in
and around Monterrey are spending 5 percent of cash flow on security, a cost
that was negligible just five years ago, while firms selling GPSs, alarms,
locks and cameras in Monterrey have seen a 20 percent jump in annual profits in
three years, according to Monterrey's commerce, retail and tourism chamber.
"If you look at the figures, companies
are still investing, but there's a lot of evidence that the money is being
diverted into security, not into research and development... This is money
that's going into barbed wire fences, not solar panels and that is going to
hurt competitiveness in the long term."
extreme circumstances, such costs can go much higher, rising to 40+% of the
operating budget as happened in high threat periods in Africa and the Americas.
costs are far lower when remediation is commenced early, before criminals have
come to perceive the company as a target.
Blackouts Do Not Imply Improvement
for example, has receded from the headlines without a significant reduction in
crime. On the ground, the Gulf Cartel with the assistance of the Sinaloa Cartel
reasserted control over significant areas of the city and substituted a less
violent but equally aggressive control.
new arrangement coupled with a government mandated reduction of crime related news
and redirection (such as claims that
violence was geographically bounded; that most deaths were linked to organized
crime members - none of which were correct) largely removed Monterrey from the
US mainstream press.
crime does its part by intimidating and
journalists. Dozens were killed during the Calderon
Hinojosa administration's actions against cartel leaders. Intimidation and
horrific crimes against the press have continued under the Pena Nieto
administration, primarily in northern
along the US border. The result is self-censorship among Mexico's regional news
election of Pena Nieto and the return of the PRI accelerated the PR campaign without
significantly altering the national level of violence. The government stopped
announcing arrests, seizures, and operational details of security policy, while
deflecting the public agenda onto topics such as the automotive sector (the
"new Detroit") and export growth.
The Risk Tree
A ranking of least risk to greatest risk
would typically contain this vulnerability hierarchy:
1.Global investors.[Least Risk]
2.Corporate or group level management.
3.In-country expat management.
4.Tier 1, 2, 3... tier N suppliers.
5.Employed local nationals.
6.Local nationals in industries and services outside the
top tier and its suppliers.
7.Citizenry of the region. [Greatest Risk]
The issues that routinely confront Mexican
citizens and most of its industries are either unknown to, have no effect upon,
or do not enter into the risk calculation of the more insulated and least risky
parts of the hierarchy (typically groups 1. And 2.).Friedman's "How Mexico Got Back
in the Game" states an opinion typical of US/EU
corporate decision makers that will elect to produce in Mexico. At their remote risk/high
reward level, Mexico makes perfect sense.
Mexican companies immediately adjacent to US/EU companies can have very
different risks. A company's size, skill and location in the tier supply chain often
make a substantial difference in its threat posture. While large manufacturers
do consider their immediate risks they often do not take into account the
susceptibility of their supply chain to predation and interruption.
Capacity at tier (from top tier or OEM down
to smaller, isolated tier suppliers) is an important factor generally
overlooked in risk analysis because there is no single security or risk rating for
all companies in a state or region.A
major supplier may have the size, revenue, processes and training to better protect
its commodities, personnel, plants and finished goods.
An example would be a large supplier's
ability to assemble a convoy of vehicle transporters escorted by vetted, paid
Mexican federal police officers. Yet a smaller supplier that may be physically located
next door to the larger supplier is vulnerable precisely because it lacks those
resources.Furthermore, hourly workers at
these lower tier suppliers are completely vulnerable to criminal predation at
work, at home and in transit.
While criminal elements can strike both expat
and Mexican nationals of US/EU firms, attacks against expats generally occur at
much lower frequency, are opportunistic or simply a result of accidentally "being
in the wrong place" events.Thefts of
inbound commodities and outbound finished goods are increasing in Mexico. In addition,
both contraband (usually narcotics) and counterfeit goods are being inserted in
shipments bound for the US.
Mexican industry and local suppliers fare
worse as criminal elements attack wide tiers of industry and society.Criminals have long troubled
maquiladora plants with robbery, extortion, abduction and murder of maquiladora
workers and family members. Extortion payments by maquiladoras are rising
despite silence from the victims of these crimes.Lower tier suppliers remain silent for fear that publicity will result in retaliation
by criminal elements and/or upper tiers will resource their business
automotive parts are candidates for criminal extortion intended to choke
vehicle production. Manufacture of wiring harnesses for North American assembly
have been highly localized in Mexico.Criminal
interruption to this wiring harness nexus would impact a significant portion of
US vehicle production.
of these many variations the risks to a particular supplier and that supplier's
appropriate remediation strategies must be analyzed on a case by case basis.
Extortion Is Now a Pervasive National Threat
Extortion [extorsion], also called "illegal protection" [proteccion ilegal], is now rampant in Mexico.
Extortion includes activities that
imply coercion of the victim by an agent distinct
from the state. Successful extortion demands that said agent demonstrate a
reputation for the use of force against those who refuse to pay for their
services. High levels of violence coupled with participation of police confer
impunity on the extortionist.
Extortion is economically
depressive, a production-less crime, i.e.,
criminals have only to tax without having to produce and sell a product. Long
present in Mexico, extortion has surged as part of criminal diversification
beyond narcotics into extortion and kidnapping, costing Mexico one percent of
GDP. We call it an unsustainable
societal tax that continues to grow, in part, because it is so easy to raise
incremental demand without risk or cost to the attacker.
Mexican assets are highly vulnerable
to predation despite denials from the Mexican side of the supply chain that a
problem exists. There is immediate loss, possibly death, to the victim;
retribution to both the victim and his/her family members for any corroboration
or public comment; and forced induction of locals into the criminal apparatus.
Mexican statistics are supremely
underreported as individuals refuse to report extortion as the police are
either directly running the extortion, or managing gangs running the extortion.
Businesses and individuals pay as long as they can, then close or are harmed
when they cannot.
The breathtaking penetration of
Mexico's commercial sector has allowed the narcotics trade to diversify their
revenue streams and reduce their net organizational risk while the economic
loss to Mexico continues to rise.
Supply Chain Vulnerabilities
Mexican supply chains are notable for
insider threats (co-opting/threatening employees), supply chain threats
(takeover of labor providers, sub-suppliers and shippers); and expropriation
(forced sale/turnover of companies and assets).
Primary extraction industries
(mining, petroleum, timber) have been a staple of Mexican criminal interest,
from hardwood timbering on native lands in the south, to illegal
bunkering/skimming of PEMEX petroleum in the east, to silver, gold and iron mining
in western Mexico.
The dining, bar, brothel, and
storefront sector - virtually anything with a fixed address for customers - has
already been brought under monthly extortion or driven out of business (as
testified by the thousands of shuttered businesses).
The focusing of criminal predation
against the Mexican side of the supply chain is good business because:
Targeted employees and families are
local, accessible and defenseless.
The cost of predation is low while the
reward is high.
Local predation does not attract
significant US political and police attention.
Mexican authorities compound the
problem by limiting access when US assets make inquiries against local
Extortion's Rising Disruption
Extortion, theft and contraband
continue to increase in the Mexican supply side. Extortion risk is already
present to maquiladora employees and the maquilas themselves. We have already
seen limited jumps to the US/EU side in areas of transport, power interruption
and contraband insertion into parcel carriers and corporate shipping containers
(especially damaging to C-TPAT suppliers as it may negatively
impact their expedited customs clearance).
The US/EU side of the supply chain
strives at all costs to have no appearance of unreliability to its upper tiers
and investors alike. Being seen as a potentially unreliable supplier is to
invite a resourcing review by an upper tier and/or see the company's share
price suffer. As a result the US/EU side of the supply chain is willing to
under-report the risks.
We see the entry point for extortion
shifting in the automotive supply chain. Initially it was Mexican tier
suppliers but has now expanded to Mexican employees of US/EU firms. Mexican
nationals are desperate not to talk about these threats for a variety of
reasons, e.g., personal threats, termination/reassignment and fear of driving
an upper tier supplier to resource.
As a result, it is difficult for Mexican
firms to execute genuinely rigorous security assessments as too many points are
open to compromise.
