Mexican suppliers are at a crossroads — either mod-ernize or disappear into the shadows of foreign giants.

“There are very few Mexican auto parts companies left,” says Enrique Villasenor, president of Sanluis Rassini, a Mexico-based supplier of suspension and brake components. “There are three options: Either expand, get acquired or partner with someone who has a global reach.”

Long reliant solely on the domestic market, the once highly fragmented Mexican partsmaking industry has been consolidating rapidly — at the expense of native firms — over the last decade. Data from Deloitte Consulting in Mexico City shows that about 4% of the estimated 500 suppliers in Mexico, including foreign-owned businesses, account for 59% of total sales there. The downfall of Mexico-based suppliers has coincided with the rise of most Mexican assembly plants from producers of cheap compact vehicles to important product programs, including the New Beetle and Chevy Avalanche.

Many small and midsize local firms lack the production capacity and technology to keep up, explains Gabriel Renero, an analyst at Deloitte Consulting in Mexico City. Key weaknesses are high-tech products such as safety systems, fuel injection systems and emission control devices. “There are a lot of parts that have a shortage here that the automakers have to look elsewhere to buy,” Mr. Renero says.

There also are challenges facing the larger suppliers that are focusing their sales efforts on exports and/or expanding into foreign markets. Most are subsidiaries of highly diversified conglomerates, and that goes against today's trend of divesting non-core businesses. For example, engine block maker Nemak is part of Grupo Industrial Alfa SA, and Sanluis Rassini is part of Corporacion Sanluis SA.

While the future of many Mexico-owned suppliers is cloudy, the parts industry as a whole is flourishing south of the border. Mexico has surpassed Canada as the top exporter of components to the U.S. auto industry, the Deloitte Consulting data shows. Mexico accounted for 28.76% of automotive parts imported into the U.S. in 2000, slightly edging out Canada's 28.70%. Shipments of Mexican-made components to foreign markets totaled $10.68 billion last year, up 4% from 1999. Suppliers invested $1.575 billion in Mexico in 2000, and auto parts industry employment totaled more than 402,000 compared to the nearly 373,000 in 1999 and 356,000 in 1998.