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CASE STUDY

The Mexican narco-trafficking problem


Clive Kerridge and Sophia O. Kerridge

This case study looks at examples of successful international crime organisations, namely Mexican drug traffick-
ing cartels. These illegal businesses are often just as structured, organised and strategically managed as legal corpora-
tions. This case gives an opportunity to evaluate strategic options, from the point of view of Mexican government
policy advisors, as the state attempts to understand the NTOs strategies in order to counteract them.

The problem to define the new governments strategic options and


quickly.
The new President of Mexico, Enrique Pea Nieto (PRI
Party), came to power in December 2012 with a big prob-
lem on his hands: spiralling violence associated with the The business
notorious drug cartels.1 During 2011, drug-related deaths
rose to over 12,000, several regions were increasingly law- The first part of solving any problem is to identify it: Pea
less and some of the countrys highest-ranking military and Nietos government was not just facing a problem of wide-
police officials had been arrested over drug-related crimes. spread violence. This was violence orchestrated by large,
Then, in mid-2012, the US Congress found HSBCs Mexican complex organisations that ran very profitable businesses
branch guilty of laundering money for some of the nations in the trade of narcotics an industry worth billions of
narco-trafficking organisations (NTOs). The new president dollars, employing thousands of people.
was facing strong diplomatic pressure, the threat of declin- In 2010, the UNODC estimated the value of the illegal
ing international business investment (especially in the global drug trade at $320 billion per year (210bn; 250bn),3
US border area), a serious threat to national security, and indicating that profits from the US cocaine market alone
recognition that the NTOs were: constituted $35 billion. In comparison, immigrant smuggling
from Latin America to the USA was valued at $6.6 billion a
. . . now posing a multi-faceted organised criminal chal-
year and the arms trade from the USA to Mexico was worth
lenge to governance in Mexico.
just $20 million a year (see Figure 1).4
Report to the US Congress, August 20122
The cocaine trade is a particularly profitable under-
The problem had been inherited from his predecessor, taking due to its non-labour-intensive production, simple
Enrique Caldern of the opposing PAN Party. In an effort technology and compact transportation. The value added
to tackle the growing strength of NTOs in his home state to cocaine at each stage of the manufacturing and distribu-
of Michoacn, Caldern had deployed the military onto tion process reflects the varying levels of risk and complex-
the streets. Little did he know in 2006 that he would be ity. For example, a kilo of cocaine that in Colombia would
unleashing a drug war of huge proportions, destabilising cost around $2000 has a value of $10,000 in Mexico and,
the illegal narcotics trade and instigating violent battles, after crossing the US border, would sell wholesale at
not only between the military and NTOs but also between $30,000. Once broken down, mixed and split among street
the NTOs themselves. As a key part of his election cam- dealers, the value per kg is $100,000.5
paign, Pea Nieto had promised to change strategy. His As can be seen in Figure 2, most of the profits from the
policy advisors needed to analyse the NTOs activities and drug trade are at distribution level (to final consumers).

The case was prepared by Clive Kerridge, Senior Lecturer in Strategy at the University of Gloucestershire and Director of consul-
tancy KvH International Ltd, and Sophia Kerridge, who completed her Oxford University research thesis on Mexican and Colombian
drug trafficking violence and government responses, and now works for Peace Brigades International in Colombia. It is intended
as a basis for class discussion and not as an illustration of good or bad practice. Clive Kerridge and Sophia Kerridge 2013. Not
to be reproduced or quoted without permission.

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708 THE MEXICAN NARCO-TRAFFICKING PROBLEM