US/EU supply chains in Mexico will
face greater risk from compromised firms and individuals on the Mexican supply
chain side. Crossover will occur as one or more criminal groups become more
aggressive vis-a-vis its peers, more acquisitive for revenue, and
simultaneously less fearful of US response. Once the Mexican chain side is
consumed (offers no further share growth), there is only taking market share
from competitors and entering new markets such as the US/EU suppliers.
Unfortunately most commercial firms
have a defensive (target) mentality that prohibits seeing themselves through an
attacker's eyes. Gaining the potential to influence outcomes demands an ability
to see into the attackers' assessment of risk and uncertainty.
Tailored Solutions Under a Governing
companies select risk to accept by design. The unprepared or poorly advised company
blindly accepts risk by default. Such firms will continually put their assets
and personnel at risk.
for such eventualities means that needed security measures are identified and quickly
put in place to ensure that the company is operating with a layered defense
against current and emerging threats.
means that the company will be able to demonstrate its commitment to a genuine
preemptive protection of its employees, dependents and suppliers. Risk
assessment and mitigation must be performed without triggering reprisal by adversaries.
and international press disclosures need to be managed as the company reduces
security risk without raising uncertainty or concern on the part of any
customer or partner.
commences with real world risk assessments and recommendations followed by
implementation and subsequent review of what succeeded and what requires
correction. Successful risk resolution implies business and supply chain continuity,
thus company managers are co-participants in the assessment and implementation
Over Confrontation to Minimize Risk
the high threat
in certain areas, operations must be conducted with the highest level
of control and security in all phases, as both Mexican security forces and
operating criminals can be expected to be on high alert for any
groups in Mexico can deliver more firepower than most companies are willing to
sustain. A corporate response that confronts or challenges such criminal groups
invariably draws unacceptable reprisal against staff, facilities and product.
lower cost, lower risk responses focus on deflecting hostile attention without
confrontation. Criminals make a risk-reward
just as businesses do. Effective security must drive up their level of
uncertainty, thereby moving them onto a more docile or unprepared victim.
must be performed in a highly compressed timetable to address existing and
needed security risk mitigation efforts in the critical areas of key personnel
(including dependents), facility operations and transport of commodities and
must focus on specific and actual security risk management matters that will
need the company's immediate, short term and medium term attention. The initial
assessment should serve the company as an extendable regional template that can
be applied to security risk management across the company's operating
managers and staff must be taught tools and skills so as to understand what has
been working, why it has worked, what should be changed and how urgently this
needs to occur. Skills training is needed to build core competencies in key
areas of operating risk management specific to security and safety risks.
protection program must be designed for the actual threat environment in a
specific location, and must produce a security risk mitigation effort that will
generate assessments, briefings, decision points, implementation plans and
immediate effectiveness reviews.
this immediate scope, company personnel must gain a broader ability to ensure
continuity of operations in any deteriorating security environment and provide
the company a basis for balancing resources while ensuring effective security
Each of these areas, singly and in combination, are best examined
by Design Basis Threat (DBT) process
(originally created to protect nuclear facilities and weapons) to define and
adjust specific responses to specific threats. This Threat Analysis entered the
mainstream in the wake of the Khobar Towers bombing in Saudi Arabia.
As the threats change so must the protective responses change. DBT
is adaptive, can be taught and embedded in normal business operations to be
monitored by company personnel. As security is embedded, there is no added
organizational layer for security.
level steps in this dynamic process are:
Value Assessment (Assess value of the facility, process, personnel to be protected
which is needed to estimate an appropriate cost of protection. If the
protective cost is too high or the target is too vulnerable the function may
have to be relocated.)
Assessment (Specific nature and scope of the threat which is essential to
design the minimum effective protective response.)
Assessment (Degree of vulnerability of the target(s) to attack.)
Assessment (Assessment of risk from any actor or group, the likelihood of
attack and the likely damage of an attack.)
Management (Continuous management of pertinent threats and appropriate
Necessary Risk Remediation Activities in Mexico
In potentially high threat environments such as Mexico, all associated
surveillance must be performed by skilled personnel in a completely
non-alertive manner as many criminal groups will assume that an unknown person
or group is a hostile competitor to be immediately eliminated.
Affected firms will need a partner that can perform a thorough threat
analysis and a calibrated response that includes:
Actionable intelligence at national, regional and situational
Outreach to authorities and relevant entities
Facility protection and upgrade steps
Transportation protection of raw materials and finished goods
Vetting employees and contractors to reduce insider threats
Each step must be executed with precision and with continuous monitoring
of any changes that alter the inbound threats.
#Mexico #SupplyChain #Risk #Extortion #Corruption
Thomas L. Friedman, "How Mexico Got Back in the Game", The New York Times,
February 23, 2013:11.
Supply chain risk mitigation
cannot now be achieved without transparency through Tier 2 overall and Tiers 3
to 5 on both core competency components and essential manufacturing
Critical, core competency components
and essential manufacturing commodities must be identified more deeply as
either criminal interdiction, M&A buyout or natural calamity can put a
critical supplier offline.
The Golden Rule: Know Who makes
What Where How at Tier.
ICG implemented this level of supply chain analysis in 2011 as its
standard for chain transparency and risk mitigation after evaluating eight
(1) 2004-to-date Mexican Drug
Trafficking Organization (DTO) incursions against companies and personnel in
(2) 2004-to-date Global Intellectual
Property (IP) harvesting by Chinese, Russian and other state-related assets.
(3) 2011 Japanese
earthquake/tsunami. Multiple tier impacts.
(4) 2010 Chrysler US east coast
(5) 2011 Thailand OEM/multiple
(6) Impact to a segment by the
entry of an Apple-like firm with similar mastery, manipulation and price
suppression of key industries.
(7) Corruption risks, notably
BRIC and emerging markets.
(8) Lanthanide (rare earth
elements) monopoly and hostile export restriction by China.
Supply chain risk mitigation
cannot now be achieved without transparency through Tier 2 overall and Tiers 3
to 5 on both core competency components and essential manufacturing
commodities. (The ultimate buyer is the Original Equipment Manufacturer (OEM)
or Tier 0.)
Critical, core competency
components and essential manufacturing commodities must be identified more
deeply as either criminal interdiction, M&A buyout or natural calamity can
put a critical supplier offline.
ICG sees consequence convergence between (1) criminal supply chain
predations, (2) natural disaster impacts (e.g., earthquake, tsunami and flood),
(3) repositioning and localization shifts in global supply chains, (4) supply
embargos with political intent and (5) commercial supply chain risks.
Highly critical, core competency
components and essential manufacturing commodities must be identified more
deeply as either Drug Trafficking Organization (DTO) interdiction, M&A
buyout or natural calamity can put a critical supplier offline, perhaps
permanently. The Chinese are examining US and EU supply chains for such
OEM/top tier manufacturers err
in thinking that they have acceptable transparency with Tier 1 identification.
That is a false positive as Tier 1 is often (even very often) as much assembler
as manufacturer. Many strategic components or processes are at the Tier 2 to
Tier 5. Any and all are subject to penetration or interruption.
In terms of compliance response,
ICG has seen entities affect supply
chain realignments to move potential trouble points below the mandated Tier 1
review level, e.g., to Tier 2 and below. Risk remains for the incautious upper
tier or Tier 0.
Today the ultimate buyer, the
OEM (Original Equipment Manufacturer) or Tier 0, knows relatively little of
their supply chains below their Tier 1 suppliers (those suppliers selling
directly to the Tier 0.)
That superficial view is grossly
insufficient. Without greater transparency, Top tier firms cannot protect
themselves and their customers from strategic surprise and disruption.
The ICG supply chain Golden Rule: Know Who makes What Where, How at
In the aftermath of the Asian
tsunami/earthquake, Toyota realized that it was vulnerable not knowing who made
what where at tier. The firm publicly stated that it would gain that chain
transparency. Two sources subsequently confirmed to ICG that Toyota had
achieved its goal. We must suspect that Nissan is not far behind.
Tier 2 is a minimum. Witness the
single Tier 2 bearing manufacturing that halted both Toyota and Nissan engine
production. ‘Where’ is not enough; you need what will likely happen at ‘where’
and what happens along the transit path (which can be as simple as the 4X price
rise of limes in Mexico due to criminal cartel regional road taxes).
