(FORTUNE Magazine) – THE NEWS from Mexico sounds too good to be true. The economy is growing at about 4% a year. Inflation has dropped from 160% a year to less than 20%. Tariffs running as high as 100% during the protectionist Eighties are down to 20% tops, and would disappear altogether under the North American Free Trade Agreement now in the works. Astoundingly, since the mid-1980s more than three-quarters of Mexico's state-owned companies have been privatized. And 81 million consumers have more to spend than they've had in a decade. Makes any red-blooded capitalist want to pack his wares, buy a Spanish dictionary, and set up a little tienda south of the border tomorrow morning. One caveat: Tomorrow morning might be too late. After years of protectionist policies and a decade of nearly terminal recession, aggravated by falling oil prices and rising foreign debt, Mexico under President Carlos Salinas de Gortari is snapping back with an energy and intensity that is startling. Other Mexican leaders have tried in the past to reform the country's ponderous, corruption-ridden economy. But none ever went as far or as fast as Salinas, 43, a Harvard-trained economist who was Budget Minister before being elected President in 1988. He has been ruthless in restructuring industry. When the bloated steel industry is fully privatized, the work force is anticipated to plunge from 25,000 to around 10,000. The government expects to complete the sale of all state companies by next fall. Salinas pledges that the estimated $4 billion the government will receive will go toward reducing the national debt. He has also been tough on the clubby business community. He has sent some prominent business and labor leaders to jail for corrupt practices and started a campaign against tax evasion. American managers have begun to notice. General Electric Chairman Jack Welch spent a week there last year and promptly moved a top corporate officer into the country. Up to then, GE had run its Mexican businesses from Texas. Says Jeffrey Gannon, the new chairman of GE Mexico: ''For companies wanting in, if you wait for the trade agreement to be signed, you'll miss an opportunity.'' Most likely, the Bush Administration won't push the trade deal until after next November's election. If the President is reelected, it stands a good chance of enactment. If he loses, all bets are off. Still, confidence among Mexican business leaders is at an all-time high. Says Gustavo de la Serna, 65, a retired IBM executive who runs the Mexican Business Council for International Affairs: ''I will mark my 50th anniversary of working next November. I've been directing American companies most of that time. I was never optimistic. At this moment, I am optimistic.'' So are a growing number of foreign investors. Economist Rogelio Ramirez de la O reports that $2.6 billion of the country's $9.7 billion in net capital inflows last year came from direct foreign investment in plant and equipment, as opposed to repatriated wealth and investments in stocks and bonds. This year he says that number should reach $3.5 billion. Who's investing? In recent months Wal-Mart announced a joint venture with Cifra, Mexico's largest retailer, to open wholesale clubs in Mexico City. Nissan plans a $1 billion expansion of its assembly plant in Aguascalientes. And Corning has signed a $300 million strategic alliance with Vitro to sell tableware in Mexico and the U.S. Most recently, Zenith said it would close its manufacturing operations in Taiwan and move more than 600 people to its existing operation in Mexico. And those are the latecomers. In September, Wisconsin's Kohler Co. fired up the kilns at its new $42 million toilet and sink manufacturing plant near Monterrey. Kohler eventually will produce and export 1.5 million units a year. In the past year Compaq Computer, Lotus Development Corp., and Microsoft opened subsidiaries in Mexico City. Franchises, including McDonald's, Pizza Hut, Baskin-Robbins, and Athlete's Foot, are spreading faster than bad Wall Street jokes. The resulting need for help is a business consultant's dream: Price Waterhouse in Monterrey is getting so many inquiries from U.S. companies curious about doing business in Mexico that it will set up a unit just to answer their questions. The lure is obvious: Mexico is loaded with import-hungry consumers. In 1990 capital goods imports rose more than 40%, to $6.8 billion. IBM expects computer industry sales in Mexico to grow 400% by the year 2000. Car purchases passed their 1981 peak for the first time in 1991. The country also has low- cost labor and abundant raw materials, including oil and various minerals. But the country's biggest selling point is something else. Mexicans call it ganas, or desire. Spend two weeks in industrial centers such as Monterrey and Mexico City, and you'll bury forever the image of the lazy Mexican snoozing under