Figure 1 Estimated annual value of some global This smuggling or trafficking is undertaken by a select
criminal markets in the 2000s number of groups that specialise in complex operations,
coordinating products from many sources and delivering
them to numerous destinations. Through this bottleneck,
wealth and power are concentrated. It has been estimated
that the Colombian Cali and Medelln Cartels, which dom-
inated the cocaine trade during the 1980s, each made
close to $5bn annually just from cocaine trafficking.7
The illicit drug trade is not a static or stable industry.
For decades, Latin America has been the main supply
source for the US market, the worlds largest consumer of
marijuana, opiates, cocaine and ATS (amphetamine-type
stimulants). However, the dominant criminal organistions
and the types of drugs being trafficked have changed:
whereas earlier traffickers primarily dealt with marijuana,
Colombians became the worlds principal cocaine traf-
fickers. Colombia has continued to be one of the biggest
cocaine producers in the world but Mexican NTOs are now
Source: UNODC World Drug Report 2010, Figure 4, p. 33 the dominant traffickers, also involved in the marijuana,
opiate and ATS trades. These evolutions in market control
or dominance occur due to factors such as changes in an
Figure 2 Distribution of gross profits (in %) of the NTOs ability to operate or fluctuations in demand. For
$35 billion US cocaine market, 2008 example, in 2012, ATS demand in the USA was increasing,
whereas cocaine demand there was forecast to decrease;
yet cocaine demand in Europe was predicted to rise.

Legal and illegal businesses: the law


enforcement effect
The illicit nature of the industry means drug trafficking
is always at risk of interruption by law enforcement.
Therefore, NTOs are often organised to keep a low profile
and avoid the states attention. Yet they maintain the capa-
city for violence and to co-opt or corrupt state employees
so they can guarantee impunity and protection over their
activities. NTOs face additional operational costs because,
unlike legal businesses, agreements cannot be enforced or
arbitrated by the law. NTOs have to enforce their own
Source: UNODC World Drug Report 2010, Figure 39, p. 79 contracts and settle their own disputes, with violence if
necessary.
Like legal businesses, however, the drug trade benefits
However, the fragmented and decentralised nature of end- from economies of scale. Organisations seek to expand and
level distribution means that concentrated wealth is at the integrate various stages of the industry, where possible mono-
international trafficking level. So, although 70% of gross polising the market, to maximise efficiency and profitability.
income goes to dealers selling to consumers, there are thou- Low barriers to entry, and the attraction of quick and high
sands of street-level drug dealers in the USA who share profits, ensure constant new competition that can poten-
those profits. In their celebrated 2005 book Freakonomics,6 tially destabilise the market. Stability and control may be
Levitt and Dubner encapsulate this fragmentation and low achieved via NTO alliances (though such alliances are often
retail profitability in the title of Chapter 3: Why do drug temporary) or with the division of territories and markets.
dealers still live with their moms?. At production level, The unpredictability of operating under such conditions
there are various supply sources and little value has yet inevitably requires NTOs to be adaptable: for example, if
been added, so gross profits are small compared to those leaders are arrested it must be possible to substitute them
made by the international drug trafficking organisations. quickly. This supports the observation by a high-level panel

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THE MEXICAN NARCO-TRAFFICKING PROBLEM 709