The shift to local sourcing over
Low cost country (LCC) sourcing will bring a surge of new OEM/Tier 1 orders to
a supply base that can potentially overwhelm and consume existing suppliers’
current capacity, leaving upper tiers scrambling in a state of strategic
All an industry needs for
disruption is for an entity to decide to become its sector Apple, a DTO
understands the effortless blackmail and extortion at hand for the taking, the
unanticipated impacts of a global sourcing realignment, or the next earth
More than one disruption can occur
simultaneously. There are frequent Ladder Effects where one failure compromising
or weakening an adjacent process or entity.
If Mexican Drug Trafficking
Organizations (DTOs) fully engage the US/EU Tier 0/Tier 1 automotive industry
in Mexico in the manner which they have penetrated the Mexican automotive and mining
industries, there will be a spike in corporate and personal extortion and
kidnapping, as well as penetration and takeover of entire supply chains just a
Mexico is poised to expand its manufacturing footprint under a Backshoring
Backshoring has the potential to
create supply chain capacity chokepoints as appropriate productions are
CONUS (Continental US) and Mexican
suppliers will benefit whereas Canadian suppliers will see negative impacts.
repatriation may begin to reduce one of the most massive involuntary
Intellectual Property (IP) transfers caused by Tier 0/OEM firms driving suppliers
to move design and manufacturing to the PRC.
OEMs and Tier 0 assembly plants
surrender 100% of their IP in a joint venture regardless of the actual partner
The scope of IP theft often
escapes attention as it is outside the normal purchasing mindshare, yet its
impacts are severe in both Direct and Indirect supply chains.
It is an axiom at our shop that "items at the edge of technology" are often unrecognizable or unidentifiable by inspectors unfamiliar with the technology. Two characteristics most contributed to a lack of recognition, robbing the viewer of visual cues as to function:
Miniaturization - a reduction of size and form.
Integration (often a handmaiden of miniaturization) - the combination of functions of multiple items into a single item, itself often miniaturized.
Defenders too often fail to recognize miniaturization and integration as crucial components in risk evaluation. The emergence of Micro-Electro-Mechanical Systems (MEMS) that exhibit both miniaturization and functional integration are already complicating timely identification of risky items. (Also see Berkeley Sensor & Actuator Center and search the domain for "mems".)
We expects fluid conditions as defenders expand their screening focus beyond larger, more recognizable items to include a proliferating class of smaller, cheaper items:
Unexpected, innovative and non-traditional methods will proliferate, finding broad applicability.
Targets will have changing vulnerabilities, technological abilities and associated risks.
Attackers' tactics will evolve in methods and operational activities from internal technological "lift" and as a response to changes by their targets.
Short of nation state confrontations, conventional operations will draw less interest as adversaries will look to escape retaliation and the cost of investments required to underwrite an overt effort.
Unless we design with the asymmetrical adversary in mind, such adversaries will continue to find ways to bypass our defenses and exploit our vulnerabilities. Such asymmetric operations will have common characteristics:
Small-scale high-impact operations.
Operations performed with greater efficiency and effectiveness, both to minimize footprint and discovery and to conserve organizational resources, in order to achieve maximum results.
Rise in operations taken to address ideological causes and this applies equally to fringe Muslim fundamentalists and single-issue groups such as Earth Liberation Front (ELF).
Creating a generalized risk assessment hierarchy
Done for the US Defense Logistics Agency (DLA),a pilot Miniaturization Threat Impact (MTI) system capable of classifying threats from miniaturization and integration was developed.
Risk characteristics spanning easily known toinsufficiently known tootherwise unknown items were captured in a generalized risk assessment tree (from least to greatest risk):
Primary function is identifiable from life experience and general training.
Primary function is identifiable from specific industry/technology experience.
Dual use/unintended use is ascertainable from specialized training and added knowledge-base.
Miniaturization (function no longer evident) becomes difficult to defeat.
Functional integration (embedding multiple functions by virtue of miniaturization) is difficult to defeat.
The relative ease or difficulty of identification scaled appropriately (from easy to most difficult):
IDENTIFICATION WITH EASE
Generalists were good at #1, generally poor at all others.
Specialists were good at #1 and #2, generally poor at all others.
#3 much harder as it requires understanding of function(s) and the ability to transfer those characteristics to new objects, especially for a "good enough" capacity.
Highly skilled and frequently retrained specialists might address #4 on an irregular basis.
Miniaturization and Integration #5 were effectively undefeatable in the short to medium term.
IDENTIFICATION MOST DIFFICULT
Capabilities difficult to automate
The author's ability to identify dual-use capability (can be used for both civil and military use) and "unintended use" capability (can be used for unintended or unimagined applications) proved difficult to transfer to existing staff without extensive retraining. Existing staff were eitherGeneralists good at #1, or modest Specialists good at #1 and #2. Staff were, in effect, being asked to perform a role for which they had no prior experience.
Implications going forward
The glide slope to the desktop that brings increasingly greater capacity in smaller form factors at lower cost to the lay user orasymmetrical attackerwill continue. Capability and/or lethalitywill rise even as components shrink.
Google Glass as an example in transition
"Wearables" (properly named the wearable computing market) has moved beyond early adopter status, but its three segments have varying degrees of acceptance:
Complex accessories - "operate partially independent of any other device, but fully operate when connected with IP-capable devices".
smart accessories - similar to complex accessories but allow users to add third-party applications.
smart wearables (notably Google Glass) - "function with full autonomy, independent of any other device except to access the Internet".
While it is now said to be a question of "when" and not "if" the wearables segment extends into the enterprise, aggressive miniaturization and integration continues to drive social unease - with more women than men in the negative. Google might benefit from flooding trusted segments with subsidized Glass, e.g., physicians, essential technicians, police and military. From Pew:
[P]ublic attitudes towards ubiquitous
wearable or implanted computing devices are the most positive, or more
accurately, the least negative. Although 53% of Americans think it would
be a bad thing if “most people wear implants or other devices that
constantly show them information about the world around them,” just over
one third (37%) think this would be a change for the better
The glide slope to the desktop will continue to accelerate as Google has already received a patent for smart contact lenses with built-in cameras and other sensors such as infrared. The technical, police and military implications are staggering.
Today's Google Glass will by then have ceased to be an issue as people look carefully at your eyes to see if you are reality augmented. I would expect a certain class of detectors to emerge to detect wearers of such contacts. And they will be mounted in contact lens, or embedded in the wearer's biologic eyes.
Though gaining notoriety for
their brutality, Mexico's organized criminal groups are rational actors who
respond to market dynamics. If not forced into a showdown or a loss of face,
their behavior can be influenced.
narrative in the Mexican press is one of
irrationality, of monsters on the loose, but reality is the exact opposite.
Yes, their methods are harsh and designed to compel compliance, but their
intense violence and cruelty is driven by objectives that can, with expert
guidance, be used to positively influence the threat they pose.
These groups are competing to
prosper in a fragmenting and hypercompetitive market that has seen its primary
market (drugs) face competitive pressure and so force entry into new markets
(corporate and personal extortion, kidnapping, robbery and oil theft).
The leadership of these
rational actors are actively trying to reduce both their own risk and their
‘costs of doing business' while maximizing profit. Properly guided, potential
targets (companies and personnel) can take advantage of this ongoing feature of
criminal planning and activity.
Mexican criminals mimic African warlords
Analysis of African "Blood
Diamond" warlord behavior is directly applicable to the 'commercial responses' of
Mexican criminal enterprises, i.e., similar operating drivers, methods,
ferocity and absence of restraint. Both cartels and warlords are attempting to
extract wealth from areas under their control while repelling competitors. In
Africa it is minerals extraction. In Mexico it was transit rights to service
the US drug market but has now diversified into wholesale extortion and other
Individuals are goal-oriented
and adaptive, and will attempt to reach their goals by what they see as the
easiest and least costly or most efficient means. (Rationality does not have to
be a universally agreed-upon mindset.)...
