Global supply risks

Migration or Exodus: When Crime Levels Rise

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Perceived crime levels have a definitive impact on a location’s business competitiveness. With the recent surge in crime levels witnessed across countries such as Mexico and Canada, we re-look at the implications this has on the operating environment, business costs, and the overarching dent this makes in a location’s appeal as a sourcing destination.

Mexico, in recent months, has witnessed a steady increase in crime levels. The number of homicides in the country during the first six months of 2016 was 15% higher than the same period last year. These statistics alone do not represent anything new; however, when tied to the fact that this increase in criminal activity is hurting investments and the resulting insecurity is driving firms away, it gives a context and a look at the bigger picture.

The Impact

Over 30 US-based companies have reconsidered moving to safer destinations within Mexico or to exit the country altogether, owing to the dwindling safety aspect in locations such as State of Mexico, Mexico City, and Tamaulipas. Incidents of crimes such as extortion and theft have prompted firms to move to comparatively safer regions in the country such as Queretaro, Nuevo Leon, and Puebla. For the ones that decide to continue to operate, there is the rising cost of spending on security arrangements for employees and supplier assets. These costs eat into the corporate earnings with security-related expenses costing around 6 to 12% of the earnings, a significant amount which could further sky rocket given the current scenario.

A similar trend could replicate across countries such as the Philippines, Jamaica, and India, where crime levels are generally high. Regions such as Mindanao and areas around Manila in the Philippines have witnessed an elevated number of kidnapping incidents. Furthermore, foreigners/expats in Philippines, especially in and around Mindanao are increasingly targeted for kidnap-for-ransom scenarios. Up to 38 kidnappings of local citizens were also recorded in 2015. India’s capital New Delhi also has a history of violent crimes. Canada, too, saw an increase in crime levels in 2015 for the first time in 12 years. Jamaica continues to feature in the list of countries with high incidence of violent crimes.

Sign of times to come?

Apparent from the above examples, geo-political risk associated with a location is an unavoidable fact and while in previous blogs we have seen how to analyze, measure, and mitigate risks associated with social unrest/strikes and to some extent natural disasters, the implications of rising crime levels globally seem all the more tangible and far reaching. The decision by some of the US-based firms in Mexico to suspend business operations and relocate could either be viewed as an overreaction or as a strategic move that might pay dividends in the long run, from the finances as well as safety point of view. Some locations, such as Jamaica, have witnessed businesses adopting coping mechanisms ranging from fewer nightshifts to training programs for “at-risk” youth as well as collective funding for security initiatives. These steps impact productivity as well as finances, but are a small price to pay for long term business continuity. Additionally, for potential investors, this highlights the need for due diligence methods that closely study the changing landscape of geo-political risk in locations, its impact on the macro-economic environment and take an informed decision that covers not only the immediate cost of business but also the long term viability to be able to source from these markets troubled by crime.

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