of the United Nations that: Organised crime is increasingly on to dominate the illicit trafficking industry in Mexico and
operating through fluid networks rather than more formal much of the Americas. Rumours about this NTO and its
hierarchies. This form of organisation provides criminals ability to influence and corrupt state officials were rife to
with diversity, flexibility, low visibility and longevity.8 the extent that the PAN government felt compelled to
Such adaptability can also be seen through novel traf- release a statement in 2010 that it was not cooperating
ficking mechanisms, which are introduced to remain ahead with the Sinaloa Cartel to bring down competing NTOs.
of the competition and law enforcement, for example via The Sinaloa organisation has strong local roots and
tunnels under (and catapults over) the USMexican border was one of the original cartels, dating back to long
or small submarines operating in the Caribbean; also before the 1980s. Based in Sinaloa State, it controlled
through the development of new generations of drugs marijuana production and trafficking in much of north-
which are easier to transport, less complex to produce, and west Mexico, mostly destined for the US market. The
harder to detect. As for longevity, life expectancy for the political stability during the many years of the PRI Partys
people involved in NTOs is often short (with prison as the control, up until 2000, meant that the Sinaloa Cartel
most likely alternative), as the police and military attack had embedded itself into the political structure, protecting
the NTOs organisational structures. its activities and members. As its leader, Guzmn was
the local patrn, somewhat similar to the figure of The
Godfather,10 enforcing his own law among the local popu-
Balloons and mercury
lation and giving out favours, buying him a strong local
NTOs do not benefit from the legal and other protections support base that served to protect him during his many
enjoyed by legitimate businesses. However, they are not years as a fugitive.
constrained by the legislation and state bureaucracy that This local support base and political protection network
can slow down business growth and development. In some was typical of Mexican NTOs until the early 2000s when
senses, NTOs are operating in a completely free market! To the situation began to unravel for two principal reasons:
survive in such fast-changing environments, NTOs have
The democratisation and election of a new governing
to be dynamic, entrepreneurial organisations. For example,
if the state suppresses drug production in a certain part party (PAN) in 2000 destabilised the traditional polit-
of the country, NTOs will often transfer their activities to ical links NTOs no longer had the same patronage
another area, or even abroad, where law enforcement is and protection networks they had enjoyed under the
less effective (the balloon effect: squeeze a balloon and PRI.
Previously dominant Colombian NTOs, subjected to
the air moves to the parts with less pressure).9 When
counter-narcotics efforts in Colombia during the late 1980s heavy government and US pressure, started to lose
reduced NTO capacity to manage complex international its ability to manage complex international trafficking
smuggling routes, Mexican groups began taking over cocaine operations. They were already working with Mexican
trafficking. Additionally, when the state puts pressure on crime gangs, so the Colombian groups started to sell
the senior levels of large NTOs, these organisations tend cocaine directly to the Mexican NTOs, which then
to split into many smaller units (the mercury effect). This independently managed transportation and supply to
occurred in Colombia once the Cali and Medelln Cartels the US market.
had been destroyed. It is worth noting that none of these Although the Mexican state had previously been able to
measures resulted in the termination of international limit or informally manipulate NTO activity through its
trafficking or the illicit drug trade. links with the cartels, Mexicos new PAN government was
less able to do so, leaving NTOs to operate with more free-
The growth of the Sinaloa Cartel dom. The US cocaine market was a huge opportunity for
the cartels, with enormous profits to be made. Consequently,
Perhaps most embarrassing for the Mexican authorities Mexican NTOs started to develop their structures to accom-
has been the continued dominance of the Sinaloa Cartel, modate the international trafficking of cocaine, meaning
often referred to as the worlds leading organised crime or new transport routes, connections and management of
mafia business. Its infamous leader, Joaquin El Chapo supply chains.
Guzmn, heralded in various narcocorridos (modern
Mexican folk songs) for his legendary outlaw status,
amassed a personal fortune which in 2012 Forbes maga-
NTO diversification
zine valued at $1bn. Guzmn had been arrested in 2001 After dramatic growth in the 1980s and 1990s, by the
but managed to escape and had repeatedly eluded recap- year 2000 US cocaine demand was reaching saturation
ture, continuing to direct the Sinaloa Cartel, which went so, while Mexican NTOs had the opportunity to take a

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710 THE MEXICAN NARCO-TRAFFICKING PROBLEM

dominant position in this billion-dollar market, there European market. Strategically located on the western US
was not much opportunity to expand the market itself. border, it also developed various complex but effective drug
An outcome was that the main Mexican NTOs were corridors for all types of illegal narcotics making their way
soon facing strong competition from each other over access into the USA. Such was their territorial dominance that
to the lucrative US market. Competition was based on anyone involved in any part of the drug trade in their ter-
territorial control access to trafficking routes in Mexico, ritory had to do it under the watchful eye of the Sinaloa
border areas, production areas, places with corrupt law Cartel, paying taxes. Although these groups were not
enforcement, and ports of entry and exit (including directly affiliated, their activities got absorbed into the
airports). Sinaloa Cartels network of interests.
As the competition became fiercer, several NTOs looked With the extra income generated from this new era
for ways to diversify, moving into new markets, such as of trafficking, the Sinaloa Cartel had to find new ways of
cocaine for Europe, or supplying new illicit drugs (prin- investing and protecting its cash. One was money launder-
cipally methamphetamines) into North America via their ing, the creation of new legal businesses where the carbel
established routes and contacts (Figure 3). Others took the could hide and reinvest its drug profits. Involvement in
opportunity to reinforce their local territorial control by legitimate businesses presented new markets that the
developing the domestic consumer market, in this way Sinaloa Cartel could seek to monopolise, using a mixture
involving more local people in their business model and of legal and illegal methods. Looking to increase its
increasing local dependency on (and thus loyalty to) that market position further, the cartel also pursued an aggres-
NTO. sive strategy of territorial expansion from 2005 onwards,
The Sinaloa Cartel, for example, building on its existing seeking to control the entire west coast of Mexico from
dominance of the Mexican drug trafficking market and its Guatemala up to California and the US border states.
relationships with US distributors and Colombian sup- This brought it into direct territorial conflict with other
pliers, expanded international operations to almost all of NTOs, notably the Gulf Cartel, its main historical com-
the Americas and started to develop trafficking networks petitor on the East Coast, resulting in a series of bloody turf
through western Africa, as a route to penetrating the battles.