"Blood diamonds" [is]
a special case [of] resource-based means of civil war. To the degree that any
primary extraction process can be sequestered by a powerful minority, the
opportunity for conflict, extortion, and interruption rises. Coupling this
concept with the fact that most wars today occur within nations rather than
between them, the risk analysis of investing firms should be reevaluated...
Hoeffler found that conflicts occur when rebels respond rationally to
market opportunities, much as entrepreneurs and investors do. Civil wars that
are so often blamed on chaotic, irrational ethnic, religious and communal feuds
now have a unifying thread:
"Rebels need to meet
a payroll without actually producing anything, so they need to
prey on an economic activity that won't collapse under the weight of the
Natural resources is a good one. The same characteristics that make a commodity
readily taxable -- that it's rooted to a spot, it can't move -- makes it
readily lootable, too."...
Negotiation short of warfare
between opponents in both regions is extremely difficult as there is no defined 'court system' to adjudicate grievances and no external entity to enforce
compliance to agreements. The result is that the conflict groups take the least
risky path of immediately attempting to eliminate their opponents in a winner-take-all
effort. Again from 2008:
While most interstate wars end
in a negotiated settlement, the majority of intrastate conflicts end with the
extermination, expulsion, or complete surrender of one side. Civil wars with a
communitarian or ethnic dimension are especially difficult to negotiate and the
most likely to result in protracted strife, and closely mapping to the African
experience, often go on for years and sometimes decades. Szayna and Tellis note
that the reason is straightforward:
the differences (genocide, forced transfer of population, partition/secession,
the differences (hegemonic control, arbitration by third party, federalization,
Because the trust that would
allow for management of differences is absent once conflict starts, it is
understandable that elimination of the differences becomes the preferred choice
and that many ethnic and communitarian conflicts end up in prolonged and bloody
strife, sometimes mixed in with attempts at genocide and complete elimination
of the other side:
Criminal actions that appear
irrational to the public have very sound operational and profit-driven motives.
Mexico’s three converging threat trends
Three trends are converging to broaden
exposure of personnel and commercial assets to criminal predation:
1)Territorial incursions and
expulsions among cartels: Increasingly splintered criminal
groups violently attempting territorial incursions and expulsions of their
competitors. Such attempts are typically extremely violent.
2)Revenue expansion beyond
drugs: Established expansion
of cartel focus to personal and corporate extortion, and commercial
penetrations and takeovers.
3)Lessened reticence to
target foreign nationals and firms:
Increasing effectiveness of formerly covert US-Mexican military cooperation is
lessening cartel sensitivity to antagonizing the US.
struggles and splintering of violent groups:
President Calderon's effort to dismember
the largest cartels by focusing upon their leadership ranks has backfired.
Deprived of senior leadership, second tier members have broken away and formed
their own criminal groups.
These increasingly splintered criminal
groups are violently contesting both their former groups and other new groups,
each attempting to penetrate competitors' territory and expel the former
owners. In some cases this has resulted in many entities fighting over smaller
territories with increasing violence. The recent arson attack against the
Casino Royale in Monterrey is being cited as one such extortion effort, but in
early stages it is difficult to distinguish extortion from expulsion.
Revenue expansion beyond drugs:
The post 11 September
tightening of US borders increased cartel costs of moving narcotics to market.
While significant quantities are continue to get through, as evidenced by no
increase in US street prices, greater volumes have to be sent north to maintain
that flow. Cartels soon discovered their own citizens as consumers and
commenced a now vibrant narcotics addiction inside Mexico. A cheaper street
price, yes, but lower costs with much less risk.
The next significant leap was
institutionalized extortion of businesses large and small as well as
individuals. Largely unpublicized until now, this 'tax' upon Mexican commerce
has reached epidemic proportions up and down Mexican supply chains. Thousands
upon thousands of businesses have closed while the better financed have
relocated the businesses as well as their owners to the US. Cartel responses to
this last step have been to scour social media sites to look for relatives
still in Mexico that can be kidnapped for ransom against the fleeing owners.
Criminal enterprises have long
penetrated the petroleum sector and have now moved into penetrating commercial
firms and their suppliers to the point of taking over entire supply chains or
taking revenue from large portions of the chain.
These more recent revenue streams have
exhaustively targeted Mexican nationals but as the Mexican target set declines
due to predation, closure and emigration, criminal groups will turn to foreign
assets and those entities that have immobile fixed investments in country.
Lessened reticence to target US and foreign nationals and firms:
We have frequently commented on US drone
overflights of Mexican soil, including the March 16 observation, "Drones in
various formats have been over Mexico for some time. What is new is the open
admission coupled with deep penetration, multi-sensor efforts. Vetted sharing
is also up," it is clear that such missions are accelerating along a wide
spectrum of communications, photographic, radar and signature intelligence
This increasingly rich intelligence stream
is being put to operational use by vetted, isolated silos of Mexican assets
operating with US intelligence, even launching from US soil. A US military
officer said, "The military is trying to take what it did in Afghanistan and do
the same in Mexico."
The upshot of this cooperation will
inevitably be increasing direct criminal activity against foreign firms,
including US nationals and firms, which criminal groups have heretofore largely
sought to avoid lest they draw US retaliation. Once formerly 'retaliatory'
actions become common, these criminal groups will have less to lose in reacting
to US efforts and confronting foreign commercial assets.
recommendations for their commercial targets:
The security situation in Mexico, and
notably Monterrey, is deteriorating at an accelerating pace as threats worsen
country-wide. Risks long keenly felt by Mexican nationals are becoming evident
to foreign nationals and firms.
Criminal behavior must be influenced early,
during target selection. This cannot be accomplished without a systematic
approach to protecting potential targets. Cost and risk rise dramatically once
your personnel and assets have been selected as targets. The worst days of
Colombia saw security costs reaching as high as fifty percent of operating
Commercial firms do not understand their three
options and if, how and when to employ them:
·Deflect (move hostile intent to
·Defer (delay hostile efforts)
·Defend (interdict an incipient
The successful approach to
defend, defer, or deflect an attacker is almost all proactive process with a
modest amount of strategically placed hardware that has a specific value to the
process - one variant of which is to prevent, deter, prepare, detect, respond,
recover, and mitigate.
Remember that these rational
criminal actors are actively trying to reduce both their own risk and their
‘costs of doing business’ while maximizing profit. As Defend is rarely a
response option against such heavily armed opponents, commercial firms gravitate
to Deflect and Defer.
Properly guided, potential
targets (enterprises and personnel) can take advantage of this ongoing feature
of criminal planning and activity to make their protection more effective and
the targets they present less attractive than other potential targets under
surveillance by these criminal groups.
Surveillance for target identification and
selection, for example, has become more costly to criminal groups as their
competitors ambush one another’s surveillance team or track them back to their
operating bases. Targets seen as predictable and less risky quickly rise up the
Systematic improvements in protective
options need to be undertaken before it is too late to take advantage of
effective and relatively inexpensive options.
To avoid this fate, firms need to move
quickly and deploy a systematic program. A well designed plan could be decisive
in helping the company steer clear of the considerable losses, pain and
reputation damage that await its peers in Mexico.
First version of Zeta Region was originally
released at Frontera List, Wed, 6 Apr 2011 12:53:58 -0400
implications of Grann's A Murder Foretold* and Cirino's Latin America's
Lawless Areas and Failed States are part and parcel of why I pay attention to
the Zetas**, Zetas with gangs, Zetas in the Isthmus region, etc. Was in Guat
decades ago when the military intelligence and commando units were "draining
the sea" by day and the guerrillas were terrorizing those still alive by night.
The only worse mass horrors were Africa. (The Indios to this day are still
fodder for abuse, forced relocation and predation at will.)
unlike their criminal competitors
Zetas are unlike other criminal groups of interest; they think strategically in
a manner that I do not see in other cartels. A group of such vision is not one
to overlook the corrupt, cooperative partner at hand. Guatemala is already a
near-narcostate and almost went that way in a formal sense in a recent
Zetas are also positioned adjacent to, and in, Guatemala with the assets and
skills to exploit a cooperative partnership with Guatemalan establishment
are solidifying an arc from the Texas plazas south thru PEMEX and its illegal
oil bunkering bonanza, through Chiapas and into Alta Verapaz department of
Guatemala and its routes east to the Pan Am Highway and the Caribbean. (The
Zetas are sufficiently adroit to have also commenced an out-of-area op to stake
a position on the west coast (Colima, et al) to have access to inbound Chinese
weapons, meth precursors and other contraband.)