a cactus. People are working 12-hour days. Says Juan Gallardo, who heads a group of 200 Mexican business executives who are advising the government on the Free Trade Agreement: ''Our competitive juices have started flowing.'' In one particularly industrious endeavor, a nonprofit organization in Monterrey called Proexport has set up a team that is analyzing all the companies on the / FORTUNE 500 in order to determine whether manufacturing or selling in Mexico makes sense for them. The message is clear: Mexico means business. This is not to say that setting up shop south of the border is a bowl of tortillas. Warns Jorge Lankenau, chairman of Abaco, a large brokerage firm: ''In the U.S. everything is permitted unless it is prohibited. Here everything is prohibited unless it is permitted.'' The country is still a good-news, bad-news situation. But the bad news is waning, and the good news is spreading. For instance: -- LABOR QUALITY. The average Mexican has only a sixth-grade education, and just 3% of the people have college degrees. But if properly recruited, trained, and motivated, Mexican workers can be as productive as their U.S. counterparts. Top executives at IBM, Ford, Procter & Gamble, A.O. Smith, Kohler, GE, and Caterpillar all rave about the quality of their work forces in Mexico. An MIT study in 1990 named Ford's Mercury Tracer plant in Hermosillo the highest-quality assembly plant in the world. The head of IBM Mexico, Rodrigo Guerra, reports that ''for every dollar you pay a Mexican engineer, you get more from him or her than you'd get in other societies around the world.'' --LABOR COST. Though wage rates remain well below those of the U.S., they are rising fast in part because of high demand for workers. Says Nicholas Scheele, who has been Ford's Mexico manager for the past three years: ''We didn't come here for low wages. From Ford's perspective, Mexico's biggest benefit is its exploding domestic demand.'' Management salaries are as high as or higher than in the U.S., largely because demand outstrips supply. -- INFRASTRUCTURE. Spend time in Mexico and you'll never complain about AT&T again. Economist Rogelio Ramirez reports that his home phone was broken for three months before a repairman showed up. Busy circuits and sudden disconnections are common. The mail is worse: Until recently, anything ordered from a catalogue had a good chance of being stolen before delivery. (Federal Express has given mail order new life.) Ports and railroads? How's your sense of humor? But conditions are improving rapidly. Since being privatized in 1990, Telefonos de Mexico has begun a huge modernization program. Cellular phones and fax machines abound. When it comes to building highways, the U.S. could take a lesson from Mexico, which has turned the job over to private companies. Most new roads are toll roads. The builders agree to turn the roads over to the government after collecting tolls long enough to recoup their investment plus a reasonable profit. -- CONSUMER MARKET. Average per capita income is only $2,931 -- not exactly enough to support a mass market for most products. Despite rising wages, inflation has cut purchasing power of ordinary Mexicans by at least a third since 1980. But price increases have slowed, thanks in part to cheaper imports as a result of tariff cuts. And the wage increases that will accompany Mexico's economic growth will help too. Jeff Gannon says that pay at GE Mexico grew about 25% in 1991. That's helpful, because pent-up demand for quality goods and services is huge -- one reason that companies such as P&G, Colgate, and Kimberly Clark stuck it out in Mexico during the miserable money-losing Eighties. There is also a thriving underground economy -- a mob of plumbers, shopkeepers, and entrepreneurs who happily use the money they save not paying taxes to buy cars and Crest. Says Claude Salomon, president of P&G's Mexican operation: ''The huge growth of the underground economy has been more important than anything else in creating the beginning of a middle class.'' What does Mexico need most? Anything, it seems, that begins with a C: corn, capital goods, cars, cosmetics, computers, components, consultants, construction equipment, canned goods, clothes, cable TV, and cellular phones. But what sells in the U.S. might not sell in Mexico. P&G, which has been marketing there since 1948, produces sudsier laundry detergents that make washing clothes by hand easier. And Mexican consumers have become far more selective and quality conscious than they were ten years ago, when they had fewer options. Says Gannon: ''In the past, what sold was the cheapest product. Now the people want quality, warranties, and local service.'' As a result, companies that previously sold through agents or dealers are opening sales subsidiaries and warehouses in Mexico to provide both technical and moral support to their customers. Says