Figure 3 Cartel territories and drugsmuggling routes, 2008

Source: Stratfor

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THE MEXICAN NARCO-TRAFFICKING PROBLEM 711

A changing competitive landscape . . . increasingly attacked each other: violence levels exploded,
resulting in thousands of deaths every year and huge
The Gulf Cartel had expanded in much the same way in the
organisational instability for many of the NTOs. While the
early 2000s but had also developed a new wing to its
aim for all of them was to manage successful international
operations: a paramilitary section that came to be known
trafficking operations, for which they prefer a relatively
as the Zetas. The Zetas served to enforce the Gulf Cartels
stable environment, survival was now based on eroding
law, collect debts and generally ensure territorial control
their main competitors.
and protection of assets. Through violence, the Gulf Cartel
Despite the inter-NTO competition and the governments
achieved control of the entire eastern coast by 2008.
drug war initiatives (Figure 4), the Sinaloa Cartel con-
In response, and in order to expand into new areas, the
tinued its strategy of aggressive expansion and attacking its
Sinaloa Cartel did much the same, creating various armed
rivals, including those with which it was once allied. While
groups or allying with local crime gangs. To build up those
it suffered defections, deaths and arrests, its ability to main-
enforcement operations, the Sinaloa Cartel increased its
tain successful trafficking operations allowed it to continue
investment in areas such as weapons procurement and tra-
dominating the market. Arguably, the continuing leader-
fficking, recruitment and corruption of military and police.
ship and legendary status of El Chapo was the glue that
This led to further diversification in cartels activities: to
held the Sinaloa Cartel together, giving it stability despite
keep their paramilitaries busy, and, to enforce territorial
changes to the hierarchy below. The Sinaloa Cartel con-
control, these groups dedicated their time not only to sup-
tinued to successfully undermine lesser organisations,
porting and protecting the narco-trafficking operations
through street battles and bombings and by organising the
and assets, but also moved into extortion, human traffick-
arrest and death of their leaders and through the success-
ing and other criminal activities that benefit from the
ful corruption and co-option of state agents.
presence of armed protection. These new activities meant
that the government of Mexico was faced with highly com-
petitive and successful criminal business organisations, A threat to stability of the state?
willing to compete violently and now developing military The year 2009 saw a new dynamic, as the Zetas broke
capabilities. away from the Gulf Cartel and expanded control dramatic-
Although tackling the cartels with force became harder ally through eastern Mexico and into Central America,
for the state, these more diverse NTOs also developed a using extreme levels of violence and brutality when deal-
weakness: they could not survive without the capability to ing with opponents. The Zetas are formed principally of
deploy force against the competition, which in turn could military deserters or people with some form of military
not survive without the huge income from trafficking, training, which is clearly reflected in their organisational
which was needed to fund arms procurement and increased structure. Their military chain of command and strict
personnel numbers. Managing the multifaceted nature of discipline have meant that when leaders are removed,
these organisations (legal and illegal business, together there is a clear line of succession. The organisations repu-
with military elements) meant expanding management tation for violence and lack of second chances has allowed
capabilities. Expansion inevitably implied more difficulty in them to assert authority over new business activities
keeping below the radar of the state. despite their rapid organisational and operational expan-
sion. The Zetas, unlike the more traditional NTOs, are more
opportunistic: they have no need to win over the local
. . . and changing alliances
population, and their principal motivation is income and
As the NTOs rapidly became stronger and more diverse, gaining control over varied illegal industries in as large an
internal tensions and frictions increased, aggravated by area as possible.
frequent attacks from competing NTOs, causing constant The resulting clash between the Zetas and the Sinaloa
changes in the NTO management hierarchies. This led Cartel is also a clash of business models. Sinaloa and the
to many clashes, such as a dramatic rupture within the older drug cartels focus on exploiting their core com-
Sinaloa Cartel in 2008 after a leadership dispute, resulting petences (international trafficking capabilities) and main-
in a new splinter NTO that the Sinaloa Cartel immediately taining their brand reputation (for quality and reliability)
came into competition with. The same happened in other in the industry. Embedding their activities in local eco-
cartels, as the new paramilitary wings started to assert nomies is central to their survival and, at the highest levels,
their own authority and undermine the parent organisa- family and personal ties reinforce the networks. In con-
tions traditional modus operandi. trast, the Zetas are more involved across a range of local
From 2006 onwards, the Mexican police and military criminal businesses and are less dependent upon inter-
stepped up strikes against the cartels, while the NTOs national trafficking operations. Although risks are spread

