Case study on International Business Mexico

Introduction

The main purpose of this report is to highlight the advantages for BT Funds to expand its services in Mexico, based on the market attractiveness. With the help of technological advancements and growing demand of services worldwide, many organizations are going global and they are getting themselves involve in international business.

Despite the size and the nature of the company it is important to have proper strategies and plans before expanding business internationally. This report will highlight the market attractiveness of Mexico based on the facts and figures of Mexican insurance market. A proper PESTEL analysis is included in the report, giving a clear view of the Mexican market.

Country / Market Attractiveness

Despite the global economic environment, the overall Mexican insurance market continued to enjoy the benefits from the unexploited market. Due to the increase in crime rates, several earthquakes and relatively low penetration in the market have forced the locals to consider the need for insurance protection (Jones. D, 2013).

The overall Mexican Insurance Industry has been rated as a stable insurance market by a rating agency Fitch (Fitch-Mexican Insurance Outlook). With Mexican fast growing affluent population, easing credit conditions and overall rising awareness of catastrophic loss potential the overall insurance industry of Mexico experienced growth over the past 8 months. According to the top 4 insurance companies in Mexico, saw a total growth of 17% in their total written premiums (Jones. D, 2013). The Fitch special report, entitled 2013 outlook: Mexican insurance industry, improving operating environment, gives the market a stable outlook because of the combination of its appetite for growth, conservative reserving, and increasing experience in catastrophe management.

The Mexican insurance market totaled at $16.3bn in Premium at the end of the third quarter of 2012, rating as the second biggest insurance market in Latin America after Brazil (Fitch-Mexican Insurance Outlook).

Current Environment of Mexican Insurance Market

In an attempt to be able to gain some competitive advantages, few insurers reinvented their strategies and services, focusing more on related pricing, commissions and customer rights, the basic aim for reinventing their strategies is to position themselves for growth and profitability in the local market (Jones. D, 2013).

Mexico, after Brazil in particular holds great promise for new entrants, who understand the basic nuisance of such insurance market and are willing to use technical innovation in order to be able to succeed (Leonardi. L, 2012).

PEST Analysis

With the help of Pestle Analysis of Mexico BT Funds will be able to identify various issues that affect the country’s performance through the prism of current strengths, various challenges along with future prospects and opportunities.

Political

The overall political condition of Mexico seems to be stable at present, with various new rules and regulation been implemented in last few years. The Institutional Revolutionary Party, or PRI dominated Mexico politics for 70 years (IMF, 2013).

Economic

In 2012 the GDP in Mexico was $1.16 Trillion, at $15,783 per capita, making it the 13th largest economy in the world. The economy retracted by 6% in 2009 as a result of the global economic downturn; however, in subsequent years the economy has made a gradual recovery recording average economic growth 4.9% over the past three years (Heritage 2012).

Social

According to (Jaffary, 2009) Mexican culture is an amalgam of indigenous Mexico and three centuries of Spanish colonialism.  The Mexican life expectancy has risen substantially in recent years. Mexicans are currently the longest in Latin America with an average life expectancy of 76.7 years, 2.6 years higher than the regional average.

Technological

The institute of Science and Technology was established in 2007, where the young generation is very interested in creating and selling apps for smart phones. In last few years the Mexican government has tried to put great emphasis on nanotechnology and biotechnology (Freno. R, 2007).

Competitive Market Analysis

The overall Mexican market is very well capitalized, the market have attractive stable returns over the last years and showing sound performance indicators. However, at the same time insurance contribution to the financial sector remains very low and is not growing. Due to the expanding middle class and rising disposable household income continue to boost its demand for automotive, P& C and life insurance products, as more and more people are seeking ways to safeguard their assets such as cars, homes and other personal belongings (Jones. D, 2013).

Local Service Providers in Mexico

There are various local companies in Mexico who have already capitalized on the growing demand of insurance services. Few companies to highlight are:

Grupo National Provincial – Grupo National Provincial SA is generally considered as the largest local insurance company in Mexico on based of the gross premium returns. GNP basically engages in life and non-life business, health and other automobile coverage. GNP saw its total direct written premiums grow 51.1% over the previous quarter to MEX$25.9 billion (US$2.03 billion), mainly due to the higher demand for property and casualty, medical and personal accident insurance coverage (EconomyWatch, 2010).

 

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Another big company that holds a big market share in the Mexican insurance industry is MetLife Mexico SA. Metlife is the larget insurer in Mexico with 13.3% share of the Mexican insurance market in 2012.

In terms of life and non-life segments, Metlife written premiums were increased by more than 50% from MEX$20 billion (US$1.57 billion) in the second quarter of 2012 to MEX$30.35 billion (US$2.38 billion) (ImF, 2013).

In 2012, both Brazilian and Mexican insurance companies continued to dominate the overall Latin America insurance industry as a whole. In 2012, Porto Seguro SA reported that its net written premiums, in terms of life and non-life segments grew 8.07% from R$8.56 billion (US$4.34 billion) in 2011 to R$9.63 billion (US$4.88 billion).

Another bank-affiliated insurance company Seguros Inbursa was the fifth largest insurance company in Mexico in terms of total written premiums, with a 5.66% share of the Mexican insurance market in 2012. Its net income grew by nearly 22.7% from the second quarter of 2012 to MEX$1.01 billion (US$79.15 million) for the third quarter of 2012, (Jones. D, 2013)

Already Existed international Firms

The Mexican market at present is dominated by 10 companies in the life sector and by other 16 in the nonlife sector accounting for over 80 percent in both cases. The dominance of the insurers with foreign capital is very strong in the life sector, where only 12 percent market share corresponds to national insurers in the Mexican market. The nonlife market share distribution is closer to a
30 to 70 percent in favor of foreign owned insurers (IMF, 2013).

