Defense imports are expected to increase during the forecast period (2012-2016)

Tuesday 3 July 2012, Amsterdam

Mexican defense expenditure, valued at US$5.5 bn in 2011, registered a CAGR of 8.7% during the review period and is expected to grow at a CAGR of 10.2% during the forecast period (2012-2016), to reach an estimated US$8.97 bn in 2016. Furthermore, Mexico’s cumulative defense expenditure over the forecast period is expected to be US$37.7 bn, of which US$36.1 bn is expected to be revenue expenditure (see graph ).

Corruption is rampant in the Mexican armed forces, specifically in the army. There is increasing evidence of the expanding role of the Mexican military in the drug war and it is suspected that arms procured by the army are passed to the drug cartels, which use the arms to enhance their drug trade. There is also concern that US aid to Mexico — US$1.4 bn has been pledged to help Mexico reduce drug trafficking — could be used for criminal activity or for personal gain by top military officials. Moreover, there is a lack of transparency in defense contracts awarded to international suppliers, with the government classifying most defense procurements as top secret. Overall, corruption and a lack of transparency are hindering the growth of Mexico’s defense industry.

As the Mexican defense industry comprises of only state-owned companies with little specialization in weapon categories. The resulting lack of advanced defense technology means that foreign weapons suppliers who intend to conduct business in Mexico face infrastructure challenges. Although foreign suppliers can bring advanced technology to Mexico, this results in technology imports without offset incentives, as the defense offset terms are not clearly defined by the Mexican MoD. Consequently, foreign suppliers find pursuing a defense opportunity in Mexico challenging.

Offset obligation provides an opportunity for the development of domestic infrastructural and technological capabilities. However, Mexico has not disclosed any offset obligations imposed for its arms procurement, which is partially responsible for the lack of development in the domestic defense industry. In March 2009, its first major offset agreement was signed between Mexico and France in which, with the purchase of six EC 725 multipurpose helicopters worth US$300 m from Eurocopter, the French company set up an assembly facility in Mexico worth US$500 m, which will help Mexico develop its aeronautical capabilities. However, during the forecast period, the country is also expected to give preference to arms exporters who provide technology transfers to offset equipment imports.