MEXICO:A Security and Business-Risk Assessment

Executive Summary Johnson Controls asked STRATFOR to provide a fresh security and business risk assessment focusing on the threats in Mexico posed by the country’s drug trafficking organizations (DTOs), the cartel war, political instability and crimes not necessarily related to drug trafficking. This update focuses specifically on the cities of Reynosa, Ciudad Juarez and Monterrey. In addition, STRATFOR was asked to include in the update an assessment of the threat environment in the city of Matamoros, which is included in this report.

The security situation in Mexico continues to worsen at an alarming rate. Fractures within cartels, combined with successful arrests or killings of high-value cartel leaders by the Mexican government its offensive against the country’s numerous drug trafficking organizations and, while it has made progress in terms of arresting and killing high-value cartel targets, the violence continues to increase. Likely due to the approaching presidential election in 2012, and despite the rising death toll, the Mexican government has increased the tempo of its operations against these organizations throughout the country. Operations are continuing in Tamaulipas and Michoacán states, and new offensives have been launched in Veracruz, Durango, Coahuila and Nuevo Leon states. With the federal government’s main focus still squarely on combating the drug cartels, general crime levels remain at all-time highs throughout the country. In many cases, this crime wave can be directly linked to drug cartel activity and individuals linked to the drug trade. However, as Mexican security forces continue to put pressure on the cartels’ drug transportation networks and revenues, the cartels are turning toward other sources of revenue by expanding their criminal portfolio to include kidnapping and extortion and to include in their target set foreign businessmen and other individuals not associated with the Mexican drug trade. Furthermore, between the high operations levels of the Mexican security forces against the cartels, and endemic corruption of municipal and regional law enforcement by those cartels, smaller criminal groups have been able to flourish in the chaos. As a result, carjacking, mugging, robbery and assault still remain the greatest threat to business operations and their employees in Mexico.

Overall violence has continued to increase annually over the past five years, with 2010 being the deadliest year yet of Mexican President Felipe Calderon’s term in office. Last year, more than 15,000 deaths in Mexico were associated with organized crime, according the Mexican government. As the national 2012 elections approach, it appears that Calderon is determined to continue his offensive against the cartels until the end of his term. As STRATFOR mentioned in the forecasting component of the original April 26, 2010, Mexico report, one cartel may prevail over the next two or three years and become the dominant DTO. The Sinaloa Federation seems to be the most likely candidate for the top spot, which we will discuss further in this report. If this trend continues throughout Mexico and a dominant cartel does emerge, one result will likely be a more predictable operating environment for multinational corporations (MNCs) operating in the country.

In the meantime, as the Mexican government and the drug cartels battle for supremacy, the drug trafficking business in Mexico will remain extremely volatile, with the security threat environment at critical levels and drug-related crime and violence a part of everyday life. Therefore, STRATFOR continues to assert that MNCs must plan their operations accordingly and maintain a healthy and robust security apparatus in the country to ensure the productivity and safety of their assets before the violence can begin to subside.

Security SituationMexico-WideThe escalating cartel war in Mexico, which has created the most severe security crisis that the country has seen in nearly a century, consists of three fronts: the government’s battle against the drug cartels, the battles among the various cartels themselves and the violence being inflicted by the cartels and other criminal groups against the civilian population. The campaign that President Felipe Calderon launched against the cartels in December 2006 has steadily escalated over the last four years, and while there is no denying that the government is making progress in fracturing the largest and most powerful cartels, one result has been a steadily deteriorating security situation nationwide.

One measure of this growing insecurity is Mexico’s homicide rate related to organized crime. According to the Mexican Public Security Secretariat, the number of organized crime-related homicides in 2009 was approximately 8,200, and a total of

15,273 in 2010. Cartel-related homicides reported for 2011, through August, were 8,776. Though more up-to-date statistics have yet to be published, it appears that over-all the level of cartel violence (and the concomitant security concerns) are consistent with those of 2010, if not necessarily all in the same regions.

Territorial disputes among drug cartels have long been the norm in Mexico, but Calderon’s offensive against the country’s most powerful cartels has severely disrupted the criminal balance of power, leaving power vacuums other criminal groups seek to fill. This conflict is especially visible in border cities such as Ciudad Juarez, Nuevo Laredo, Reynosa, and Matamoros, which the cartels use as drug-smuggling corridors into the United States. But the conflict also affects Monterrey, Durango, Veracruz, Acapulco, and other parts of Mexico that fall along the drug supply chain. At this point, there are very few states in Mexico which have not been affected by the cartel war.

This cartel power struggle is far from over, and until a lasting balance of power has been solidified, the bloody warfare will continue and possibly intensify. It is this situation that confronts foreign businesses, which are forced to conduct daily operations in an increasingly volatile environment. Not only is the personal safety of their employees threatened, but also the profitability of their business operations.

One indication of how badly Mexican government policies have disrupted drug trafficking operations is the violent response that the cartels have directed at law enforcement and other high-ranking government officials. Several have been assassinated in retaliation for government counter-narcotics operations. High-ranking local and regional law enforcement and elected officials have been executed throughout the country, more often than not for having committed one of three sins: refusing to work for a cartel, working for the wrong cartel (so killed by the rival group), or caught either snitching on – or stealing from – the dominant cartel.

Given the potential for a profound fracturing of the CDG, the Calderon government and its successor both face the near-future need to increase the military in that region significantly beyond the current deployment as a large upswing in violence brought on by a CDG split is likely to negatively impact multinational corporation operations profoundly. The security of MNC operations, as well as their ability to maintain a workforce, will be directly affected by GOM actions in this eventuality.

CHIHUAHUA STATECiudad JuarezJust across the border from El Paso, Texas, the Juarez Valley in the state of Chihuahua is a strategic point of entry for both legitimate commerce and illicit goods. Ciudad Juarez is the only major Mexican metropolitan area on the border with quick access to the U.S. interstate system within several hundred miles in either direction, making this area also extremely valuable to Mexican cartels. U.S. Interstate 10 runs directly through El Paso, where it also intersects with U.S. Interstate 25. This makes it easy to traffic drugs and other illicit goods east, west and north from Juarez. With the highest concentration of murders per 100,000 inhabitants due to a raging turf fight between the Sinaloa and Juarez cartels, the Juarez Valley is considered the most violent region in the world (outside of active war zones) by the Citizen’s Council for Public Security. This region also happens to be where the Mexican government is most active in employing its new counter-cartel strategies and where it has deployed the largest concentration of security forces in the country.

The conflict in Juarez has evolved into three different layers of violence. The first layer is the street-level violence between local Juarez-based street and prison gangs backed by both the Juarez and Sinaloa cartels. The second layer is the more traditional conflict between the enforcement wings of the Sinaloa and Juarez cartels, Nueva Gente and La Linea, respectively. (Several top leaders of both enforcer wings were captured by military forces within the last several months, but it is not yet confirmed that either organization is neutralized by those losses.) The third is the Mexican security forces battling gangs and cartel enforcers. The first two layers are the primary reasons for the high levels of violence in the Juarez area. Members of the Juarez cartel-aligned street gang Los Aztecas (estimated to number approximately 5,000 in Juarez) continue to serve as footsoldiers, enforcers, and smugglers, while augmenting their activities by extorting nightclubs and other businesses. The Sinaloa cartel utilizes proxy forces among the street gangs in Juarez as well, particularly the Mexicles and Los Artistas Asesinos, to seize territory, steal drug shipments from the Juarez cartel’s operations, and serve as surveillance assets.