Manuel Parra, vice president of Compaq Latin America: ''Customers in Mexico are more loyal than in the U.S., so you have to spend a great deal of time understanding their needs and showing that you are interested in a long-term relationship.'' Compaq opened its first Latin American subsidiary in Mexico City in June and expects sales of personal computers in 1991 to be double what they were the year before. ALTHOUGH nearly three-quarters of Mexico's economy is now open to 100% / foreign ownership, rules vary greatly by industry. Railway transportation, mineral extraction, and everything having to do with petroleum are still closed and are likely to stay that way for some time. Best advice: Hire a lawyer, or contact Jaime Alatorre, president of the Mexican Investment Board in Mexico City, whose staff can direct you to the right government agency, give you information on regulations, and introduce you to a banker. For companies wanting to manufacture in Mexico, besides setting up a wholly owned Mexican subsidiary, there are three main approaches: the maquiladora, the so-called shelter operation, and the joint venture. The maquiladora program, created by the Mexican government in 1965 to generate jobs and revenue, works best for companies aiming to export most of their goods back to the U.S. It allows manufacturing, assembly, or processing plants -- known as maquiladoras -- to import materials, components, and equipment duty-free; in return they use Mexican labor. When the completed product is exported to the U.S., the maquiladora pays duty only on the value added in Mexico. Maquiladoras now can sell up to one-third of their output in Mexico -- instead of exporting all of it -- and they are no longer confined to border areas. Nor are they the sweatshops that many once were. Some are gleaming, high-tech showcases employing the latest management techniques. At A.O. Smith's electric motor plant, for instance, teams of production workers operate unsupervised, making their own decisions and recording results hourly on the number of defect-free motors and rejects they have produced. At the end of each shift, employees meet to discuss results, quality problems, scrap costs, and how to do better in the future. So far, turnover and absenteeism are less than 2% per month -- better than at many of the company's U.S. plants. SHELTER OPERATIONS are the choice for companies that want the advantages of manufacturing in Mexico without the risk. Shelter operators are independent contractors who for a fee will take care of the costly and time-consuming administrative aspects of starting a foreign manufacturing venture, such as site selection, labor negotiations, personnel recruitment, and nontechnical training. Initially, the shelter operator owns the factory and bears most of the startup costs. After a period of time agreed upon in the initial agreement, the U.S. company can buy out the shelter operator at a preset price and continue running the business. + A joint venture is the best approach for U.S. companies planning to manufacture mainly for the Mexican market. Such a venture provides the comfort of having a local partner who knows the territory. For example, Alfa Industrial Group takes in about half of its $2.2 billion in annual revenues with foreign partners such as Ford, Du Pont, and Stone Container. GE's Jeff Gannon notes that in ''one of the best successes we've had anywhere,'' GE formed a joint venture in 1988 with MABE, one of Mexico's largest appliance manufacturers. The following year the two companies opened a gas range plant in San Luis Potosi. This year it will turn out 800,000 units -- ''the best gas range going'' -- to be sold in the U.S., Canada, and Mexico. John Pfeffer, who worked in Mexico for Caterpillar from 1969 to 1972 and returned last July as managing director of its Conek plant, is amazed at what a difference two decades has made. ''The ease of doing business has changed dramatically,'' he says. ''People want to help you now. It's absolutely incredible.'' To cash in on this kinder, gentler Mexico, the best advice is to keep an open mind. Don't assume anything will work -- or won't work. Take the case of Pace Foods. In 1990, Pace went to Mexico City to film three commercials for Pace Picante Sauce, which it sells in Texas. One ad featured a supermarket end-aisle display stacked with jars of Pace's hot sauce. Upon returning to San Antonio, the crew left all the jars behind, telling the store manager to go ahead and sell them if he could. A few weeks later, Pace got a phone call from Mexico City. ''I've sold all 350 jars,'' said the manager of the supermarket. ''What do I do now?'' Pace now has a hot new business -- selling salsa in Mexico.

CHART: NOT AVAILABLE CREDIT: NAI LEE LUM FOR FORTUNE/SOURCES: IMF INTL. STATISTICS; MEXICAN EMBASSY; MONTERREY TECH.; WORLD ALMANAC; COMPUTER WORLD MEXICO CAPTION: MEXICO