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712 THE MEXICAN NARCO-TRAFFICKING PROBLEM

Figure 4 Evolution of the Sinaloa and Gulf Cartels, 200312

Source: Sophia O. Kerridge

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THE MEXICAN NARCO-TRAFFICKING PROBLEM 713

Figure 5 Mexican drug cartels main areas of influence, 201213

Source: Stratfor

across various operations, those local businesses have A new strategy in the war on drugs
much lower barriers to competitive entry and are more
susceptible to fragmentation. Furthermore, their rapid By 2012 it was clear that the states strategy was not
expansion and excessive use of violence have attracted having the desired results. If anything, quite the opposite:
the attention of various states and competitors, and forced there was widespread anxiety about personal and public
Zeta units to adapt constantly. Blood, rather than political security, particularly in the main cities. A new presidency
corruption, is their currency. was an opportunity for a new approach in the war against
From 2010 to 2012 the violence continued: frictions the cartels, perhaps confronting them from an altogether
caused divisions; divisions led to several new organisa- different position.
tions and new alliances. Meanwhile the Mexican state, In theory, a change in political leadership should
through police and military responses, continued trying affect NTOs negatively, since previous political linkages
to break the NTOs power and influence (Figure 5) by would end and fresh ones would have to be established
attacking their organisational hierarchies. While this has within the new political system. With the election of the
served to destabilise the NTOs, it does little to limit the PRI in 2012, the party that had previously accommodated
business of drug trafficking, as the organisations merely NTOs was returning to power. Although rumours of a
adapt and continue supplying drugs to their customers. return to the previous system of cohabitation with the
As a sombre warning to the incoming President Pea, there NTOs was fiercely denied, the pervasive violence meant
was no pause in the levels of violence after his election in that such options surely would be considered, if they might
2012: indeed the NTO violence was even reaching Mexico guarantee better public safety.11
City, something many thought the cartels would never At the same time, the Mexican state also has to respond
dare. The need for a new approach was evident. This was the to various national and international influences. In a
challenge for President Pea Nieto and his policy advisors. democracy, where the president has just a few years to

