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Cover Story April 9, 2009, 5:00PM EST

The Other Mexico: A Wave of Investment

Who says it's a "failed state"? Ignoring the drug wars, multinationals are pumping in billions to set up factories

By Pete Engardio and Geri Smith

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Nam (center) leads Skyworks' Mexicali plant and an engineering team of 300 Brad Swonetz/Redux

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In 2007, Fusion Specialties chose Juárez over China for a new mannequin plant Shaul Schwarz/Corbis

K. Alan Russell has spent 23 years clearing bureaucratic and logistical hurdles for U.S. companies running low-cost plants in Ciudad Juárez. Never has he had to do as much hand-holding as now. Each time the Mexican city makes headlines—for kidnappings, murders, or police battles with drug cartels—Russell does damage control. He calls the headquarters of the 28 tenants at his company's industrial parks to tell executives their staff and property are safe. "They need to hear from Ground Zero that there [were] no disruptions and the violence is not affecting their people," he says.

He has his work cut out. Since early 2008 the corpses of 2,050 victims of a turf war among narco-traffickers have been dumped around this city of 1.4 million. Twice, Russell had to remove ATMs from his facilities after thieves attempted heists—once with a forklift. Juárez Mayor José Reyes Ferriz estimates the violence cost 20 foreign projects last year that would have created 5,000 jobs.

But there also is surprising truth in Russell's message. Even as American TV anchors report on "the war on our border," the city's 285 maquiladoras—factories making goods for export—are not fleeing. Each day, 9,000 managers cross the Rio Grande without incident from their homes in El Paso to the Juárez plants of Johnson Controls (JCI), Cummins (CMI), Emerson Electric (EMR), Visteon (VC), Delphi Automotive (DPHIQ.PK), and others. Travel to Monterrey, Guadalajara, Mexicali, and Querétaro, where Whirlpool (WHR), Honeywell International (HON), Daimler (DAI), and Lenovo (LNVGY) have been expanding, and you'll think that talk of Mexico as a "failed state" seems absurd. "Not only are we not going anywhere, but more and more of our key suppliers are in Mexico," says Randy E. Wilcox, president for the Americas for Otis Elevator. "It's the hub of our supply chain for North America."

A VALUABLE PARTNER

Manufacturers have good reason to hang tough. The 41% drop in the peso against the dollar since August has made Mexico an even cheaper place to manufacture: Factory workers in Juárez can be hired for $1.50 an hour. When President Barack Obama visits Mexico in mid-April, he will find a nation that has enhanced its position as a global manufacturing and design base for everything from appliances to aircraft parts. If Mexico can rein in the drug cartels—a huge if—it could emerge a more valuable partner than ever for U.S. industry.

Mexico's economy is reeling now. Nationwide, foreign investment plunged 46% in 2008, to $18.6 billion, and the economy in January shrank at a 9.5% annual clip. The country will probably lose half a million jobs in this year's first half.

But the slump is almost entirely due to the global recession—not economic mismanagement as in the past. Manufacturing has crashed everywhere, China included. Attacks on foreign staff and factories, moreover, have been rare in Juárez and other border towns along drug-trafficking routes, such as Reynosa, Nuevo Laredo, and Tijuana. The narcos seem focused on each other and police and politicians who stand in their way.

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