Zetas are forming cooperative partnerships with Latin gangs in the Central
American/Isthmus corridor, going so far as to train the more aggressive members
of what have long been described as hyperviolent gangs.
submit that the Zetas want nothing less than to solidify their control along
the Central American corridor.
control would enable the Zetas to achieve a chokehold on the Isthmus drug
pipeline, currently thought to be moving the largest percentage of cocaine into
Mexico and then onto the US and Canada.
Zetas will be able to control supply, either monopolizing and/or taxing
transport to other buyers.
is not unreasonable to suspect that other cartel groups understand the Zetas'
direction and looking at variations of planning a countermove, planning a shift
in allegiance or wondering how much time that they have given the changes
competing cartels achieve a heretofore absent operational grasp, or external
intervention backstops the remaining functional Guatemalan and Mexican assets,
I see little on the horizon to slow the Zetas' advance.
*Grann does not mention any specific cartel. What Grann's story brought out in
prose more gracious than mine was the corrupt nature of the Guatemalan
oligarchy in and out of government. Their willingness to buy and be bought is
touching in its completeness.
** The use of the term, Zetas, specifically refers to the airmobile commandos
that the US trained, that later went rogue, and became known as the Zetas. The
Zetas shifted from Praetorian Guard to cartel, appearing to lose none
of their operational focus in the bargain. In
contrast, other cartels increasingly draft younger unskilled recruits that
indiscriminately spray rounds. Bowden's sicario, among many others, makes this
point of rising unskilled assets.The Zeta organization of which I
speak is really remarkable, quite unlike the other cartels in so many ways. We subsequently trained the equivalent Kabiles in Guatemala that the Zetas are
now recruiting. We put structure and vision, tactics and strategy, into these
people. We made them; the blowback is severe.
Latin America's Lawless Areas and Failed States An Analysis of the "New Threats" Julio A. Cirino, Silvana L. Elizondo, Goeffrey Wawro CHAPTER ONE of: Latin American Security Challenges A Collaborative Inquiry from North and South Paul D. Taylor, Editor Senior Strategic Researcher, U.S. Naval War College Newport Paper Twenty-one 2004 NAVAL WAR COLLEGE Newport, Rhode Island ISSN 1544-6824
Mexican Intelligence at a Crossroad Leroy, Christophe SAIS Review - Volume 24, Number 1, Winter-Spring 2004, pp. 107-130 School of Advanced International Studies The Johns Hopkins University Press
Cartel activity moving beyond narcotics into increasing penetration of commercial supply chains for multiple purposes.
No internal Mexican solution is able to deal with this incremental, rising threat.
Business can still be transacted in concert with enhanced guidelines beyond piece part considerations.
OPENING REMARKS to 2011 update to ICG’s 2007 Mexican risk projection:
Nature of the threat
Having worked in the Americas, Middle East, Africa and Asia, we have seen conditions far worse than Mexico. Business is, and can be, done in Mexico. Problems facing businesses are not uniformly distributed (at either supplier tier or location) as some areas are clear or face diminished threat levels.
Our concern is that there are no factors in the Mexican economy effectively promoting correction or improvement of the trends we publicly identified in 2007.
Corruption is vastly wider in scope than ever experienced in Colombia. The amounts of money at play boggle the mind.
There are no blacks and whites in Mexico; there is no binary contest of good government against bad criminals. Instead, there are multiple groups of corrupt local, municipal, state, federal and judicial assets working in concert with various criminal cartels.
Different groups of the same police unit can be working for or with different cartels. There are honest members in various agencies, but their numbers are under pressure due to a combination of payoffs or death for failure to comply – what is called Plata o plomo, Silver or lead.
Cartel predation will continue to increase as it is a pure form of unrestrained, unregulated capitalism attempting to move to monopoly, likely a narcostate. Just as Adam Smith felt that capitalism must be regulated not because it is inefficient but because it is too efficient, cartel criminal actions should be regulated by the police and justice systems.
Those protective systems are unfortunately not up to the task, at least in Mexico. In the face of that rising void, our only forecast is a step series of increasing US interventions. We submit that training, joint cooperation, intelligence gathering, covert operations and interdiction are early steps along that path.
Hear, see, speak no evil
No party wants to publicly recognize Mexico’s failing state stature:
Commercial firms fear loss of business, investment and supply chain interruption.
Advisors fear loss of consulting revenue and client backlash.
Mexican authorities fear crisis of confidence.
US cannot tolerate a failed state on its border.
Criminal elements fear overt US intervention.
Consequently, we expect intervention to be held below the horizon as long as possible. Of the above actors, we suspect that it will be a cartel action that will draw matters into the open, galvanizing US public opinion in the process.
Unintended consequences of government offensive against the cartels
Cartels have been forced to diversify by attacks on their drug production and transport, both by the government and rival cartels. Those diversified areas now rival drug profits. If drugs were to disappear from the market, the cartels remain positioned to prosper and succeed.
Those diversified areas will increasingly bring criminal assets into, and adjacent to, commercial activities. We forecast expansion in:
Recurring ‘taxation’ (cuota) upon businesses in order for them to operate.
Criminal infiltration of tier suppliers.
Rising insertion of contraband packages into supplier shipments and/or contract shippers.
Criminal takeover/substitution of tier suppliers.
Rising threats to personnel. Mexico has gained the title, Kidnapping Capital, for example.
Impact on business
On an individual piece part basis, Mexico has bettered the ‘China Price’ -- the global lowest cost production price -- but we submit it has done so at structural costs to Mexico and its nationals that will become increasingly evident as time progresses.
Interestingly, we have found business to be immune to the future impact of these structural costs, preferring to focus upon immediate piece part savings and supply chain cost reductions. (If you work with purchasing officers, and know how most are compensated, you understand their near-term focus.)
The usual business process is to monetize risk such that short of relocation, production in troublesome areas, and transit to and from troublesome areas, is covered by allocating a premium. We submit that this process will not suffice once cartels increase their commercial penetration.
Companies and their staffs, both expat and national, have to better understand their risks by:
Supply chains and their supply lines
Size of firm and/or Supply tier (An automotive OEM/manufacturer has very different risks than a Tier 3 in all respects)
Expat or Local nationals
Collateral effect (Who are you adjacent to? Who are you simply in the way of?)
Growth directions of criminal groups (constantly in flux)
Recapping the 2007 Forecast, slides 2-9, 12-16
Slides with a bracketed date, e.g., , indicating the year published, recap the original forecast.
The 2007 forecast was based upon early symptoms of Calderón’s 2006 assault on the cartels. By late 2006, a cartel counterattack progression could be projected. Those Cartel counterattacks  were seen as dire, even inflammatory, in 2007. The intervening four years have shown the forecast remains valid.
By 2011, the trends begin to accelerate in the absence of any realistic governors other than cartel retrenchment or an external intervention.
Then, and still today, much industrial calculation on supplier relocation/expansion is based upon the piece part landed cost, ignoring key Mexican factors.
Failing/failed state characteristics, slides 17-18
Mexico shares characteristics of both failing and failed states. The state still functions but substantial areas have passed from sovereign to criminal control, and criminal assets have forcefully inserted themselves into the legitimate commerce that remains, leaving citizens, employees and visitors at rising risk.
The slipping veil of denial, slides 19-22
Each for their own purposes, all parties - Mexican and US governments, commercial firms and their business advisories, and the criminal elements themselves - support denial of the country's substantive problems.
As noted in the introduction, all parties are attempting to maintain the status quo below the horizon as long as possible. Some observers have remarked that such denial on the commercial side is tantamount to fiduciary breech.
Of the many actors involved, we suspect that it will be a cartel action that will draw matters into the open, galvanizing US public opinion in the process.