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714 THE MEXICAN NARCO-TRAFFICKING PROBLEM

turn things around, there have to be visible improvements The Sinaloa Cartel
if there is any hope for re-election. There are also external http://www.youtube.com/watch?v=4PEi0I6g9eg
influences that need to be considered, such as foreign Stratfor, Mexican Cartels: Sinaloa Cartel, http://www.
investment, US political pressure, and impacts on neigh- stratfor.com/video/mexican-cartels-sinaloa-federation
bouring countries as the NTOs expand across beyond
Mexicos borders. Zetas
Evidently, the previous administrations policy of Reuters, Reuters investigate: Mexico drug cartel
armed attacks on the NTO hierarchies and short-term unleashes new levels of violence, http://www.youtube.
disruptions of certain drug routes had not produced the com/watch?v=wcQDEexlkWc
desired results. In part, this was because that strategy had Insight Crime, Zetas in Guatemala, http://www.
not attacked the root of the problem, the business of drug youtube.com/watch?v=STjiPvDtpb8&list=UUhEvdHcQ
trafficking. EGdoKTsLFeNdb7g
To develop an effective strategy, the state needs to BBC, Mexico Zetas leader Z-40 captured, http://www.
understand how the NTOs grew to be so large and wealthy; youtube.com/watch?v=QZswKWg-OaQ
what strategies NTOs used to develop their markets and Stratfor, Mexican Cartels: Los Zetas, http://www.
fight their competition. Much like other companies may stratfor.com/video/mexican-cartels-los-zetas
look at competitors and try to evaluate their strategies as
Violence as a marketing strategy
a means to improve or adapt their own, the state can also
do this to identify the cartels business weaknesses and Al Jazeera, Mexican drug gangs public relations cam-
vulnerabilities. By analysing how an NTO has developed paign, http://www.youtube.com/watch?v=MFasg6qI1TY
its business model, the state can evaluate its likely strategy Money laundering
in future scenarios and try to act pre-emptively. Not least,
Al Jazeera, How Mexican drug lords spend their ill-gotten
instead of fighting the symptoms of the NTO problem,
notably violence and the widespread influence of wealthy gains, http://www.youtube.com/watch?v=BY1dcqgEG2I
criminal families or organisations, it may be more pro- Notes and references
ductive to beat the NTOs at their own game: by changing 1. Note that the term cartel, used in reference to large drug trafficking
conditions for the business of trafficking. organisations, does not necessarily mean that they control and
determine market prices.
The new presidents policy advisors were well aware 2. June S. Beittel (2012) CRS Report to the United States Congress,
that suitable counter-NTO strategies would have to be R41576, 3 August 2012.
acceptable to a range of stakeholders, in Mexico and 3. $1 ~ 0.65 ~ 0.77.
4. UNODC (2010) The Globalization of Crime: A Transnational Organized
beyond. For implementation to be feasible, it would be Crime Threat Assessment, p. 16.
imperative that the government had sufficient and appro- 5. Patrick Radden Keefe (2012) Cocaine Incorporated, New York
priate capabilities. It was a tough but vital assignment. Times Magazine, 15 June 2012, http://www.nytimes.com/2012/06/17/
magazine/how-a-mexican-drug-cartel-makes-its-billions.html?
pagewanted=all
6. Steven D. Levitt and Stephen J. Dubner (2005) Freakonomonics: A
For further information, see the following videos. Rogue Economist Explores the Hidden Side of Everything, New York:
William Morrow.
The business model 7. Sophia O. Kerridge (2011) Drug Trafficking Organizations and the
State in Colombia (19801995) and Mexico (19952011), MPhil
CNN, How do Mexican cartels get drugs into the US?, Latin American Studies, Oxford University.
http://www.youtube.com/watch?v=nO2AOQAeVJI 8. United Nations High-Level Panel on Threats, Challenges and Change
DNA Info, DEAs New York Chief explains the business (2004), quoted in UNODC (2010) The Globalization of Crime: A
Transnational Organized Crime Threat Assessment, p. 27.
model of drug trafficking, http://www.youtube.com/ 9. Michael Shifter (2007) Latin Americas drug problem, Current
watch?v=k2bF0-VY1ps History, February 2007, p. 62.
Insight Crime, Drug gangs and human smuggling, 10. As epitomised in The Godfather mafia movies, based on a novel by
Mario Puzo.
http://www.youtube.com/watch?v=JH9GNd5ARmU&l 11. El Mundo (2012) Queremos tener tranquilo el pueblo. Todo est en
ist=UUhEvdHcQEGdoKTsLFeNdb7g&index=3 su mano, Bogot, 2 October 2012.

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