These three layers of violence often overlap, and combined they have produced unprecedented levels of violence throughout the region. Recently, however, according to a U.S. intelligence report, the Sinaloa Federation has gained control of the majority of the Juarez Valley. This may help stabilize the region eventually, but the remnants of the Vicente Carrillo Fuentes organization (VCF) are not expected to quietly fade away, and the violence likely will continue for some time.

As reported previously, on April 9, 2010 the Mexican Federal Police officially assumed all law enforcement and securityoperations in the city of Juarez from the Mexican military. The military then took up positions outside of the Juarez metropolitan area, in the more rural areas of the region, where military skills are better suited. This changing of the guard did not mean much in terms of immediate security improvements in the city. In fact, beginning in mid-April the violence in Juarez increased markedly with May through October monthly totals ranging from 262 to 352 per month (October being the worst) before the violence subsided. Conditions stabilized in Juarez at the end of 2010 and into Spring 2011, and from a high of 231 in February declined steadily to a level of 156 cartel-related deaths in June this year. A spike in street battles during July elevated that month’s total to 216, however the violence once again subsided to an extent. Between Jan 1 and Oct 31 2011, the number of cartel related homicides in Juarez and surrounding communities totaled 1,738, while the same time frame in 2010 had a total of 2,700 cartel related homicides.

Regarding Juarez security, the conclusions which can be drawn are that – absent direct pressure from a large military presence – the rival Sinaloa and Juarez cartels (and their proxy street gangs) were able to turn more attention to building revenues, but the standoff over control of the city’s lucrative ports of entry (POEs) remains. The Juarez cartel is known to retain control over the three main POEs that directly access El Paso and, though it is not known whether Sinaloa operations have been slipping contraband shipments through those POEs as well, the Sinaloa cartel does control the POEs on both sides of Juarez and most of the lower Valley of Juarez. Effectively, Sinaloa forces encircle the city of Juarez, though the Juarez cartel currently is demonstrating its continuing access to its narcotics supplies. We anticipate that, probably within the next 12 to 24 months, when the Juarez cartel no longer has its supply line from the interior of Mexico and the organization’s revenues shrink proportionally, it is likely that we will see a shift in loyalties by the Azteca gang – for while that gang’s loyalty to the Vicente Carrillo Fuentes organization has been long-standing, it has been a purchased alliance. We expect that at some point the highest bidder for the huge street gang will become Chapo Guzman’s organization. The likely indicator that the Juarez cartel is nearing financial starvation probably will be a very sharp and violent surge in cartel battles as they struggle to reopen their supply lines. If that sudden upswing in violence materializes, we will look then for a significant shift in the alliances of the players. If the Azteca street gang indeed changes its alliance and accepts a high bid from the Sinaloa cartel, the balance of power – and the control of the POEs in Juarez – will shift in Sinaloa’s favor. Should that eventuality materialize we expect violence in Juarez will subside – significantly lower than what is currently the case – whether the Juarez cartel is wiped out by its rival or manages to survive by coming to an accommodation with Sinaloa. To date Vicente Carrillo Fuentes has displayed no willingness to become a vassal of Chapo Guzman as the Arellano Felix organization has done, but STRATFOR sources in the El Paso-Juarez area believe that at some point in the next two years such an accommodation will be reached. When that occurs, security for corporations operating in the Valley of Juarez will improve – and likely to a fair degree.

COAHUILA STATEThough most of Coahuila state has tended to be quiet for the last several years, with Los Zetas holding the border cities of Ciudad Acuña and Piedras Negras along with most of the rural territory, the cities of Saltillo and Torreon stand out as significant exceptions. The state is sparsely populated, lacks high-volume interstate highway arteries and remains largely undisputed Los Zetas territory. But several recent events along with an increasing Mexican military presence could point to a coming change in Coahuila’s security conditions.

According to official government news releases and confirmed by STRATFOR sources in the region, there has been a gradual increase in the deployment of military assets to Coahuila and in military activities during the summer and fall months of 2011. As the military presence grew and began operations, their patrols began to have an impact on what appears now to be the “back room storage area” for Los Zetas. On June 1, Mexican army personnel found 38 narcofosas, or hidden graves, in the village of Guerrero, 50 kilometers (30 miles) southeast of Piedras Negras. It is not yet clear how many victims were disposed of at the Guerrero site — the meter-deep pits contained thousands of bits of charred human bones, metal buckles, buttons, and other personal items, and three 55-gallon drums also were found in which human bodies had been cremated.

By no means are these recent events in Coahuila unique for Mexico, but the increase in military personnel and operations in the sparsely populated state is notable. As that military presence grows, STRATFOR expects significant clashes between Los Zetas and Mexican troops – the cartel’s operators have demonstrated a tendency to fade away and not engage the military unless pressed or cornered, but there appears to be a concerted effort on the part of the military to ferret out the Zeta assets in Coahuila, which may push Los Zetas into reacting. In Mexico, cartels have demonstrated that they will absorb a low level of losses as “the cost of doing business.” However, losses can reach a point where they are no longer acceptable to an organization, and violent countermeasures tend to result. In the quieter areas of Coahuila, particularly in the western and

northern parts of the state where the Sinaloa and Gulf cartels have not bothered to contest Zetas control, Los Zetas may soon respond to the Mexican government’s inroads with direct and violent action against the military.

MonclovaMonclova, a small crossroads city, has been fairly quiet, though not entirely. Within a few miles of the city several huge munitions and narcotics caches belonging to Los Zetas were found by the military during May and June. The stashes included a metric ton of cocaine, just under one metric ton of methamphetamine, 11 kg of heroin, 378 assault rifles, 600 sets of camouflage or black uniforms (with boots), several grenade launchers, three sniper rifles, and over 122,000 rounds of ammunition. The threat of loss of other munitions and narcotics caches in the vicinity (for there probably are many more) may cause the cartel to defend them violently if cornered, nor more likely to seek to move the stashes quickly. The security issue with the latter possibility revolves around corporate assets such as cargo trucks and vehicles being stolen or violently high-jacked for use in moving Zeta supplies, and/or unauthorized use of structures owned by Johnson Controls.

SaltilloSaltillo has been fairly quiet relative to other cities in NE Mexico, over the last four years, but that condition has been deteriorating. The nature of conflicting information from STRATFOR sources in the region tells us that Saltillo is becoming a hot spot in the war between Los Zetas and the Gulf-Sinaloa alliance. The longstanding stability in Saltillo (and much of Coahuila state) according to some sources results from the presence an old aristocracy power structure which has been described as a tough “still-on-horseback” type of aristocracy in the old Latin American style. That pre-existing aristocracy is said to have little tolerance for “cartel nonsense” if there is commotion, and that they are not intimidated by the cartels. That said, the Saltillo aristocracy reportedly is not concerned if drug shipment activities pass through their area. The evidence of increasing cartel clashes in Saltillo is notable in that there appears to be occasional sharp spikes in violence over the course of 2011, rather than a steady escalation of pandemic violence as seen in other hotly contested cities.

Notable events occurred in March, May, June, and most recently on Nov 1. In the running gun battles on Mar 5, 6, and 22, groups of Gulf cartel gunmen drove through the city, provoking battles with Los Zetas. Reports of gun battles flared up in central Saltillo surfaced again on May 18, involving mobile gunmen from either the Sinaloa or Gulf cartels “heating up the plaza” – essentially conducting random attacks to stir up the local Zetas and cause law enforcement and military troops to respond. The next series of events reportedly occurred in the vicinity of the Cathedral de Santiago, on May 29, during which machine-gun fire and several grenade blasts were heard by residents in the neighborhood.

