In 2023, Mexico surpassed China as the United State’s largest trading partner, with an estimated $397 billion worth of goods moving between the two countries in the first six months of the year. This 44% spike is driven by Mexico’s low-cost labor force, free-trade agreements, and its proximity to the U.S. These same factors have made Mexico an attractive manufacturing destination for, among others, the automotive, aerospace, and electronics sectors.

In March 2023, for example, Tesla announced plans to build a multi-billion-dollar “gigafactory” in the northern border state of Nuevo Leon; Mattel Inc. and Ollin Plastics have also revealed plans to open or expand their facilities in Mexico. Beyond the U.S., in early 2023, Mexico reported that more than 400 companies have expressed interest in relocating production from Asia.

While increases in trade and manufacturing are positive economic indicators and expected to lead to an influx of jobs and financial benefits for Mexico and the companies seeking to operate there, launching operations in Mexico comes with significant risk. Weak economic growth, systemic corruption, organized crime, and drug and human trafficking all present substantial risks to any organization looking to set up shop in Mexico. Companies that fail to conduct robust due diligence at the outset do so at their own peril. And here’s why.

Government Corruption in Mexico

When he took office in 2018, President Andrés Manuel López Obrador (AMLO) vowed to take down bad actors and reduce corruption in the country; however, as his term nears its end in September 2024, many experts agree that AMLO’s administration has made little headway in enacting laws to reduce corruption, organized crime activities, and drug and human trafficking.

Two years into AMLO’s presidency, a 2020 Latin America Corruption survey reported that nearly 90% of respondents still considered the police force in Mexico as being significantly corrupt. Prosecutors didn’t fare much better at 75%. And four years under AMLO’s leadership, Transparency International’s 2022 Corruption Perceptions Index gave Mexico a score of 31 (“with zero being very corrupt and 100 very clean”), placing it at 126 out of 180 countries.

What does this all mean for U.S. companies that choose to operate in Mexico? It means that boots-on-the-ground due diligence is as vital today as it was when AMLO took office. Given that lawmakers and possibly the courts are often perceived as corrupt and willing to do the bidding of organized crime, relying on public records and government transparency could be risky. The most effective method of mitigating risks – from logistical to political, from legal to regulatory – is conducting in-country due diligence by thoroughly vetting suppliers and partners.

Logistical Concerns within Mexico

Although corruption is a well-known barrier to conducting business in Mexico, logistical complications present an equally salient challenge. Mexico’s industrial heartland is located along its 2,000-mile northern border with the U.S.; however, transportation networks such as roads and rail infrastructure, which connect Mexico’s north to the rest of the country, have suffered from chronic underinvestment, making moving goods throughout the nation more costly and time-consuming than other “better interconnected” nations.

Mexico’s Political Progress

In September 2023, President Joe Biden, AMLO, and other senior government officials held one of several meetings in Washington, DC to discuss the U.S.-Mexico High-Level Economic Dialogue (HLED), which was relaunched in 2021. According to a White House press release, the HLED is a framework designed to strengthen supply chains, support economic development in Central America and southern Mexico, and coordinate workforce development efforts. “We are using the HLED framework to reduce inequality and poverty, boost job creation, catalyze investment in our people, and achieve greater regional prosperity,” the release states.

The Mexican government has enacted other reforms to combat corruption and increase manufacturing sector transparency. The United States-Mexico-Canada Agreement (USMCA), which was implemented in July 2020 as a replacement for the North America Free Trade Agreement (NAFTA), strengthened the government’s regional commitment to fighting corruption. With its emphasis on preventing and combating corruption and bribery in international trade and investment, the USMCA has paved the way for legal reforms and a more transparent regulatory framework.

Meanwhile, Mexico’s National Anti-Corruption System (SNA), established in 2015, seeks to coordinate the prevention, detection, and prosecution of corruption offenses at the federal, state, and municipal levels.

And despite his administration’s spotty track record fighting corruption and other related crimes, AMLO’s administration has had some successes. In recent years, multiple former Mexican government officials have been investigated for corruption, and high-profile bribery probes were launched into private individuals, such as former Pemex CEO Emilio Lozoya Austin.

Still, lingering concerns about corruption, weak rule of law, and the perceived inability of the Mexican government to confront these issues underscore the critical role of  due diligence in mitigating these risks.

The Importance of Due Diligence

As Mexico continues to grow with investments from companies around the world, savvy executives must take extra measures to ensure that their operations comply with domestic and foreign policy shifts. Conducting in-country interviews is usually considered essential to comprehensively assess reputational risks in Mexico, where regulatory institutions have limited enforcement capacity and litigation records are often incomplete, missing, or inaccessible.

There is an array of benefits for companies that choose to “nearshore” in Mexico, but the risks are also significant and pervasive. By conducting thorough due diligence with the help of experts in the field risk assessment, companies can mitigate these dangers and operate safely and profitably.

At IntegrityRisk, we have conducted due diligence research into hundreds of Mexican subjects in recent years, from local small businesses to regional and national politicians to individuals / companies who appear regularly on global 500 lists. Our team of trained and experienced analysts use deep industry expertise; geographic, geopolitical and local-language knowledge; and far-reaching resources to provide helpful insight for clients looking to start or expand business operations and relationships in Mexico.

Reach out today to learn how IntegrityRisk can provide valuable insights to guide your business decisions involving Mexico or any other global location.

By Kathryn Mackenzie

Kathryn Mackenzie, Senior Editor, has been a writer and editor for the healthcare, technology, and commodities sectors for the past two decades. Prior to joining IntegrityRisk she worked with publishing giants including Gannett and Knight Ridder to provide thorough coverage of the global pulp and paper commodities markets. Kathryn has won several awards for her feature writing, most recently from the Alaska Press Club for her executive interviews with U.S.-based industry leaders in finance and logistics, and earlier from the National Newspaper Association for her freelance work writing and editing for the association.