Companies Shun Violent Mexico

Unrest Deters Electrolux, Whirlpool, Others Who Have Considered New South-of-the-Border Plants

NICHOLAS CASEY JAMES R. HAGERTY

MEXICO CITY—Growing numbers of companies are deciding to limit their investments in Mexico because of spiraling drug-related violence in one of the world's most important emerging markets.

The latest is Swedish appliance maker Electrolux AB, which said Thursday it had chosen Memphis, Tenn., over locations in Mexico for a $190 million appliance factory that will employ 1,200 people.

The decision involved a host of factors, including proximity to component suppliers, distribution centers and another Electrolux plant in Springfield, Tenn. But Mexico's deteriorating security also played a role, the company said.

Mexico continues to lure foreign investment with its low wages, location next to the U.S. and the advantages of the North American Free Trade Agreement.

One of the U.S.'s largest trade partners, Mexico attracted $14 billion in foreign direct investment in the year's first nine months, up 20% from a year ago, according to government figures. And some of Mexico's biggest investors, including Wal-Mart Stores Inc., are maintaining their investment plans.

But fights between rival drug cartels have claimed more than 31,000 lives in the past four years, including more than 11,000 this year. Other crimes like robbery, extortion and kidnapping also have climbed. For some companies, particularly those that don't yet have operations south of the border, the violence has become daunting.

"We won't put a factory in Mexico until some of this violence gets addressed," said Ron DeFeo, chief executive of Terex Corp., a Westport, Conn., maker of construction cranes and other heavy equipment. "We just can't put our people at risk."

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In contrast to some companies, Wal-Mart says it will continue to invest in Mexico despite the violence. Above, a Mexico City Wal-Mart store.

Mr. DeFeo said Terex has looked closely at building plants in Mexico but decided to hold off for now.

Owens-Illinois Inc., a Perrysburg, Ohio, maker of glass food and beverage containers, is also wary.

"We have been monitoring the Mexican market for a few years now, looking for the right opportunity to directly enter that market," said spokeswoman Stephanie Johnston. "The escalating violence has led us to be more cautious. We take the safety and security of our employees very seriously."

Concerns about safety in Mexico were a factor in a decision by Whirlpool Corp. earlier this year to build an oven and cook-top factory in Cleveland, Tenn., rather than in Mexico, Alan Holaday, vice president of North American manufacturing and quality, said in a recent interview. Security was only one of several factors in the decision about the plant, which will employ more than 1,600 workers, he said.

Drug-related violence in Mexico probably cost the country some $4 billion in foreign direct investment this year, estimated Gabriel Casillas, J.P. Morgan's chief economist for Mexico.

Crime has also spooked foreign executives. Jim Davis, a managing director at Russell Reynolds Associates, an executive-recruitment firm, said he recently conducted a search for a pharmaceutical company seeking a top manager in Mexico City.

"A lot of the folks would say, 'My wife would not be in favor of us moving down there at this time,'" Mr. Davis said. "I think the fears are a little bit overblown but the reality is that's what people are reading in the newspapers and seeing on TV."

While foreign direct investment is expected to be slightly up in Mexico this year, the figures were boosted by the $5 billion takeover of the beer business of Fomento Economico Mexicano SAB by Dutch brewer Heineken NV. That deal won't include typical investment benefits like construction of factories and creation of jobs in Mexico.

Stripping out the Heineken-Femsa deal, Mexico's foreign investment numbers begin to look less healthy, said Mr. Casillas. Moreover, companies usually plan investments far enough ahead that this year's dramatic increase in violence will probably only show up in next year's numbers.

In Mexico's violent border regions and troubled interior states of Durango, Sinaloa and Michoacan, foreign investment has dropped to roughly $1.9 billion in 2010 from an average of about $5 billion a year from 2005 through 2008, excluding the Heineken-Femsa deal.

Concern about violence is leading to "a lot of caution around future growth plans," said David Speer, chief executive officer of Illinois Tool Works Inc., a big industrial conglomerate based in Glenview, Ill.

Mr. Speer said some companies that buy products from ITW units have delayed projects in Mexico due to security concerns, though he declined to name any projects.

Violence has spread to parts of the country formerly seen as "immune" from such problems, he said.

Some global companies are making investments deeper in Mexico's interior to avoid the violence. Japanese car maker Toyota Motor Corp., for instance, is building a plant in the state of San Luis Potosí.

Others are adapting. A truck operated by Ryder System Inc., a trucking and logistics company, was intercepted in August in Monterrey, Mexico, and the driver was forced out by gunpoint, said Bill Anderson, group director of global security. Earlier in the year, Ryder trucks carrying consumer electronics for a customer were hijacked, he said. Ryder has implemented new rules in response. Since September, shift changes occur during daylight and the company beefed up its travel restrictions.

Some firms are carrying through with new investments despite the concerns.

Polaris Industries, a maker of snowmobiles and all-terrain vehicles in Medina, Minn., plans to open a 425,000 square-foot facility in 2011 in Monterrey. Still, the company is taking precautions like attaching tracking devices to company cars and hiring armed guards to patrol the site, said Suresh Krishna, company vice president of operations.