While many cite snippets of Chargé d’Affairs John Feeley’s primmer on Mexico for a forthcoming Defense Bilateral Working Group, Feeley's text is so important that it should be read in its entirety:
Commenting early on of the banality of certain UN documents, I was advised that its materials destined for public release had to suffer the scrutiny of many diplomatic eyes intent on defending parochial interests. The result was often text that offended no one and omitted granular, actionable recommendations.
Commercial entities are often in similar orbit, desiring furtherance of business, avoiding offense to governments and key players, and damping down public risk issues that could interrupt business continuity.
Larger top tier OEMs such as GM, Volkswagen, Chrysler and Honda have much greater resources and more protected supply transport not available to their supply tier companies.
We also maintain that investors and more senior business echelons do not share the same risk horizon with local nationals and even expat employees. For the former it is a financial risk/reward calculation. For the latter it is more pressing.
Two respected business advisory firms, Boston Consulting Group (BCG), here and here, and AlixPartners, here and here, document advantaged piece part savings for Mexican manufacturing and assembly without touching on other risk issues.
A more recent OECD report, Latin American Economic Outlook 2011, also painted a comforting view in print of all Latin America, Mexico included, but public comments by its contributors were more cautious. First the unintentional understatement by OECD economist, Jeff Dayton-Johnson:
Then Banco Santander’s chief economist and director of strategy and analysis for Latin America, Jose Juan Ruiz indirectly points out the foreign investor’s immediate lack of shared risk with regards to Mexican investments:
“In the short-term, in the past 12 months, I have not seen any drop in tolerance for investing in Latin America because of the perception of narco risk, not even in Mexico,” ...
“I do not have any evidence today that somebody decided not to make an investment in Mexico because of the war on drugs,”...
“It is clear that (drug trafficking) imposes political costs” and “reduces the attractiveness of investment” in Mexico...
Closing with a unresolved Catch-22, Dayton-Johnson and Ruiz "agreed that the Mexican state must deal with the threats from drug traffickers" while flagging its lack of resources to do so:
"The capacity of the state" must be brought to bear on the problem in Mexico, Dayton-Johnson told Efe, noting that in other countries dealing with similar situations, such as Colombia, "they have apparently had some success in recent years."
It is our opinion that such advisories along with the appropriate risk remediation guidelines should enshrined in the printed texts.
The dissenters, slide 24-26
Our consistent finding is that those closest to the threat, either as victim or police agent, see matters rather differently.
Among themselves, Mexicans speak candidly about rising crime, increasing criminal encroachment and inability of local, state and federal assets to interdict. One often has to get verbals as the Mexican press has been attacked to the point that it must self censor in order to stay alive. This is astounding to most US and EU nationals:
"You can openly criticize the president or the government ... In this administration, there has never been gag laws or censorship," Calderon said at the annual meeting of the Inter American Press Association, a Miami-based organization that groups newspapers across the Western Hemisphere.
"Now the great threat to freedom of expression in our country, and other parts of the world, without a doubt, is organized crime," Calderon added.
Many small newspapers in the most violent regions of Mexico, especially the northern areas bordering the United States, acknowledge that they no longer cover drug-gang violence because their reporters have been threatened or killed.
Even stories published without a byline can be dangerous if a co-worker tips off criminals about the identity of the reporter...
The war between the cartels is being waged not just with assault rifles but with censorship of the press, preventing media outlets from reporting adverse stories or victories over rivals.
The threats sometimes come via cops on the cartels’ payrolls, journalists said, adding that crooked police intervene to get reporters to scrap a story.
"We only publish about 10 percent of the information, a lot of it ends up in the files,”... it was dangerous to let a drug capo know what you know when he rides around the city in a convoy with 40 armed men. “We wait until they kill him or arrest him,"...
Writing small bits is better, however, than the alternative, which is to "be a hero" and get the deadly visit from the hitmen...
Voluntarily working with the drug traffickers, like some reporters do, often because they have no choice, can become a sword pointed at your neck, the journalist said.
"If the narco seeks you out and you publish according to his instructions, you can appear to the public to be a mouthpiece for the cartel, and then the other gang will go looking for you,"...
Cartels are nothing if not thorough; beyond informally and formally extorting news staffs on the article selection and reporting end, they station pre-informed ‘bystanders’ to brief arriving news staffers, and report back any comments or questions posed by reporters.
Even the nominally legitimate Mexican business sector sees itself being destabilized. Deloitte México has issued a quarterly Business Barometer (Barometro de empresas) since April 2007, covering executive expectations, trends and current event impacts. (All reports are in Spanish, with some in English.)
As late as January 2010, security was seen as a secondary, even moderate, threat:
October 2009, Business Barometer 11, based upon “Current situation compared with one previous year”. “political discord” was greatest among the “Threats to the Mexican economy within the incoming months,” followed by the “US economic downturn.”
January 2010, Business Barometer 12, ranked political discord (desacuerdos politicos) and US economic slowdown (desaceleración norteamericana) highest among the threats.
The change comes by April 2010 and further spikes in July 2010:
April 2010, Barometro de empresas 13, shows failing security emerging as a greater threat than a lapsed US economy.
July 2010, Business Barometer 14, shows a spiking increase in industry fears of failing security over the previous quarter.
See charts on pages 4, 5 and 11 of Business Barometer 14:
CURRENT CHART, page 4: All indicators are up except for “seguridad” which sinks.
FUTURE CHART, page 5: All indicators remain up except for “seguridad” which stays in the cellar.
FACTORS THREATENING THE ECONOMY CHART, page 11: Inseguridad (insecurity) goes off the chart. Conversely, issues such as corruption and social conflicts (and there are many, especially in Southern Mexico) are near zero, i.e., they are baked in the Mexican operating outlook.
The most recent issue, Barómetro de Empresas 16, January 2011, is as of this writing only available in Spanish. The key trend charts noted above, however, remain consistent.
NAFTA is a signal success from the standpoint of US/EU and foreign manufacturing companies. Lower manufacturing costs, lower transport costs, shorter supply lines, and lessened port and customs issues have seen Mexico better the China Price that was the investment go, no-go decision point for over a decade.
The China price is now in the process of increasing rather than decreasing, noticeably so for lower technical content assembly and manufacturing (due in part to the Chinese government pressure to substitute more highly engineering products in their place). The end of denim supplies at virtually any price is one of many canaries in the Chinese coal mine.
All this would normally be a boon to states such as Mexico. Unfortunately the unintended consequences of NAFTA are causing major structural fractures in Mexico.
Most businesses we speak to are surprised that the benefits they derive from NAFTA are not broadly shared by their Mexican workforce. Even within the Mexican labor pool, impact and benefit are not uniform. Engineering staffs, especially those in the OEMs and Tier 1 suppliers, fare much better than low end assembly workers.
Migration to the maquiladoras became driven less by betterment and more by desperation of decreasing opportunity. As the cost of living has nearly equalized along the border, low wage maquila workers cannot survive and so often leave. (Prices are often lower on the US side.) Here again the impacts are disproportionate with more men leaving and women remaining as head of the nuclear family. Those who remain become targets for predation or slip into criminal orbit.
We believe that business, their employees and investors do not see these effects, as with the attacks on Eagle Ottawa labor buses, investors and those employees insulated from local conditions do not share a common risk-reward envelope with local employees and their dependents at risk.
Until that gap closes, or its direct and indirect costs pierce the financial window of investors and insular employees, the focus will remain on the piece part cost. Operational cadres cannot be blamed as they have specific metrics to achieve in their procurement and production objectives, even if the metrics being measured (currency, for example) have other negative effects.
Given the plight of low end maquila assembly workers, we also marvel that no one has taken up their cause, at a minimum, as a reputational risk. The total number of injuries and fatalities from Apple/Foxconn, Nike and Adidas combined is a rounding error compared to the losses suffered by Mexican maquila workers yet there has been virtually no outcry from major US constituencies. That may change as we have seen a US group, the Pittsburgh Human Rights Network, take up the plight of employees of a Ford Motor Company supplier in China, Yuwei Plastics and Hardware.
Overlapping commercial and criminal footprints, slides 29-32
Violence is coterminous to Mexican and foreign industrial centers. The branching out of cartels into non-narcotic pursuits has brought criminals around and into the plant and corporate environments.