On Nov 1, beginning at about 2 p.m., several running gun battles flared up in neighborhoods on the east and northeast portions of Saltillo. In one firefight, rival groups of gunmen from the Gulf cartel and Los Zetas fought through the neighborhoods of Los Cerritos, Praderas, Magisterio, Los Maestros and Guanajuato. The inter-cartel battles triggered responses from local and federal authorities. Another gunbattle occurred in the immediate vicinity of the Instituto Tecnologico de Saltillo campus between a group of gunmen and Mexican marines. Fighting spread through the east and north-central portions of Saltillo over several hours before it subsided.

STRATFOR is paying close attention to the dynamics evolving in and around Saltillo, specifically watching for indications that the aristocracy has had enough and reacts powerfully, or that the younger generations within the old families opt to seek an accommodation with the cartels active in the region. It is on this point that we perceive

TorreonSituated in central Mexico at the intersection of a couple of major highways, Torreon is a critical hub for cartels moving product to northern Mexico and, eventually, into the United States. Control of Torreon helps facilitate the movement of product from Mexico’s Pacific coast across the country to smuggling corridors, such as Nuevo Laredo and Ciudad Juarez, on the U.S.-Mexico border.

Because cartels understand the importance and vulnerability of their own supply routes, such gateway cities have become hotly disputed territory. Los Zetas and the Sinaloa Federation have been fighting for control of Torreon for some time, and members of one or both of those groups were very likely among those involved in the shootout. We can expect to see continual violence in the city as the Zetas and Sinaloa continue to vie for unfettered control of transit routes. Unfortunately for Torreon, its geographic location predisposes it to such violence

TAMAULIPAS STATE

In the last four months, it has become apparent that a schism within the Gulf cartel (CDG) over divided loyalties is evolving into a split with large and violent consequences. During 2009-2010, the organization was led by a pair of co-leaders, Antonio Ezequiel “Tony Tormenta” Cardenas Guillen, and Jorge Eduardo “El Coss” Costilla Sanchez. This arrangement shifted when “Tony Tormenta” was killed in a six-hour standoff with Mexican military forces in November 2010. The split within the CDG that we are now watching began to a large extent with the death of “Tony Tormenta.” At the time, it is believed that Rafael “el Junior” Cardenas, the nephew of Osiel and Antonio Cardenas Guillen, expected to replace his uncles as co-leader of the CDG. Instead, Costilla Sanchez assumed full control of the organization. The schism became wider as two factions formed, Los Metros, which is loyal to Costilla Sanchez, and Los Rojos (aka “Los Erres” for the letter R), which is loyal to the Cardenas family.   Early in the 2nd quarter of 2011, the Calderon administration deployed several thousand military troops to the NE Mexico region, predominantly in Tamaulipas state, during which time 22 municipal police departments were suspended or dismissed pending corruption investigations and vetting procedures. The military continues to be in place at the time of this reporting.

During the summer in 2011, the government of Mexico moved to stabilize Tamaulipas state with multiple operations which of necessity are continuing well into 2012. Initially, 2,500 Army troops were sent to remove and replace the police forces in 22 municipalities, in an effort to mitigate rampant corruption of local law enforcement by Los Zetas and the CDG. Then operations to capture or kill Zeta and CDG cell and plaza leaders began to blossom in cities and towns across the state. As these operations started bringing results, and likely a fair amount of actionable intelligence, the rift within the CDG began to destabilize and indicated that the organization has been far less cohesive than was believed by authorities on either side of the border.

While government operations against the CDG resulted in the capture of several plaza bosses over the last three months -- Abiel  “El R-2” González Briones, Manuel “El Meme” Alquisires García, Ricardo Salazar Pequeño and José Antonio “El Comandante” Martínez Silva -- internal violence brought down one of the factional leaders. On Sept. 3, 2011, the body of Samuel “El Metro 3” Flores Borrego was found by authorities in Reynosa. Flores Borrego had been the trusted lieutenant of Costilla Sanchez and served as his second in command as well as Reynosa plaza boss. These two men were at the top of the Metros faction.   On Sept. 27, in a brazen hit on U.S. soil, gunmen in an SUV opened fire on another vehicle traveling along U.S. Route 83 east of McAllen, Texas. The driver, Jorge Zavala from Mission, Texas, who was connected to a branch of the Gulf Cartel, was killed. Though his role in the cartel is unclear, he was believed to be close to a senior Gulf plaza boss, Gregorio “El Metro 2” Sauceda Gamboa, who was arrested in April 2009. As indicated by his “Metro” nickname, Sauceda had been aligned with the faction of the Gulf cartel that supports Costilla Sanchez.   On Oct. 11, the Mexican navy reported that the body of César "El Gama" Dávila García, the CDG’s head finance officer, was found in the city of Reynosa, Tamaulipas. According to a statement from the Ministry of the Navy, the body was found in a home, dead of a gunshot wound. El Gama had been Antonio Cardenas Guillen’s accountant, but after the 2009 death of Tony Tormenta, El Gama was made plaza boss of CDG’s port city of Tampico for a period of time, then placed back in Matamoros as the chief financial operator for the cartel. Many questions arise from this killing, but for STRATFOR it indicated deepening of the internal CDG conflict.

Further indication of active internecine conflict came when U.S. Immigration and Customs Enforcement agents arrested Rafael “El Junior” Cardenas Vela on Oct. 20 after a traffic stop near Port Isabel, Texas. The Los Metros faction has a strong incentive to take out the Los Rojos leaders and is in a good position to have or acquire information on Cardenas Vela’s whereabouts and his likely hideouts. Cartels usually try to avoid conducting hits on U.S. soil, which suggests that Costilla Sanchez’s faction may have tipped off U.S. authorities, instead of killing him.

There has not been any confirmation that Los Metros was responsible for the tip to U.S. authorities, but it will benefit from Cardenas Vela’s removal from the game. It appears Costilla Sanchez has already begun efforts to consolidate power before the Los Rojos faction has a chance to reorganize and name a new leader. Such efforts will likely include putting out orders to kill other Los Rojos faction leaders, which may explain why Jose Luis “Comandante Wicho” Zuniga Hernandez, believed to be Cardenas Vela’s deputy and operations leader of the Matamoros plaza, reportedly turned himself in to U.S. authorities without a fight near Santa Maria, Texas, on Oct. 28. The Los Metros faction will try to move quickly before the Sinaloa cartel or Los Zetas conclude that now is the time to make a move to seize control of the Gulf cartel’s territory.

Though the CDG split has been quietly widening for two years, the apparent eruption of internally focused violence during the past quarter indicates the division may be about to explode. The consequences of a violent rupture within the CDG likely include moves by Los Zetas and Sinaloa to take advantage of the situation and grab territory. This new dynamic is expected to further heighten violence beyond the already volatile conditions created by the three-way battle between Los Zetas, the CDG and government forces for control of Mexico's northeast. The cities specifically effected by these developments are Matamoros, Reynosa, and Tampico – as well as the smaller communities along the network of roads connecting them. Since July 2010 the U.S. State Department has maintained an active order to restrict the travel of U.S. diplomatic personnel in the northern tier of Mexico’s states, but Tamaulipas state has been of particular concern regarding personnel security. All recommended corporate security precautions should be adhered to stringently.

