NEWTON, MASS. — It's tough all over North America.

U.S. distributors who set up shop in Mexico within the last five years are seeing that all too clearly. With an economy highly influenced by its Northern neighbor, Mexico must deal with a range of economic pressures. Over 85 percent of Mexican exports end up in the United States, and since the signing of the North American Free Trade Agreement in 1993 the connection between the two countries' economies has grown.

In the late 1990s, many distributors set up shop in Mexico, lured by a fertile market and growing economy. Some underestimated the difficulty of doing business south of the border, however, and have since been hit hard by a shrinking manufacturing base and increased competition. For those determined to stick it out, potential still exists in Mexico, as long as you stay focused but flexible.

"The dynamic has changed. Companies are coming back to the question, are we making money or not?" said Bob Dill, president of Hisco, a distributor doing business from eight Mexican locations as HiscoMex. "Mexico continues to present a lot of opportunities for U.S. distributors, but you've got to know what you're doing."

As Dill explains, the goldrush effect of a few years ago has waned. Business volume is down due to general economic conditions and the flight of many manufacturers, especially in the electronics industry, to China, where labor and other costs are lower. That leaves distributors to compete for less business and faced with a customer base under pressure to reduce costs. Those factors are complicated by what many say is a burdensome reporting process to Mexico's government agencies.

Dill and others say it's vital for U.S. companies incorporating in Mexico to understand the reporting requirements and keep meticulous records in order to capitalize on their Mexican investment.

Despite these issues, Hisco is in Mexico for the long haul. The Houston-based distributor of electrical, electronic and industrial supplies set up its first location in Tijuana in 1998 and opened six more branches shortly thereafter. The company has eight locations today, on the U.S.-Mexico border and throughout the interior.

It hasn't all been smooth sailing for HiscoMex, however. While the HiscoMex division has remained profitable since inception, profit levels had declined in the last year or so, causing the company to "rightsize" personnel and services. The company is back on track, and Dill credits its staying power to a balanced approach to the marketplace.

While most of Hisco's products are used by electrical and electronics customers, general industrial accounts comprise a fair amount of business, as well. HiscoMex sells to both maquiladora companies, Mexico's assembly-for-export plants, and traditional Mexican customers.

It's equally important to be well-balanced on the service side, Dill said. Hisco is working to unbundle the supply chain, selling what many would consider non-traditional services.

As one example, Hisco sells third-party logistics to manufacturers selling direct to Mexican customers. The manufacturers don't want the headache of setting up shop in a foreign country, so HiscoMex imports the products for them. The manufacturers still negotiate price and service agreements with the customer, but HiscoMex takes the transactional trouble away and then bills for that service.

Such actions have addressed a growing need in the marketplace, according to many distributors: reducing the customer's total cost of doing business.

"People are starting to look at total cost of ownership, total cost of acquisition," Dill says of the Mexican market. "There needs to be no excess or redundancy in the supply chain."

W.W. Grainger's Ben Randazzo agrees. Grainger has been in Mexico for five years and Randazzo says the country's rough economic times are causing customers to seek more efficient ways of doing business. They want to reduce inventory levels and procurement costs and increase productivity, he says — the same things U.S. customers are demanding.

"Our strength has always been service, a broad array of products, and having the products in stock," said Randazzo, adding that Grainger's Web site, catalog and storefronts round out the mix. "Those are all things we're excited about as far as growing marketshare in Mexico."

Grainger entered Mexico as part of a plan to cover all of North America. Today, the firm has five branches in Mexico, three of which were added last year. Grainger, which recorded sales of $4.75 billion last year, does less than $100 million in sales in Mexico.

The Mexican business struggled in 2001 and was forced to reduce overall headcount by almost a third. Randazzo says the Mexican operation was profitable during the first and second quarters of this year, however, and added that "we don't plan on looking back."

Grainger serves Mexico's industrial sector primarily, though the firm targets hospitality customers and institutions, as well. Randazzo said Mexico's industrial base has been most affected by the economic downturn, while the hospitality industry has fared much better.

Samuel Arochi manages the Toluca, Mexico, branch of manufacturer Martin Sprocket & Gear and has witnessed the same conditions as Dill and Randazzo. His facility opened in 1995 and originally dealt only with Mexican distributors.

Today, Martin Sprocket & Gear does business with some of the large U.S. distributors who've opened Mexican operations. Arochi said Martin's philosophy for being in Mexico is the same as the distributors': "There's a market here and we want to be there to serve them."

The best way to do that, Arochi said, is to have a presence in Mexico, with the stock, in his case the manufacturing capabilities, and the local people in place to support the business.

Whatever economic troubles arise, companies committed to Mexico are keeping similar thoughts in mind.