The significance of China's impact on the global economy has been well chronicled in recent years. But many companies, especially U.S. distributors, are looking in increasing numbers to Mexico as a source of revenue. Some do so because their customers ask them to follow them into the country; others do so via the acquisition path, but only after prolonged research and due diligence.

In Industrial Distribution's 62nd Annual Survey of Distributor Operations (see our cover story, p. 20), 63 percent of respondents said they are conducting business outside the United States. Of that number, 54 percent are setting up branches or locations in Mexico, 31 percent are buying from Mexican companies and 66 percent are selling to Mexican companies.

Two U.S.-based distributors—W. W. Grainger and Gas & Supply Inc.—are among those that have ramped up business south of the border recently. Ranked 4th and 30th, respectively, on Industrial Distribution's 2008 Big 50 list, both companies have been attracted to Mexico's growing economy in recent years, particularly its manufacturing segment.

In January, 2008, TNT Welding Supply, a division of Gas & Supply, began its first venture in Mexico.

As often happens for “rookies” in foreign countries, TNT was asked to provide local service for a longtime customer that had opened a factory in Mexico. Scott Jernigan, an outside sales rep, has been overseeing the efforts there.

“The customer feels we do a good job [in the United States] and they wanted us at this new location also,” Jernigan says, six months into the process. “We don't have a [location] there ourselves yet, so we're exporting everything to them.”

Jernigan has been going to Mexico once a month, staying for a few days each time. He says the experience has been good so far, though there have been a few adjustments. He points to a slower pace of business and a higher level of paperwork, in particular.

“It's a big learning curve. The biggest issue we have is learning how to get stuff across the border—packaging it with the right documentation, especially,” he explains. “In the states, you have the shipping list and you're fine. But there, you have to have an 'origin of materials' list and NAFTA forms. There's just a lot more paperwork involved.”

When compared to TNT/Gas & Supply's six months in Mexico, W. W. Grainger is a veteran of conducting business in the region.

Grainger has been steadily expanding its presence in Mexico for 12 years. The supplier of MRO products has gone from five Mexican branches to 19 branches and one distribution center in that time, says Cesar Lanuza, Grainger's vice president and Mexico country manager.

“The overall climate has been very strong [this year],” Lanuza says, adding that Grainger expects its sales “to [increase] in the 20 percent range. We continue to drive double-digit growth.”

Grainger has not acquired any businesses in Mexico yet, Lanuza says.

“Everything we've done here has been organic growth,” he says. “But we are always open to other options, and if we see an opportunity here, we'll explore it.”

Much as in the United States, distributors in Mexico should be attuned to local customers' needs, Lanuza advises.

“Our approach to the market ... is to adapt the model to local needs,” he says.

About 60 percent of Grainger's customers come from Mexico's manufacturing segment, but Lanuza says the customer base is diverse and not tied to any particular industry or customer.

And he agrees there are differences in doing business in the United States versus Mexico, but says service still wins the day in either location. As an example, he points to how Grainger has sped up its delivery times.

“About a year ago, if you were a customer located in Cancún, it could take us up to five days to deliver a product. Today, it will take us 24 hours or less,” he says. “We decentralized our inventory and moved it close to our customers.”

Ed Johnson, regional manager for Kaman Industrial Technologies, agrees that building and sustaining relationships is key to doing business in Mexico.

In 2002, Kaman acquired a Mexican bearings and power transmission distributor, Delamac de Mexico S.A de C.V. The deal has been beneficial for Kaman, Johnson says, in part because of management's due diligence prior to making the acquisition, but also because of the company's ongoing emphasis on developing and sustaining local relationships, as Grainger has done.

“[Relationships] are very important—a cultural issue in Mexico,” Johnson explains. “But understanding how to do business there, that's the key point. Having the right associations with the right kind of companies there is important. We've been able to develop our position over time.”

In a large country like Mexico, the framework for those relationships can vary from region to region, adds Grainger's Lanuza.

“It's very regionalized. You have unique characteristics for each region in the way you do business,” he explains. “In the north, for example, you have a lot of U.S. dynamics in terms of manufacturing capabilities. Whereas in the south, you have more oil and gas and hospitality markets. The difference is significant in how you might approach customers in the north than in the south.”

Midway through 2008, Mexico's economic climate remains encouraging, says Deborah Riner, chief economist for the American Chamber of Commerce of Mexico in Juarez, who explains that earlier this decade the numbers were mostly negative.

“The contrast with 2001 is a pleasant one [here], indeed,” Riner explains. “[In] the first quarter of 2008, the Mexican economy grew 2.46 percent. So things are going well. Now, of course, the question is will they continue to go well?”

Riner expects the Mexican economy to grow by about 2.5 percent through the rest of 2008, down slightly from last year.

Mexico's president, Felipe Calderon, has been in office since January, 2007, after winning by a razor-thin margin.

Though it's too soon to make any definitive judgment on Calderon's impact as the country's leader, Riner says she likes the efforts his administration has made toward helping business.

Calderon passed a major reform of state workers' pensions, along with some fiscal legislation that previous presidents had been unable to pass, she explains.

“It's impressive that Calderon has been able to step into a difficult position and has been able to get some major pieces of legislation passed, which is no small accomplishment,” she says.

Matt Petersen, field services manager for software provider SAP's Wholesale and Trade Business Unit, agrees with Riner's outlook on the Mexican economy.

“Business is strong in Mexico now,” he says. “They're not suffering the same credit crunch we are [in the United States]. We're seeing a lot of demand and we're working hard to respond to all the requests for proposals.”

In Mexico, SAP's distribution customers fall into two main categories: American distributors that have opened branches there and Mexican wholesale distributors.

“We focus on food service distribution, pharmaceutical and life sciences distribution, and industrial or technical distribution,” he explains. “We're seeing demand in all three segments.”

Among the American companies with which SAP works are Grainger and Border States Electric. And Petersen agrees that the business relationships in Mexico are essential to maintain and also take on unique distinctions from business in America. Take negotiating, for example.

“In the U.S., typically customers will negotiate with their suppliers by talking about points discounts. [For example], 'Can you give me an extra five points on that?'” Petersen says. “But what we have found in Mexico in some segments is, they think in terms of 'free goods.' So they don't say 'give me five percent off' as much as 'If I buy 10, give me one free.'”

That not only permeates the negotiations between customers and suppliers, but also influences how distributors handle their inventory.

“They'll need to keep track of what inventory they paid full price for, as well as those materials they received for free,” Petersen explains.

Among the industries that have been growing in Mexico are aerospace and automotive manufacturing. Ford Motor Co. recently announced plans to build a factory outside of Mexico City, for example. And though the business climate in Mexico is upbeat at the moment, Riner admits that it often takes its cue from what's going on north of the border.

“What's happening in the United States is something that causes a great deal of concern around the world, as well as in Mexico—because of the importance of the U.S. as Mexico's trading partner and also a source of foreign investment,” she explains.

Primarily, Riner is referring to talk of a U.S. recession and the effect that has, and will continue to have, on the North American economy.

“Whether there is a recession or not, there clearly will be slower growth [in America] than we have been accustomed to,” she says.

But at the midway point of 2008, American distributors in Mexico say they are pleased with the pace of their growth and that of the country overall.

“It's very competitive down there. There's a very strong bond between the distributor, the manufacturer and the end user,” Kaman's Johnson explains. “But there's a lot of opportunity in Mexico.

“The message I want to send is that we're very pleased with what's going on there.”