The cartel regional coverage in slide 31 is recent but nominal as cartels increasingly compete, fracture and recombine. Many outside observers are unaware that cartel footprints mimic the impacts of geography and culture. Slide 32 shows the geography of a central valley/plateau surrounded by two mountain ranges bordered by two coasts.
Extortion and insider threats, slides 33-35
The so-called Juarez Valley where the converted school buses were attacked has been racked by fighting between powerful drug cartels. But the more than 330 border factories, or maquiladoras, that dominate Ciudad Juarez and surroundings have [heretofore] been left out of the worst of the recent drug violence... factory buses have been burned by attackers in extortion attempts... escalating violence has forced factories and other businesses to boost security in Ciudad Juarez, where foreign manufacturers are drawn by a large workforce, mostly female, willing to work for low wages...
The automotive supplier, Eagle Ottawa, was understandably attempting to calm the situation by deflecting any threat to the maquiladora itself. The firm had no grounds for its pronouncement and, as colleagues have noted, the bilingual El Paso Times reporter did not question the firm's statement or present any contrary evidence of which there is ample supply. As chance would have it, on the same day Eagle Ottawa was in denial, the lead story in Diario (the valiant must-read paper across the Rio Grande) was devoted to the prevalence of extortion aimed at maquiladora suppliers in Juarez. Again, if you are deprived of both local ears on the ground and a nuanced reading of local Spanish language press, you will come away with a view wide of ground truth.
"This attack on the employees was a high-impact event that seeks to destabilize governments... They are fighting over their own interests, and only the bad guys know what it is about."
The buses bore the name of the company where the employees worked, Eagle Ottawa, an automobile upholstery manufacturer based in Auburn Hills, Mich., that has two plants in Ciudad Juárez...
Determining patterns in the drug war is difficult. At least seven major trafficking organizations, and their various splinter groups as they break apart and re-form, are vying for territory and supremacy.
"As the organized crime groups are pressured by the government and in a sense the military strategy, as people are arrested and drugs taken away, you are going to see internal strife and intergroup competition over the market..."
The Eagle Ottawa attack brought a wider audience to a problem that had been ongoing. Accounts from family for months earlier noted buses being attacked, people robbed or kidnapped. In addition, the ruteras in Juarez have been increasingly attacked for months. Crime is so great that residents of Ciudad Juarez have taken the unusual step of closing - with or without city permission - more than 2,000 streets in an attempt to keep out criminals.
Mexican statistics on drug war fatalities are not credible. Until late 2010, despite repeated evidence to the contrary, the Mexican government consistently repeated the view that all those killed - now 30,000 - were involved in the drug supply chain in some manner. Only recently, including the high profile innocents of the Eagle Ottawa shootings, did the government relent by admitting that homicides in the general population were under represented. Unfortunately, the opinion that all those killed are guilty also appears among US law enforcement.
Mexican criminal enterprises are increasingly inserting themselves into legitimate supply chains, or supplanting legitimate supply chains by forcing them from the market. Until those effects become manifest, it will take extraordinary political will to overcome the commercial focus on the piece part cost:
"The infiltration is often a real concern in a city like Matamoros [just] south of Brownsville (Texas), you have two unions and if you are operating a factory and you have people that you need to hire for your factory floor, you've got to work with one of the two unions... Both unions are involved with organized crime so there is a concern there that if you don't take the time to do at least a little bit of due diligence on the people that you're hiring, then you could be hiring a criminal to come do work in your factory and who knows what happens after that."
We see supply chain issues, cloaked but real otherwise no mention would have been made, in OEM discussions of insuring that materials arrive in timely fashion.
Criminal groups have begun to replace legitimate supply chains, and/or institute parallel low(er) cost supply chains, with the effect of chasing legitimate firms from the market. This is well underway in the mining/primary extraction sector.
Criminal groups are creating exclusion zones all across Mexico for production and warehousing, assumption of legitimate enterprises, access (ingress/egress routes) and security (creating their own free fire zones against opponents).
The situation raises questions about the government’s ability to defend the company, which was created after the 1938 expropriation of the petroleum industry and is now an important symbol of sovereignty and self-respect for Mexicans...
“Once Pemex … comes under regular attack from the cartels, rather than just random, disorganized thugs, then you have far more serious national security problems – much worse in the government's eyes than a bunch of homicides in the slums of Ciudad Juarez,” Mr. Beith said. “The government's management of Pemex has long been questionable, but the fact that it can't secure its pipelines from organized crime … shows just how insecure parts of the country are and could become.”
Pemex and the Petroleum Workers' Union (Sindicato de los Trabajadores Petroleros de la República Mexicana) have long been deeply permeated by corruption and have now been penetrated by criminal activity. Its problems are long standing and are now institutionalized. The citation list has numerous Pemex and organized crime items.
We believe that with state and national political and police assets compromised, even complicit, that one of the few means of recovery will come from other large established Mexican firms that can independently muster sufficient political cooperation while providing both creditable resistance and physical protection to their employees.
One such firm is Cemex (Cementos Mexicanos SAB) and its owner, Lorenzo Zambrano. It will be crucial to watch Cemex's efforts, the "change back" reactions from criminal elements; counter-responses from Cemex; and what, if any and when, allies that Cemex can draw to its side.
All firms, certainly high value targets such as Cemex, must continuously address three vulnerability areas:
Pricing model compromise (tier chain event, supplier outsourcing, subcontracting, etc.).
Each area, singly and in combination, should be examined by the criteria of Design Basis Threat (DBT):
Asset Value Assessment.
All-source vs. piece part risk, slides 38-39
Operational, reputational, geopolitical, financial and technology risks are best managed as a portfolio. We reduce the chance of adversarial surprise by using an all-source approach to risk management rather than a partial piece part approach.
Design Basis Threat (DBT) does not add new task layers for employees. On the contrary, DBT adjusts current business processes to make them more robust to penetration.
Our grounding in operational supply chain and purchasing allows us, as needed, to address chain efficiencies while insuring that the protective envelope in not pierced. Slides 40-43 are examples of our granular supply chain analytics.
Conclusion, slides 44-45
Those who rely on US/EU high street press sources unsupported by local knowledge will not have a granular understanding of what we call ground truth. Our experience is that investment decisions are too often made in the absence of that information.
Commercial calculations are necessary but not sufficient for corporate risk management. Operated in a vacuum, commercial-only risk decisions have and will lead to vulnerabilities.
Takeaway: In such instances, companies accept risk by default rather than by design.
Design Basis Threat (DBT) supplies that consistent risk amelioration approach for pricing model compromise, citadel attack and HR.
Journalists contact us from time to time, too often to make a story on the back of our disclosing proprietary research to them. In fewer but welcome cases, they want to get terms straight to educate their readers.
Do you have any insight into how best to define a car bomb versus a bomb in a car? I ask [as] it’s my impression that we haven’t really seen a proper car bomb in Mexico yet – not on the scale of the ones I saw in Iraq or other places. But what’s the right definition? When do we know the cartels are looking to get such a device?
Where do you think they got it? is that common on the international criminal market, or is that just what might be locally available [from] the mining industry in Chihuahua?
Each of the recent spate of vehicle explosions is a Vehicle Borne Improvised Explosive Devices (VBIED) and the groups employing them are coming up the experience curve.
What makes a VBIED
First, slowly deconstruct VBIED, i.e., a vehicle borne IED.
In effect, a VBIED is both a shrapnel pack and a delivery mechanism for an IED described as:
They are unique in nature because the IED builder has had to improvise with the materials at hand. Designed to defeat a specific target or type of target, they generally become more difficult to detect and protect against as they become more sophisticated.
Almost anything that blows up will do, from grenades to plastic explosives to leftover mines. The most everyday of electronics -- a cell phone, a garage door opener, a child's remote-control toy -- can be recast as a trigger. And the hiding places for these handmade bombs are everywhere: in the ground, aboard a truck, even inside an animal carcass
Though they can vary widely in shape and form...
Once the perps understand fuzing and vehicle transport, they will quickly scale the explosive content.