Matamoros Matamoros sits just south of the Rio Grande River from Brownsville, Texas, and has been home to one of the most prolific Mexican drug trafficking organizations since the 1990s -- the Gulf cartel. With its long history of organized criminal activity, Matamoros has grown accustomed to periodic bouts of violence, but the sustained high levels of violence which began in February 2010 are continuing through 2011. In the 17 months since the Gulf cartel and Los Zetas began fighting in the Tamaulipas border region, Matamoros remained a stronghold for the Gulf cartel. During 2011, Matamoros continued to be a target for Los Zetas to carry out raids against the Gulf cartel, and running firefights in the streets of Matamoros became almost a weekly -- and sometimes daily -- occurrence.

The security threat to Johnson Controls facilities in the Matamoros area over the next six to 12 months stem from the above discussed schism within the Gulf cartel due to increases in intra-cartel combat, Zeta forces pushing into the area with large forces to take advantage of Gulf weaknesses, Sinaloa forces attempting to make the same move (and fighting against Los Zetas), and the very real necessity of increased military actions against all parties. Expect running gun battles in any zone of the city, cartel road blocks (often funneling traffic into ambush kill zones), rampant vehicle high-jacking activities by all cartel elements, and heavy clashes between military and cartel forces.

ReynosaReynosa, just across the Rio Grande River from McAllen, Texas, is certainly no stranger to violence. The Reynosa area has been under the control of the Gulf cartel following the Los Zetas strategic retreat to its strongholds in Monterrey, Nuevo Laredo, and Veracruz, in July 2010. But that Gulf cartel control has been regularly and violently contested by Los Zetas over the last 16 months.

Today, the Tamaulipas border region is the front line of a conflict between the Gulf cartel and Los Zetas – with occasional assistance to the Gulf by the Sinaloa cartel. Reynosa is caught right in the middle. In addition to the running gun battles, skirmishes between the Mexican military and the cartels have paralyzed the city for hours at a time. The competing criminal groups have been known to deploy their own checkpoints in the area in an effort to catch rival cartel members. We continue to see both Zeta and Gulf elements utilize roadblocks to impede the response of Mexican soldiers and police to cartel activities. Typically there is a heavy rash of vehicle thefts of tractor-trailer rigs and other heavy commercial vehicles within a few hours of a major cartel clash, as gunmen either aim to keep out or hem in military, law enforcement, or rival cartel forces.

MonterreyThe greater Monterrey metropolitan area, in Nuevo Leon state, is the third largest population center in Mexico – and the country’s industrial and manufacturing hub. In addition to being a commercial powerhouse, Monterrey is a well-known stronghold for the Los Zetas organization. Strategically situated about 150 miles south of the Texas-Nuevo Leon border, the Monterrey metro area is a key transshipment point for legitimate commerce and illicit goods headed to northern Mexico and South Texas, largely because of the highway infrastructure that connects it to the important Reynosa and Nuevo Laredo border crossings. The conflict between Los Zetas and the New Federation spread westward into the Monterrey area during 2010 and, though the level of violence has not been nearly as intense as the conflict to the east along the South Texas-Mexico border, contingents of the Sinaloa and Gulf cartels have been targeting the Los Zetas support network in and around Monterrey in a regional offensive that began in the final weeks of 2010. Police officers and journalists who are known to be affiliated with Los Zetas have been threatened, targeted for kidnapping or killed in a move to slowly undercut the Los Zetas organization in Monterrey.

This continued offensive by the New Federation has degraded the security environment in the Monterrey region over the last 12 months. In Monterrey, Los Zetas have employed tactics similar to those seen in Reynosa. The groups will hijack and disable large tractor-trailers and other vehicles to block major thoroughfares throughout the city, stalling traffic for hours. Los Zetas typically use this tactic while conducting operations against rivals or moving large quantities of drugs through a particular part of town, in order to hinder a response by Mexican security forces.

Due to the economic importance and size of Monterrey there have long been significant numbers of troops and Federal Police agents in the city, yet there have not been significant federal deployments to augment these forces. They are currently positioned throughout the Monterrey area at checkpoints and as quick-reaction forces to thwart possible cartel activities or operations. Should anyone associated with Johnson Controls encounter a military or law enforcement checkpoint, the person should stop and follow the directions of security personnel. Failure to do so could result in security forces firing upon the vehicle. Several innocent civilians have lost their lives when they have tried to avoid these checkpoints or disobey directions.

Criminal ThreatMexico-WideThe general crime threat in Mexico is at a critical level and has been for more than a decade. Changes in the security landscape over the last couple of years, however, have led to an expansion of criminal threats in the country. Three recent developments in particular illustrate this growing problem.

First, Mexico's rampant corruption and general breakdown in law and order have created an environment in which other criminal organizations, unrelated to the drug trade, can operate with impunity. Mexican authorities have their hands full with the cartels and have not had the resources to focus on other criminal activity. While Mexican police have always had a reputation for corruption, the extent of the problem is not fully understood. Over the past two years, several high-ranking officials have been arrested on charges of cooperating with organized crime.

Second, many drug-trafficking organizations have begun to turn to other criminal activities to supplement their incomes. Previously, drug traffickers generally focused their attention solely on the lucrative drug trade. This meant drug traffickers rarely crossed paths with civilians not associated with the drug trade. However, due to the government offensive against the cartels and U.S. efforts to interdict drug shipments from South America over the past two years, cartel turf battles have intensified, as have feuds within the organizations. As a result, many drug traffickers are becoming increasingly involved in crimes such as extortion and kidnapping for ransom (KFR).

(It is important to note that accurate statistics regarding the kidnapping and extortion threats in Mexico do not exist, since the vast majority of kidnappings are not reported to authorities. However, one inquiry by a Mexican legislative committee estimated there are some 4,500 kidnappings per year in Mexico, only one-third of which are reported to police because families fear reprisals from the kidnappers and because the police often are involved in such crimes. Nevertheless, Statistics available from the Mexican Public Security Secretariat show reported cases of kidnappings in Mexico rose by 40 percent from 2008 to 2009, increasing from 838 to 1,181 incidents. While these reports should not be considered comprehensive, they do provide a useful baseline.)

Several KFR groups operate throughout Mexico with varying degrees of sophistication. The more professional groups employ several teams with members assigned to specialized roles such as surveillance, counter-surveillance, and snatch and ransom negotiation. On the other end of the spectrum, so-called “express kidnapping” gangs flourish in major metropolitan areas. These gangs snatch people off the street and take them on a tour of banks and ATMs where the victims are forced to withdraw cash from their bank accounts. Due to the nature of express kidnappings, these gangs do not have to be tactically skilled. Another kidnapping trend in Mexico is the phenomenon known as the “virtual kidnapping.” In one such scheme, the kidnappers position themselves at a mall or other youth hangout claiming to offer young people a chance to enter a contest for prizes such as iPods or Xboxes. The youths then fill out “entry blanks,” unwittingly offering up personal information such as addresses, home phone numbers and the names of parents. Afterward, the kidnappers follow the potential target until he or she enters a place where cell phones cannot be immediately answered, such as a school or movie theater. This provides the kidnappers with a window of opportunity to call the target’s parents, claim that they have abducted their child, describe details of authenticity such as what the person is wearing or where he was going, and demand that a ransom be paid immediately. While we are not aware any cases of kidnapping or extortion reported by U.S. manufacturers operating in the auto industry in Mexico, the exposure of companies such as Ford and GM in Monterrey and Mexico City, means they likely

have had to deal with these issues, at least in terms of taking preventive security measures.

