NAFTA is working, and perhaps nobody knows that better than automotive suppliers doing business in Mexico.

How well it's working is highlighted by the severe recession that hit Mexico in 1995 and nearly devastated its auto industry. Without the North American Free Trade Agreement (NAFTA), it's difficult to imagine how the industry would have survived. On the other hand, the recession accelerated the pace at which the country's automakers are implementing their rationalization and globalization plans already in place under NAFTA. And the biggest winners will be the large multinational suppliers that can help automakers, particularly the U.S. Big Three, achieve their ambitious new goals.

Mexico's most severe economic crisis in three decades started in late 1994, after its new government veered sharply away from the policies of its predecessors and decided to let the peso trade freely in international markets. Devaluation persisted throughout 1995. Inflation soared out of control, the peso lost about 60% of its value against the U.S. dollar, and vehicle inventories swelled to unprecedented levels as domestic new car and truck sales plummeted to less than a third of 1994's level, from about 623,000 units to 189,000.

Fortunately, the Mexican units of the U.S. Big Three were able to cut their losses by shifting more production to export models -- about 80% of the vehicles produced in Mexico in 1995 were for export, compared with only about 48% in 1994. The Big Three also pushed ahead plans to reduce the number of different vehicle models they produce in Mexico, a move made possible by NAFTA provisions that allow them to beef up vehicle lineups with imports.

Marc Scheinman, an observer of the Mexican auto industry and author of the recently published Ward's Special Report, Mexico's Auto Industry in Transition: Recession Hastens Globalization, says the Mexican industry is well on its way to becoming almost fully rationalized and world-competitive in costs and quality by the end of the century. This means heavy reliance on foreign suppliers because they are the only ones that can provide the engineering, design, technology and investment the automakers need to thrive in both the global market and the increasingly sophisticated home market.

General Motors Corp. alone plans to source $1.4 billion worth of components in Mexico by the turn of the century. Ford Motor Co. is seeking numerous suppliers there to support its Ford 2000 program.

Before NAFTA, Mexico severely limited the access of foreign suppliers to protect its numerous domestic suppliers, enabling them to dominate the industry for more than three decades without fear of serious competition.

Now permitted to operate under the same rules that govern Mexican-owned companies, these foreign suppliers (termed national suppliers in Mexico) are stomping out the small Mexican companies whose strength came not from their products or processes but, rather, from their government's protectionist policies.

Not only are the small domestic suppliers up against the national suppliers and maquiladoras (border operations set up by the automakers and their suppliers to produce components for export), they also face elimination or acquisition by the dozen or so powerful Mexican conglomerates, or grupos, all of which have strategic alliances or licensing agreements with big-name global suppliers such as Dana, AlliedSignal, TRW, A.O. Smith, Arvin, Rockwell, Budd, Luk, Teksid, Mahle, Maremont and some of the automakers' own components divisions.

Foreign suppliers will become increasingly dominant as all restrictions on foreign ownership of Mexican companies are phased out by the end of 1998.

Mexico's increased prominence as an export platform involves not only vehicles but also engines and other components. The export surge will be supplemented by strength in the domestic market, which already has begun a comeback.

Domestic sales should reach their pre-recession level by the end of the century and remain strong thereafter, says Marc Santucci, president of Lansing-based ELM International, which publishes The ELM Guide to Mexican Automotive Sourcing. In addition, the country's aging vehicle fleet should spawn supplier opportunities in the aftermarket.

While anticipating a great deal of activity in the supplier segment, Mr. Santucci stresses that the door is more open to some products than others. For example, he says, "If I were a glassmaker, I probably wouldn't go down there."

Mr. Scheinman foresees a sharp drop in the number of Tier 1 suppliers in Mexico by the turn of the century, with the biggest winners being companies in which foreign multinationals hold a majority stake.

The shakeout of Mexico's smaller domestic suppliers already has begun. For example, Mexican-owned companies accounted for 52.2% (396) of the country's suppliers in 1992, compared with 165 (41.7%) export-driven maquiladoras and only 24 (6.1%) national suppliers. By the end of 1995, there were equal numbers of national and Mexican-owned suppliers -- about 155 each -- plus 164 maquiladoras. There also were about 40 Tier 2 and 3 suppliers.

Mr. Scheinman says suppliers capable of serving as single, global sources of products the automakers need should waste no time in making their move into Mexico because the door may not be open much longer.