Second, the size and brisance of the Mexican explosions in relationship to Iraq and Afghanistan
The size and brisance of the current Mexican VBIEDs are not on the scale of devices being encountered in the Mideast and SW Asia. From a private note:
Cheap escalation, expect both IEDs (Improvised Explosive Devices) and VBIEDs (Vehicle Borne Improvised Explosive Devices) to increase in volume and lethality as actors build larger charges.
IEDs and VBIEDs in Iraq, Afghanistan and other high tempo war zones are constructed from UXO (unexploded ordnance) abandoned or captured on the battlefield or looted from former state magazines.
By contrast, Mexican devices are currently utilizing blasting explosives [Tovex] that have far less brisance than military explosives. (In lay terms this has to do with the velocity of the radiating shock waves; blasting explosives are designed to fracture rock rather than pulverize, so explosive mixtures are tuned accordingly.)
Mexico's powerful drug cartels have long been experimenting with explosives. In the northern state of Durango in 2009, more than a dozen masked gunmen stole 900 cartridges of Tovex water gel explosives from a warehouse run by the U.S.-based Austin Powder Company. Mexican authorities recovered the stolen material, but the theft underscored how easy it can be to get explosive material in the country, where armed men also have attacked transport vehicles carrying such substances.
The ATF has helped investigate several events involving improvised explosive devices around Mexico, including a roadside bomb in March at a gas station in the northern state of Nuevo Leon. That bomb, which didn't injure anyone, consisted of two large cylinders filled with nails and possibly black powder, another substance that is readily available on the black market.
The ground situation will rapidly escalate when one or more of the criminal groups begin to add military explosives (Semtex or C4) to their global shopping lists. As I noted in The reality of Mexican drug cartel weapons sourcing:
[The] cartels could easily rise above the squad subordinated weapons (assault weapons and light machine guns) currently in use to include antitank missiles and larger ordnance. Beyond the demands of ego and attempts to demonstrate superior area control, there are not enough viable targets to justify the added expense. Be certain that when the need or desire is there, so will be the weapons...
Improvised Explosive Devices (IEDs), Unexploded IEDs, Hand Grenades, Indirect Fire (mortars, rockets, and unidentified indirect fire), Rocket-Propelled Grenades (RPGs), Small Arms Fire (SAF), Vehicle-Borne Improvised Explosive Devices (VBIEDs), and Complex Attacks. The most common attacks along Route Irish are IEDs, VBIEDs, and SAF.
IEDs [continue] to evolve. Current techniques are:
Explosives positioned alongside guard rails. The large number of guard rails on the road make these devices difficult to detect and relatively easy to emplace by staging equipment in vehicles or near overpasses, and, in a matter of minutes, having the IED armed and in the desired location.
Explosives wrapped in a brown paper bag or a plastic trash bag. This is a particularly easy method of concealment, easy to emplace, and has been used effectively against Coalition Forces and civilians along Route Irish.
Explosives set on a timer. This technique is new to the Route Irish area, but is being seen more frequently.
Use of the median. The 50 meter wide median of Route Irish provides a large area for emplacing IEDs. These can be dug in, hidden, and/or placed in an animal carcass or other deceptive container.
Surface laid explosives. The enemy will drop a bag containing the explosive onto the highway and exit the area on an off-ramp with the detonation occurring seconds or minutes later depending on the desired time for the explosion.
Explosives on opposite sides of the median. Devices have been found along both sides of the median that were apparently designed to work in tandem, to counter Coalition Force tactics to avoid the right side of the highway while traveling Route Irish.
Explosives hidden under the asphalt. Insurgents pretend to do work on the pavement, plant the explosives, and repair the surface. These are usually remote-detonated devices.
Vehicle-Borne Improvised Explosive Devices (VBIEDs) contain two types of car bombs, e.g., when the vehicle is moving (suicide) and when the vehicle is parked and stationary. Both can be either command or remote-detonated:
Multiple suicide vehicles. The first vehicle either creates an opening for a second, more powerful vehicle, or acts as bait to draw other personnel, such as medics and other first responders, into the kill zone of the first vehicle. As people respond, the second VBIED engages the responders.
Suicide VBIEDs are typically used against convoys, Coalition Force patrols, or Coalition checkpoints where they can achieve maximum damage. Such vehicles will rapidly approach the convoy from the rear and attempt to get in between convoy vehicles before detonating.
Stationary VBIEDs are typically parked along main supply routes, like Route Irish, and often have been found near known checkpoints. These are usually remotely operated and may be employed in conjunction with a suicide VBIED.
Mexico demands what is called situational awareness of its citizens and visitors. While the violence in the border towns is reaching epidemic proportions, Monterrey and Acapulco (aka Narcopulco) now increasingly have what amounts to squad level firefights in the central business/tourist district.
Criminal co-optition will accelerate as groups jocky for product, plaza control, security and supremacy.
These negative events are paralleling Mexico’s betterment of the China Price, and may well deprive Mexico of added legitimate revenue and infrastructure build-out.
By early 2008 the Gulf Cartel had “begun acquiring more military-grade weapons, including FN Herstal P90 submachine guns, FN Herstal 5.7 x 28mm pistols, M72 LAW (light anti-tank weapon) rocket launchers, AT4 anti-tank rockets, RPG-7 rocket-propelled grenade launchers, MGL 37mm grenade launchers and fragmentation grenades.”
The use of Vehicle Borne Improvised Explosive Devices (VBIEDs) has started and I would expect that to accelerate with even more paralysis of Mexican judicial and police asset that US forces suffer in Afghanistan.
Missing from this first effort: Secondary and tertiary detonations, often waves of parallel ignitions, against massed first responders and receiving hospitals. The Chechens and Iraqis have perfected this progression, but for the foreseeable future these secondary detonations will be IEDs and VBIEDs and not suicide vests. As time progresses: Multiple targets, simultaneous attacks, multiple vehicles per target and armed assault/breaching cadres to clear security personnel and gain access to the primary target...
Last week's Mexico car bomb in the border town of Cuidad Juarez killed three. It is the first known use of a car bomb against authorities and marks a troubling new level of violence in the country's brutal drug war.
From my vantage point, Mexican violence is merely trending towards a truly epic level of systemic violence. Despite the sad drumbeat of killings in Mexico chronicled by Frontera List, that nation has yet to experience the savagery that Africa has found itself awash.
My wildcard is the US and various US-based groups. While such groups vary widely in their intent, some would appear to go so far as to support a false flag event against the US with the intent of forcing the legitimate government to move assets into Mexico.
Misreading the patterns
We believe that it is a misleading of the data to believe that:
The government's crackdown "has achieved significant results as far as breaking up the leadership, financial, logistical and operational structures of organized crime"...
The informe [Calderon's annual report] lists more than two dozen top-ranking or local drug bosses taken down since last September. The most significant were kingpins Arturo Beltran Leyva and Ignacio "Nacho" Coronel, both killed by Mexican troops.
The sudden spate of captures of high level operators from various competing groups begs attention as coincidence does not exist for an intel analyst. Always possible we say, but unlikely and only accepted after all other avenues have been exhausted. (And only accepted once as twice is a pattern.)
By leaking information to selected (or neutral) authorities, these groups, who are likely corrupt themselves but not a partner to the personages being surrendered, gain leverage and advantage without having to endanger themselves or make themselves a target for retribution.
As the arresting agency has been selected on the basis of their tolerance to, or payment by, the leaking criminal group, those agency members will get a handsome bonus for removing the leaker’s competitor.
We long ago dispensed with the DTO (drug trafficking organization) label as the binary fiction of criminal cartels against honest government has been replaced by what we define as criminal groups:
Corrupt groups comprised of traditional organized crime, corrupt state and federal police, corrupt military and corrupt politicians who compete against one another in a fluid Co-Opetition [cooperative competition] in which only those at the top of their game survive.
In this operational environment the 'intelligence' cited by various parties is very likely not coming from a single legitimate sovereign source but rather from a series of interested parties seeking to damage another of the parties.
There is a yet to be written analysis of intelligence and counter-intelligence operations of Mexican criminal groups against one another.
All data from Mexico is suspect
Mexican statistics, especially those regarding criminal matters, are supremely suspect. As Molloy has diligently noted regarding this WSJ comment: