How To Run A Drug Cartel: Book Review/Explanation

I re-read an excellent book recently.

A book SO GOOD I haven't been able to get it out of my head.

What is it called?

Well, you'll have to scroll to the end of the article to find out.

For now, I'm going to explain what I learned from it.

Here is how to run a drug cartel.

 

How To Run A Drug Cartel: A Business Perspective

howtorunadrugcartel

PRODUCTION

Coca. The plant used to make cocaine. It grows primarily in Colombia, Bolivia and Peru. Cartels have labs in these countries; outposts - often in the jungle - where coca gets turned into cocaine.

Without coca, there is no cocaine.

Knowing this, starting way back in 1961, the United States government began promoting a strategy to destroy coca crops in these countries. The logic being either:

1. We’ll destroy all the plants and they’ll be no cocaine

2. We’ll destroy most of the plants and nobody will be able to afford cocaine.

Problem: destroying coca plants doesn’t work. Should work in theory: cut supply of the base ingredient of cocaine while demand for the drug stays the same, price rises to unaffordable levels and people can no longer afford cocaine.

Why doesn’t it work?

Well, cartels have a monopoly of demand (a monopsony). As the overwhelmingly-largest buyers of coca, drug cartels dictate the price of the plant. Regardless of supply, you’ll find the price of coca doesn’t really change.

In any given area, they’ll be one cartel in control, and buying up all that coca. Lack of supply? Doesn’t matter. Farmers have no choice but to sell it to them at the price they set. That, or they don’t sell it at all. If they try, they’ll be killed.

The cartel is the only buyer.

In short, destroying coca doesn’t hurt cartels, it doesn’t hurt consumers, it only hurts the poor coca farmers!

You need about a ton of coca leaves to make a kilo of cocaine. A ton of coca costs about $500. A kilo of cocaine in the States goes for $150,000 retail. In other words, even if the price of coca doubled, the street cost per gram would increase by less than a dollar.

…and that’s assuming 100% of the additional cost of coca would be passed on to the consumer.

So, basically, bad strategy. Impossible to completely eradicate the crop, and decreasing supply doesn’t raise the retail price…this isn’t your typical product!

Point is, cocaine gets made. And, as long as it’s profitable, it will continue to get made. Now it needs to get transported. How is that done?

 

 

TRANSPORTATION

Drugs are transported using many methods. Cars, trucks, trains, boats, planes, humans, catapults, tunnels under the US border. Any way you can think of, it’s probably been done. Indeed, there are some very clever ways to smuggle drugs.

Originally the favored route for cartels was by plane or boat via the Caribbean to Miami. DEA cracked down on that, so they funneled them on up through Central America. Cracking down on that now, so Caribbean routes are being used more again. Squeeze a balloon…

You often hear of huge cocaine seizures amounting to millions and millions of dollars. How can cartels take these massive hits and still be profitable, you ask? They’re big organizations but are they really that big?

Fun Fact: Seizures are calculated in dollar amounts by the retail (street) value of cocaine not the wholesale value. So, seizures don’t deal as big a blow to cartels as reported. This is for PR purposes (your tax money going to good work; more funding for drug war! etc.).

Remember that cocaine enjoys a truly extraordinary markup. A kilo of pure cocaine that sells in Colombia for $1000 can be sold retail in the states for $150,000. In other words, that “20 million-dollar bust” isn’t as big a hit to the cartels as you might think.

Point is, cartels throw as many drugs toward the border as they can, because even if 10-15% of their loads never make it through, the ones that do make up for it many time$$$ over.

And it's not just the USA, of course; supply the world with drugs through various smuggling routes.

Sound easy? Well, it’s probably not. Like any business, cartels deal with organizational strife.

 

 

RECRUITMENT

Cartels have to deal with an extremely high turn-over rate. For instance. A lot of cartel members end up killed or in prison. And it’s not exactly like cartels can take out newspaper ads and TV spots to get new recruits.

Ironically, prison serves this purpose for them: many prisons in Latin America are run by gangs, so if you weren’t in one when you got thrown in, you’ll likely be in one when you’re released.

Other forms of recruitment include intimidation, promises of money/housing/food as well as a sort of "corporate social responsibility” strategy, like building soccer fields and randomly handing out cash to people in the community to gain trust and support.

In short, recruitment isn’t much of an issue in countries where there aren’t many employment options for the poor. Which is the case in much of Latin America. Now, what about expansion?

Like any business that wants to grow, cartels need to adopt a sound strategy. From a business perspective, here are two possible models .

 

 

FRANCHISING vs COMPANIED OWNED

Take Mexican Cartels.

The Sinaloa Cartel could be considered as applying a “company-owned” model, growing outward from the state, and adopting a largely centralized approach (although that’s now changing).

The Zetas adopted a franchise model, opting to recruit local gangs under their brand to expand into new territory as opposed to using their own, original people to take it over.

What happened?

These gangs served as affiliates. In exchange for training and arms, the Zetas took a cut of the gang’s earnings, and was promised their allegiance in case a war with another cartel sparked off.

Their trademark (brutal violence) served to strengthen their global “brand” and made gangs more ready to seek out their protection as affiliates.

But the trouble with franchising is that you’ll have rival franchisees. The franchiser takes a cut of sales, not profits, so they don’t care which branch is making more money - they take the same cut.

So, in-fighting occurs. Splinter gangs pop up. Decentralized leadership means that control is delegated, and mistakes that are made by one cell can affect the entire organization’s reputation.

For instance, a branch of Zetas killed a US agent. It’s an unwritten rule you don’t do that. So, US and Mexico came down hard and captured Zeta leaders which marked the downfall of their organization.

Franchises are less loyal than a company’s core employees, so it’s inevitable more mistakes will be made. Faster growth, but less strength as a unit.

After the arrest of El Chapo, the Sinaloa Cartel is dealing with in-fighting of its own, but ultimately its unity as an organization has allowed it to remain one of Mexico’s most powerful cartels for so many years (that, along with some help from the Mexican government).

Right. But what about in practice? What steps do you have to take as a cartel to seize control of over territory?

 

 

EXPANSION

Well, aside from killing your enemies, you must get the local authorities on your side. Which usually means getting them off the side of the other cartel.

How is this done? Let’s look at what Sinaloa did to take the Juarez corridor from the Juarez Cartel.

Ciudad Juarez. 1990s, the aptly named Juarez Cartel had a stronghold on Ciudad Juarez. No competition = not much violence.

But, when its leader Amado Carrillo Fuentes died during a botched plastic surgery of all things, and when one of its main contacts in the government was revealed, rival gangs saw weakness and moved in.

Around this time, the infamous “El Chapo” escaped from prison. And his Sinaloa cartel went after Juarez hard. It didn’t help that President Calderon had declared war on drug cartels as well. Three fronts.

The Sinaloa Cartel began targeting police in Juarez. Why? Because they were planning a CORPORATE TAKEOVER. Police are the main regulators of the drug industry, so you need them on your side (or dead) to have your biz run smoothly.

Problem was, that Juarez already had the city cops firmly in their pocket. They weren’t changing teams. The Juarez cartel also had the state cops.

What do you do as a business when you can’t convince the REGULATORS (police) to take your side? You appeal to a new authority! And that’s exactly what El Chapo and his Sinaloa Cartel did.

El Chapo got the federal police on his team. Now you had cartels fighting cartels, cartels fighting cops and cops fighting cops. A complete clusterfuck.

The Juarez Cartel was losing the war and desperate for revenue. That’s when they started kidnapping people and extorting local businesses, thrusting the city further into chaos.

That's why cities basically collapse when cartels are fighting over territory - it touches everyone.

But why Juarez? Why do cartels fight over the territory that they do? Why does violence explode in certain parts of the country and not others?

Somewhat obviously, it comes down to controlling drug trafficking routes. The value of cocaine increase the closer it gets to the US border and skyrockets when it crosses. Whoever controls the load when it crosses the border earns that money.

But it’s not only border cities like Juarez, Tijuana, Reynosa, Nuevo Laredo that are important. Big ports are also valuable, since that’s where the drugs enter. That's why Veracruz, Michoacan and Guerrero see so much cartel violence as well.

 

 

CONTROLLING THE SUPPLY CHAIN

The tighter your control on the supply chain, the more money you make (which is why Mexican cartels are now moving into Colombia…but we’ll leave that for another post).

If you're a "freelancer, so to speak, and want to move drugs through certain patches of territory, you may be permitted to do so. But, you'll have to pay the piso, or, in other words, pay a fee to the cartel that runs that territory. 

So, the more territory you own, the more money you make, even if your gang isn't the one doing the smuggling.

 

 

EMPLOYEE RETENTION

“But why are Mexican Cartels so violent? Surely routes are being competed for in Europe as well, but they aren’t cutting off one another’s heads.”

It’s simple. Like any business, those in charge need to make decisions about preserving contacts and relationships. employee retention. Since Europe has stronger institutions and better opportunities, it’s harder to find employees to work in the drug trade.

Unlike Mexico, Central and South America, where employees are easily replaceable, in Europe, if you kill your contact/employee, it may be awhile before you can hire and properly train a replacement. It’s not compassion - just sensible business.

 

OK. We’ll leave it there.

As you can see, drug cartels have many of the same problems as regular ol' businesses - and, sometimes, they deal with these problems in similar ways!

Want to learn more? Or, if you want to start your own cartel...

All of the information covered here can be found in the book:

 Narconomics: How to Run a Drug Cartel by Tom Wainwright. You can buy that here.