Third, with Mexican security forces tied down in the cartel battle, common criminals not involved in the drug trade have flourished. Car thefts, robberies, muggings and pick-pocketing have long been staples in the Mexican crime scene, and such crimes have increased throughout the country in recent years. Indeed, these more common crimes are much more likely to affect Johnson Controls operations and personnel in Mexico than the cartel-related violence dominating the headlines.

The obvious risk associated with these developments is that, while the government continues to make it difficult to traffic drugs, very capable drug-trafficking organizations and other criminal groups will continue to target businesses and citizens throughout Mexico for abduction and extortion. These trends can be expected to persist at least for the next two or three years, until the country’s security situation stabilizes.

Matamoros (Jan. 21, 2011)Matamoros has a unique criminal operating environment. Virtually every criminal activity that takesplace in and around the city is somehow tied to a larger drug cartel. With a population of a little morethan 420,000 people, the city has geographic and criminal landscapes that are somewhat easier tomonitor than larger metropolitan areas like Monterrey or Ciudad Juarez. Most of the crime that takesplace in Matamoros occurs on the orders or with the complicity of either Los Zetas or the Gulf cartel.The fighting between the two organizations has increased over the past year, and as the Gulf cartel10© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comhas appeared to be suffering from some internal turmoil, it and Los Zetas have both had to expandtheir criminal enterprises from simply trafficking drugs and people to a wider range of activities to helpfund their efforts to control the Matamoros region.Auto theft increased dramatically throughout 2010 in the Matamoros area, specifically the theft ofSUVs, heavy-duty trucks and four-wheel-drive vehicles. This can be directly related to the cartel needfor these vehicles to transport drugs and people. Armored cars have proved to be a particularlysought-after commodity, used by criminal groups as ersatz armored personnel carriers. Many MNCplant managers have requested these types of vehicles as the security situation has deterioratedinside the city. While armored vehicles are an option, STRATFOR advises against the use of highlyvisible and heavily armored luxury-style vehicles because they raise the targeting profile of corporateusers who often lack sufficient training to handle the vehicles. In many cases, the handling andmobility problems caused by the heavy armor have actually hindered the ability of drivers to escapethreatening situations. Instead, low-profile and less heavily armored vehicles are recommended ifarmored transportation is preferred.A tactic favored by both the Gulf cartel and Los Zetas is to hijack large tractor-trailers and personalvehicles to block key intersections when they are conducting operations or when high-rankingmembers of their organizations have been captured by Mexican authorities. This tactic is designed toimpede the response of Mexican security officials and first responders. There have been numerousinstances of this tactic being employed in the Matamoros area, most notably in the Mexican militaryoperation that killed Tony Tormenta in November 2010, when multiple roadblocks were set up thatsignificantly affected the ability of anyone to move about the city. While these hijackings are rarelyviolent when victims comply and give up their vehicles, they are usually carried out by several armedmen and have the potential to escalate very quickly. The targeting of the vehicles is based on size andconvenience, not necessarily contents or occupants. Often, the vehicles are set ablaze to furthercomplicate the process of clearing blocked intersections. This can result in the loss of precious cargo aswell as company vehicles and equipment.While the cartels prefer to hijack already assembled and running vehicles, cargo theft is also a concernthat plagues the northern Tamaulipas border area and impacts most industries operating in the region.Mexican Federal Highway 2, which runs from Matamoros to Nuevo Laredo, has been identified as oneof the most dangerous roads in Mexico by the Mexican National Chamber of Auto-Transportation ofCargo (CANACAR). While most incidents of cargo theft in Mexico occur outside urban areas, high-valuecargo has been targeted at warehouse depots and customs checkpoints in cities. However, due toMatamoros’ proximity to the U.S. border, travel time to the United States is short enough to mitigatethe threat of cargo theft along this route to some extent. We are not aware of any recent examples ofthe theft of auto components or of anything specifically related to the CRH Group’s facility in

Matamoros, which Johnson Controls is acquiring, although no part of the Matamoros metro area isexempt from this threat.Regarding other forms of crime in Matamoros, the Gulf cartel has not traditionally engaged in largescaleextortion schemes against companies, unlike its rival, Los Zetas, who are known to be quiteruthless in this practice. In fact, maquiladora leaders commented in 2010 on how maquiladoras inMatamoros had seemingly been sheltered during the conflict between Los Zetas and the Gulf cartelover the previous year, compared to their maquiladora counterparts in Reynosa. However, given thestate of flux in which the Gulf cartel currently finds itself, an increase in extortion schemes is likely inthe Matamoros region over the next two to three years. It is important to note that media coverage ofany new extortion operations will likely be hard to come by due to the threat of retaliation, which willmake it more difficult for MNCs operating in Matamoros to anticipate and navigate around the threat.While in many larger Mexican cities the conflict between the Gulf cartel and Los Zetas and between thecartels and Mexican security forces has allowed lower-level criminal organizations to flourish, opensourcereports indicate that lower-level criminals in Matamoros are fleeing the city for fear of gettingcaught in the crossfire. As a result, Matamoros has been somewhat sheltered from petty crimes likepick-pocketing and mugging. However, home and business invasions and other burglaries have11© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comincreased over the last six months as the Gulf cartel and Los Zetas have targeted rivals hiding amongthe civilian population and stolen valuables to help finance the fighting. STRATFOR expects this type ofcrime to persist and perhaps increase over the next two to three years as the fighting between LosZetas and the Gulf cartel continues.ReynosaWhile the Reynosa and northern Tamaulipas region boasts arguably the highest volume of drug trafficin Mexico, the conflict that recently erupted between Los Zetas and the New Federation along theTamaulipas-South Texas border has prompted both groups to venture into other criminal activities tohelp fund the conflict. Home and business invasions have increased dramatically. For example, on thenight of April 9, a group of armed men raided a facility in Reynosa owned by Schlumberger, a globaloil services company, making off with five company trucks and several uniforms, perhaps to be used infuture break-ins at the facility or other Schlumberger installations in Mexico.Extortion of businesses is widespread in Mexico, and a refusal to meet extortion demands has led toseveral business owners being kidnapped and held for ransom. Threats and extortion attempts againstthe gambling industry in northern Tamaulipas state have caused at least 12 such businesses to closetheir doors. (At least two deaths in the area are thought to be related to businesses that failed to payprotection fees to criminal groups.) Due to a high level of impunity in the Reynosa region and therelative ease of access to the United States, residents of South Texas are being kidnapped inincreasing numbers and brought to Reynosa where they are held captive while ransom payments arenegotiated. More often than not, these cross-border KFR cases result in the death of the victim whenbusinesses or family members refuse to pay the ransom or simply cannot come up with the amount ofmoney demanded.Moreover, firefights between Los Zetas and the New Federation as well as with the Mexican military inthe Reynosa area have prompted many businesses to cancel shifts and/or send workers home early.Some workers even have refused to leave their homes for work after a firefight has taken place in thecity for fear of being caught in the crossfire.Cargo theft is also a serious concern for any company operating in Reynosa. There are some 140maquiladoras in 11 industrial parks in the Reynosa area, and these industrial parks offer aconcentrated target-rich environment for enterprising criminals. In 2009, three high-value shipmentswere hit by cargo-theft gangs in Reynosa, resulting in several million dollars in losses. Although it is aserious concern, the threat of cargo theft in Reynosa is not as great as it is in the more interior regionsof Mexico. Proximity to the border mitigates the threat because the cargo has a shorter distance totravel before reaching the United States.The cartel tactic of hijacking large trucks and private vehicles and using them to block roadways is alsoa cause of concern in Reynosa, though these blockades do not occur frequently enough to warrantfurther precautions, nor do the vehicles involved appear to be targeted for their cargo. While therehave not been any reports of drivers being harmed in these incidents, armed gunmen taking over aJohnson Controls vehicle could pose a serious risk of bodily harm to employees.

Other, more common crimes, such as pick-pocketing, mugging, car theft and carjacking, do occur inand around Reynosa, but they occur nowhere near as frequently as they do in larger metropolitanareas such as Mexico City. Many criminal groups that operate on both sides of the border in thisregion, such as Texas-based Tango Blast, specifically target the auto industry in stealing vehicles andauto parts. STRATFOR believes this kind of crime will increase in the Reynosa area over the next twoto three years as the security situation worsens before it improves.• (Updated Jan. 21, 2011) Many of these conditions still persist in Reynosa, although the criminallandscape of the area seems to have changed slightly. There are unconfirmed rumors of a trucebetween elements of the Gulf cartel that control the urban areas of Reynosa and the Los Zetaselements that operate in the more rural areas around the city. There are still firefights andgrenade attacks, but the frequency of such incidents has subsided somewhat over the last12© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comthree months. It is important to note that any truce between these Gulf and Los Zetas elementswould not be expected to remain in place more than a few months, as which point we could seethe violence return to levels seen in April 2010.JuarezOf all cities and regions in Mexico, the Juarez area has been hit perhaps the hardest by the dramaticincrease in criminal activity. Kidnapping, extortion and corruption are rampant throughout the city andsurrounding areas. Perhaps the strongest indicator of the level of corruption in Juarez is the fact thatLa Linea, the VCF enforcement arm, is comprised of current and former members of the Juarez policedepartment, underscoring the concern that law enforcement personnel still on municipal and federalpayrolls also are working actively for the cartels. La Linea has been one of the primary instigators ofthe escalating violence in the city, serving as hit men for the VCF and as muscle to force businessesand other entities to produce “cuotas,” or extortion payments.VCF and La Linea are not the only organizations in Juarez extorting businesses in exchange forprotection. Nearly every criminal group operating in the Juarez area uses extortion to supplement theirincomes, especially as the groups try to fund their operations against each other, from local streetgangs like Los Aztecas and the Mexicles to the VCF and Sinaloa cartels.• (Updated Jan. 21, 2011) According to recent insight from STRATFOR sources, the VCF isbelieved to be limited to the downtown area of Juarez while Sinaloa forces allegedly control allother parts of Juarez, including the main trafficking corridors. Since the VCF is the primaryorganization that conducts extortion campaigns, businesses and employees in the downtownarea of Juarez can expect more extortion-related threats than those who work in other parts ofthe city.Kidnapping is also prevalent in the Juarez region, and it often is employed against persons orbusinesses that refuse to pay their cuotas. Also targeted are high-net-worth individuals or peopleportraying themselves as such. Again, the sophistication of kidnapping operations ranges fromprofessional teams with specialized roles to amateur gang operations.Large corporations also fall victim to extortion attempts by criminal groups operating in Juarez. Thedegradation of the security environment in the city and the increase in extortion has prompted mostMNCs and maquiladoras to spend more money on security at their Juarez facilities. While suchmeasures aid in the protection of company assets and employees at work, criminal elements also havestarted targeting employees at their homes or while they are in transit. Management and executiveswho live and work in the in the Juarez area have been furnished armored cars and executiveprotection, so criminals have begun targeting lower-level employees. The impact on company moralebecomes a kind of psychosis that spreads throughout the workforce and, in many cases, results in lowemployee attendance. STRATFOR sources involved in the computer industry in Mexico recentlyreported employees were being pulled off of company buses and later killed, presumably because thecompany refused to meet extortion demands.More common crimes are also prevalent throughout the city. Naturally, security forces are not nearlyas concerned with more petty offenses as they try to stop targeted assassinations and kill or capturecartel enforcers, so little is done to detain and prosecute common criminals. While the more violent,headline-grabbing crimes involve those in the drug trade, common criminals target victims ofopportunity and do not discriminate.Monterrey

Corruption, while a pervasive problem throughout Mexico, is especially prevalent in Monterrey. LosZetas have co-opted a large number of local, state and federal law enforcement personnel in theMonterrey metro area through the common ploy of “plata o plomo,” or silver or lead. This is the cartelreminder to public officials that they have two choices: They can cooperate with the cartels andreceive plata (silver, or money) or resist the cartels and receive plomo (lead, or bullets). This messagecan be seen in the large number of targeted assassinations of law enforcement officials in the13© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comMonterrey area who likely did not respond appropriately to Los Zetas’ demands. Also, as part of itsoffensive against Los Zetas, the New Federation has killed 25 Nuevo Leon police officers allegedlycorrupted by Los Zetas and has vowed to kill 20 more.Widespread police corruption and the deteriorating security situation have led to a breakdown of lawand order in northern Mexico, where other criminal groups are now able to operate more freely. Thecorruption can manifest itself in many ways, from having to bribe a police officer to get out of aspeeding ticket to being detained unlawfully by a police officer and turned over to a criminal group andheld for ransom. As elsewhere in Mexico, the increasingly chaotic and permissive environment in theMonterrey area has led to an uptick in petty crimes as common criminals take advantage of distractedsecurity personnel. Although carjacking, car theft, pick-pocketing and mugging occur in the city,however, these crimes are still less common in Monterrey than they are in other large cities in Mexico.In Monterrey, pickpockets and street beggars are common in tourist areas and crowded parts of town,while muggers operate mainly at night in isolated areas.As the industrial and manufacturing hub of Mexico, Monterrey is ripe for cargo theft. While about 50percent of such incidents occur in the Mexico City area, the Monterrey area is the second most activearea for cargo theft in Mexico. Large volumes of everything from raw materials to high-end finishedgoods travel in and out of Monterrey every day, creating a target-rich environment for cargo thieves.Additionally, being about 130 miles from both the Nuevo Laredo and Reynosa border crossings, withinthe 200-mile border zone in which most cargo theft occurs, the Monterrey area provides criminalsample time to stalk, stop and interdict shipments. Mexico’s two major highway corridors, FederalHighway 85 to Nuevo Laredo and Federal Highway 40 to Reynosa, are the lifelines that pump productsfrom Monterrey into the United States. Since there are no alternative routes, these highways offerlucrative hunting grounds for Mexican cargo thieves, who are growing increasingly active.The threat of kidnapping also is increasing in the Monterrey area, even though the city has notexperienced the same level of KFR cases that other regions in Mexico have seen. On April 21, forexample, more than 50 armed men stormed two hotels in the heart of Monterrey and kidnapped sevenindividuals before fleeing the area. The group even went so far as to block major intersections withhijacked vehicles and a construction crane to impede the security response.• (Updated Jan. 21, 2011) STRATFOR has been anticipating an escalation in kidnappings in theMonterrey area due to the large concentration of wealth in the region and to the defensiveposture Los Zetas have had to assume because of their ongoing conflict with the NewFederation. The threat of kidnapping in Monterrey has increased to such an extent that the U.S.State Department ordered the departure of all minor dependents of U.S. diplomatic personnelin the region in August 2010. According to anecdotal reports from the U.S. State Departmentand open-source information, kidnapping-for-ransom cases have increased dramatically overthe last six months, including the targeting of U.S. business executives.

Political Stability

The Mexican political system is gearing up for general elections scheduled to be held July 1, 2012. The elections will determine who will succeed Mexican President Felipe Calderon in the presidency for the next six years in Mexico, and by proxy, Mexico’s ruling party.

Mexico’s campaign against the cartels is being waged as a joint effort between the military and federallaw enforcement agencies. State and local law enforcement are often called upon to assist, though thefederal government views them as far too untrustworthy and incompetent to play a serious role. While

previous presidents have relied on the military for more focused counternarcotics missions, Calderonhas deployed an estimated 45,000 troops around the country to conduct security operations, searchfor drug shipments, destroy drug production facilities and make arrests. General security operationshave been a noteworthy addition to the military’s role over the past two years. During 2007, suchmilitary operations resulted in a noticeable security improvement, but by early 2008 it became clearthat the army was stretched too thin and no longer capable of deploying sufficient force to everyembattled area. Still, the military has proved to be by far the most effective -- if controversial -- forcefor dismantling cartel operations. Meanwhile, as more and more reformed Federal Police agents get tothe field, we will see them take the lead in counter-cartel security operations. As we recently saw inJuarez on April 9, 2010 the Federal Police are now able to take over the control of security operations14© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comfrom the military. Juarez, however, is a unique situation, and the military remains the primary securityforce used in counter-cartel operations throughout the rest of the country.• (Updated Jan. 21, 2011) As in Juarez, a new federal government offensive dubbed CoordinatedOperation Northeast deployed the Federal Police in November 2010 as the primary tool tocombat cartel operations and provide a level of security in other areas of the country. However,the Federal Police were confined to the urban areas of Reynosa, Nuevo Laredo, Matamoros andMonterrey while the military was deployed in the more rural regions along with the Mexicanspecial operations group (GAFES) to conduct black operations targeting high-value carteltargets.Several factors account for the high rate of official corruption, and none of them can be easilyresolved. For one thing, the billions of dollars that Mexican drug cartels make each year mean theyhave plenty of cash to bribe government officials (witness the case of the federal drug czar who wasraking in $450,000 per month from the BLO). Second, low education requirements and poor salaries ofpolice officers have traditionally made law enforcement a career of last resort. Given this reality, fewpolice officers would refuse a bribe if offered one, especially when the alternative is death. Moreover,there is also a historical culture of graft in Mexican police departments whereby street cops areexpected to pay bribes to their superior officers. Being poorly paid, the street cops must get themoney to pay their superiors from somewhere, hence their corruptibility. All of these issues meanforeign businesses in Mexico are forced to deal with security on their own, since the local authoritieshave proved to be unreliable (and at times malicious) partners. In addition, the tendency to employretired law enforcement or military personnel in corporate security positions elevates the risk tobusinesses. In these cases, it is important to pay close attention to vetting procedures, which requiresadditional time and resources from both security and human resource departments.The violence in Mexico actually is reaching a saturation point politically and socially. Innocent civilianscaught in the crossfire are growing increasingly angry and vocal, and protests have been staged inMonterrey, Juarez and Mexico City that have drawn tens of thousands of people. With the 2012presidential election approaching, Calderon and his National Action Party are trying to find a way toreduce the level of violence and restore the balance of governmental and cartel power in the country’smost embattled regions. Eventually, over the next two or thee years, companies looking to expandoperations in Mexico could find themselves operating in a less volatile security environment.

Impact on Business OperationsThe deteriorating security situation in Mexico presents a range of security implications to WesternMNCs doing business in Mexico. As organized-crime groups expand their targeting, it seems all butinevitable that MNC personnel and facilities will become part of that growing target set.In most cases, the situation will likely warrant increased spending on security measures. Cargo thefttypically costs the private sector in the United States more than $30 billion each year in insurance,replacing and reshipping lost cargo and preventative security measures alone. Dedicated cargo-theftgangs number into the hundreds in Mexico, and though these gangs vary in sophistication, each gangusually has at least one or two members with some level of operational experience. There are evencargo-theft gangs (like the Texas-based auto-theft gang Tango Blast) dedicated to targeting specificbusiness sectors such as the automotive industry, which has direct implications for Johnson Controls.

The Los Pumas gang is a criminal group operating out of the central Mexican state of Mexico, just westof Mexico City. Several members of the group were arrested April 6 for kidnapping a truck driver andstealing auto parts, which are a profitable commodity in the thriving black markets of both Mexico andthe United States.This threat has led some companies to hire armed escorts for shipments of high-value merchandise.However, other companies feel armed escorts attract too much attention to the shipment and to thecompany and can cause more problems than they solve. As the security situation in Mexico continues15© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comto deteriorate, the costs of doing business will continue to go up. Neither approach -- enhancing visiblesecurity or maintaining a low profile -- is completely effective, and incidents of cargo theft in Mexicolikely will increase over the next two to three years.As criminal threats continue to increase, more companies are seriously considering the possibility thattheir personnel could be targeted as well. Executives and employees who have not received protectiveservices may begin to demand them for themselves and their families. Expenses related to theseservices, which may include armored vehicles and armed security personnel, can quickly add up. Andwhile executives are perhaps most at risk during their workday routine, the deteriorating securitysituation in many parts of the country could make it necessary for some companies to providepersonal protection during business travel, also at a considerable expense.• (Updated Jan. 21, 2011) It is important to note that providing such security measures maycatch the attention of criminal elements. For example, on Jan. 4, 2011, a heavily armed groupkidnapped a U.S. citizen who reportedly worked for an unnamed U.S.-based company withoperations in Monterrey. The victim apparently was driving a company-issued armored luxuryvehicle at the time of the kidnapping, according to STRATFOR sources. The victim was severelybeaten during the ordeal, and was released later in the evening in the nearby city of Escobedo,Nuevo Leon state, just north of Monterrey. No ransom was demanded, indicating that theattackers’ main objective was stealing the armored luxury vehicle. As noted above, armoredcars are sought after by organized crime elements for obvious reasons. While MNCs sometimesshare this view of armored cars as offering effective mobile protection, drivers must beadequately trained in their use. And as with any expensive luxury car, driving an armoredvehicle significantly raises the occupant’s profile, thereby making him or her a “high-value”target. Training in self-defense and countersurveillance as well as in armored-car operation andevasive-driving is recommended for employees working and traveling to Mexico.The host of threats facing MNCs operating in Mexico will require many corporate security teams toreassess several aspects of their security programs. Increasing protective services for employees, forexample, may not only require hiring executive protection teams but also could require employingadditional corporate security managers to oversee enhanced programs. These security managers willalso find themselves busy preparing and updating other programs, such as reliable communicationssystems, business-travel protocols and contingency plans.Deciding where to focus security spending will depend on the particular situation and threat. ForJohnson Controls, two principal areas of interest are cargo theft and personnel safety. Whileunderstanding the cost of an armed escort or security camera is fairly straightforward, there are other,less obvious costs involved in adopting an appropriate security posture in Mexico. For example, thereare redundant features required to secure a single shipment of goods effectively -- from multiple GPSdevices to track the cargo to sophisticated locking mechanisms for shipping containers to effectivecountersurveillance programs in and around cargo-staging areas.There is no denying the fact that many of these security measures pose difficult financial decisions formany companies. At the same time that companies search for ways to reduce costs, they must nowaddress whether to increase spending on security measures (assuming they have or can obtain thefunds to do so). But while these costs may be uncomfortable, many companies will find themnecessary to maintain business operations and ensure employee safety.

ForecastAs we look ahead two to three years, which is the time it will take for the Mexican government to even

begin to stabilize the security situation, Mexico will continue to face some extraordinary challenges.The current cartel conflict has led to unprecedented levels of violence that the Mexican governmenthas been unable to control. The Mexican government has exhausted vast amounts of nationalresources to try to reduce the violence to politically acceptable levels, but violence has continued to16© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comincrease steadily throughout the country. While it is difficult to forecast the security environment for aparticular city or region, indicators of broader trends in violence in Mexico lead STRATFOR to believethere is hope.As previously mentioned, violence in Mexico is reaching a saturation point politically and socially. Aspoliticians try to save face and citizens fed up with the violence become more vocal, Mexico is reachinga point where something must change. And something certainly will; it is just the form of that changethat is still uncertain.As we see it, there are two possible scenarios: One involves the eventual involvement of the UnitedStates in the conflict. There is mounting pressure for Mexico’s northern neighbor to take a more activerole in counternarcotics efforts, but political and social sensitivities in Mexico have prevented asignificant U.S. presence on the ground in Mexico. However, there are indications that this sentimentin Mexico is beginning to change. The president of the Mexican War College recently said Mexicocannot handle the cartel problem on its own. Even more indicative of this changing sentiment was therecent decision to embed U.S. intelligence analysts and operatives in the Juarez Intelligence andOperations Fusion Center to better facilitate information sharing. However, STRATFOR believes thetrigger for a dramatic increase in U.S. involvement will be the targeting of a U.S. elected official orhigh-net-worth individual on U.S. territory by Mexican drug cartels.With an increase in U.S. involvement, the situation in Mexico could become similar to the situation inColombia, where U.S. advisers trained and sometimes led Colombian troops and law enforcementpersonnel in counter-cartel operations as part of Plan Colombia. It would also mean an increase in aidto Mexico in addition to the $1.4 billion Merida initiative already in place, in which U.S. federal drugenforcementagents provide equipment and limited training to their Mexican counterparts. A significantincrease in U.S. assistance, including more hands-on involvement by U.S. advisers in conjunction withthe ongoing Merida initiative, would give Mexican security forces a distinct advantage in combatingcartel power throughout Mexico.Once Mexican security forces are able to reduce drug-related violence to politically acceptable levelswith more direct U.S. assistance, Mexican security forces can then divert excess resources to focus onother crimes, such as kidnapping, extortion, cargo theft and other more common crimes thatpermeate the security landscape throughout Mexico, affecting both Mexican nationals and foreignbusiness operations.The second scenario would be to restore the balance of power among the cartels and the Mexicangovernment, which conceivably could be achieved over the next two or three years. In order for thisequilibrium to be achieved, an agreement must be reached between the cartels and the Mexicangovernment that does not necessarily involve President Calderon shaking hands with Sinaloa leaderJoaquin “El Chapo” Guzman. A unified drug-trafficking group that is able to consolidate and preventitself from fracturing would be the most likely candidate to enter into such an agreement. And it is notunreasonable to assume that sometime between now and the end of 2012, one cartel will have cooptedand/or destroyed most of its competitors and emerged as the dominant drug traffickingorganization in all of Mexico’s embattled regions.Today, the Sinaloa Federation appears to be the most likely choice, given the geography it controlsand the upper hand the organization seems to have in various conflicts throughout Mexico. TheSinaloa Federation is engaged in just about every region of Mexico, giving it a geographical advantagecompared to more isolated organizations like La Familia Michoacana, which controls only the state ofMichoacan. While many of the regions the Sinaloa is engaged in are considered disputed territory, thecartel is often on the winning side. The New Federation, an alliance between the Gulf, Sinaloa and LaFamilia Michoacana cartels, is a testament to how Sinaloa might co-opt willing organizations whiledestroying rival organizations like Los Zetas.Going forward, if the Sinaloa Federation were able to consolidate its power and gain hegemony in theworld of Mexican drug trafficking, the cartel would be able to divert some of it enforcement resources17

© 2011 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.comto quell the activities of other criminal organizations that have risen up in the chaos. This is not to saythat crime in Mexico would disappear, only that the crime that did occur would run the risk of Sinaloablowback or be heavily regulated by the cartel. However, this kind of transition would take time, andthe security situation in many parts of the country would remain chaotic. Should the Sinaloa scenarioplay out, businesses operating in Mexico would likely have to deal with the cartel in some form orfashion, and whether this would involve extortion payments is unclear. In any case, as the dominantcartel authority in Monterrey, the Sinaloa Federation likely would be interested in any expansion plansby Johnson Controls in the area.• (Updated Jan. 21, 2011) This scenario is beginning to play itself out in the cities of Tijuana,Acapulco and Monterrey as the Sinaloa Federation begins to increase its presence and expandits operations in these areas. While there have been some spikes in violence, places likeTijuana have benefited from the more predictable operating environment resulting from theSinaloa clamp-down on lower-level organized crime and everyone in the city now knows who isin control, at least for the moment. The main issue going forward will be the SinaloaFederation’s pursuit of control over the eastern half of Mexico, including the cities in whichJohnson Controls operates. A degradation of the security environment would follow as theSinaloa Federation clashes against Los Zetas, who will fight to maintain control over the region.(Under the terms of the current New Federation alliance, the Sinaloa Federation would not fightagainst the Gulf cartel, although, as we have seen in past years, truces can be temporary.) Anystabilization of this region similar to what we are currently seeing in Tijuana would probablytake at least two or three years, and this is assuming that Los Zetas could be marginalizedenough by the Sinaloa Federation. We have seen time and again that when backed into acorner, organizations like Los Zetas have proved to be quite resilient, especially on their hometurf.In both scenarios, the level of violence would get much worse before it improved. Both situationsrepresent a single entity essentially taking over control of geography that presently is controlled bymultiple actors. As we have seen time and again, the cartels will defend their turf ferociously. But theeventual domination of the geography by a single entity will force the weaker groups away fromtraditional methods of generating income, primarily drug trafficking, to other criminal activities. Wealready have begun to see indications of this in the current conflict. While still active in drugtrafficking, Los Zetas have begun to engage in extortion and kidnapping in Tamaulipas state.Additionally, the Arellano-Felix Organization (AFO) in Tijuana, Baja California, was relegated tokidnapping and other non-drug related crimes after bearing the brunt of an offensive by the Mexicangovernment and the U.S. Drug Enforcement Administration.Meanwhile, as Johnson Controls looks to expand its operation in Monterrey, it must considerappropriate security precautions to protect its investments, assets and personnel. Any increase inoperations in Monterrey will lead to an increase in exposure to the city’s degrading securityenvironment, and it is simply a matter of when, not if, organized crime will in some way affect JohnsonControls’ operations. Over the next two to three years, common crimes such as kidnapping and cargotheft will continue to increase, and the addition of an auto-parts manufacturing plant likely will drawsome degree of criminal attention. But if the company can prudently persevere through the next twoor three years of continuing turmoil in Mexico, it could be rewarded with a more secure andpredictable operating environment.• (Updated Jan. 21, 2011) Since Matamoros is smaller then the other cities highlighted in thisreport, MNCs operating there are more likely to be impacted by the changing cartel dynamicsand related violence, at least in the short term. Should the Sinaloa Federation decide to focusits resources on the area, Matamoros would likely be one of the first locations to see a decreasein violence due to the existing relationship the Sinaloa Federation has with remaining Gulfcartel elements, making it much easier for Sinaloa to take control of Matamoros than Reynosa,where Los Zetas have a greater presence and more control.