Why BT funds would be successful in Mexico

At present the BT – Financial group has $35.4 billion funds under management, the present amount funds represents 1.3% of the $2.7 trillion dollar investment market. By expanding the operations in Mexican market it will increase the level of total funds managed by BT financial (BT- Financial 2012).

Another important reason for expanding the BT operations in the Mexican market is mainly because of the reason that Mexican banking sector is strong. IMF, (2013). More and more foreign banks are entering the Mexican market mainly because of the high profit rates and the growing demand of insurance policies. A notable example is the recent acquisition of Banamex by Citigroup and the Spanish allied Bancomer. Many foreign run affiliates are involved in retirement-fund administration and mutual fund management (AEGON 2009, IMF 2013).

According to Fitch special report, entitled 2013 outlook: The Mexican insurance industry provides a stable outlook to its market because of the combination of its appetite for growth.

Mexican insurance industry totaled $16.3bn in premium at the end of the third quarter of 2012, making it the second biggest market in Latin America after Brazil. However the overall the insurance penetration in Mexican market is still low at 1.82%, that’s been indicated by Fitch as indicating room for ample growth.

Important factor to note is that in 2012 only 30% of the countries cars have insurance and only 5% have some sort of property and casualty insurance protecting against natural disasters. Premiums that were written across all lines of insurance grew an aggregate 14.7% in nominal terms in the first three quarters of 2012, compared with the same period in 2011.

Complexity of Mexican Market

In a country like Mexico, establishing foreign subsidiaries can only perform foreign investment in insurance and surety businesses.

For any foreign insurer to be able to apply for a license to operate in Mexico has to provide, among other information, a confirmation from the home supervisory authority to the CNSF. Such confirmation should and must state that the insurer is authorized by the government to carry out the lines of insurance business proposed.

In Mexico, insurance legislation clearly highlight the fact that the same institution cannot acquire a license to perform both life and nonlife business lines. This legislation has to be taken into consideration by BT Funds. For insurance undertakings licensed prior to this legal provision (introduced in 2002), regulation establishes that risks and accounting must be handled separately (IMF, 2013).

Market Entry Strategy

The decision of entering any foreign market is a very key decision for any organization, regardless of the nature of the industry the business operating in, firms face a very critical decision in choosing the best market entry mode. There are various options available for any organization to consider entering in any foreign markets, such as:

Direct and Indirect Exporting,

Franchising,

Licensing,

Mergers or Acquisition,

Strategic alliance.

With respect to the nature of the business and the industry BT Funds will be entering, the best option available for BT Funds to enter in Mexican Insurance market would be through cooperation strategies.

The overall activity of Merger and Acquisition in the Latin American region has showed no signs of slowing down over the past 9 months, with the help of low market penetration rate and a growing middle class population and most importantly an increasing number of property and car buyers throughout the region the insurance sector is at boom.

Over the last few years many insurance and investors swooped in Latin America insurance industry for acquisitions. Few of the examples to consider are

  • Australia’s QBE (ASX: QBE), which completed its acquisition of HSBC’s Argentine Holdings SA in May 2012. This merger and acquisition deal included a ten-year bancassurance agreement enabling QBE to become one of the exclusive providers of general insurance products to HSBC customers in Latin America region.
  • Another major example of merger can be considered of UK – based, RSA insurance group Plc, the company completed the double acquisition of Aseguradora de Creditos and El Comercio Compania, the price of such merger is not disclosed yet. The major reason for such deal is to be able to attempt to generate opportunities and improve efficiencies and profitability.

Though there are examples of mergers activities taking place in the Latin America Insurance industry, still for BT – Funds the suggested opinion would be through cooperation strategies.

Cooperative Arrangement

A cooperative arrangement is a partnership collaboration based on a contractual agreement that is generally based by a mutual balance of interest.

Joint Ventures

Cateora and Graham (2002) define a joint venture as “a partnership between of two or more participating companies that have joined forces to create a separate legal entity”(p. 336). Joint ventures generally base on two attributes; cooperation and autonomy. Another important factor to consider, that will favor joint venture entry, is the existence of oligopolistic competition. Insurance industry are usually characterized by a small number of competitors, it is because of this reason that the foreign companies may find it difficult to enter the market on their own due to the high entry barriers.

Strategic Alliance

For global managers, strategic alliances are mainly considered as tools. Strategic alliances are termed as a wide range of cooperative partnerships and joint ventures between local and international firms. 

They have three defining characteristics:

  1. Various entities are united in order to pursue a set of important and agreed goals.
  2. Both the partners share benefits of the alliance and their control on the performance of assigned tasks, during the period of their agreed partnership.
  3. Both partners contribute in one or more key strategic areas.

According to Hollenson (1998) cross-border alliances may take various forms and may also become one of the most popular method of internationalization. 

The difference between joint ventures and strategic alliances:

 “The formal difference between a joint venture and a strategic alliance is that a strategic alliance is typically a non-equity cooperation, meaning that the partners do not commit equity into or invest in the alliance” (Hollenson, 1998, p. 247).

Marketing Plan Highlights

BT Funds mission is to provide the finest level of insurance services in Mexico, by providing exceptional services.

Marketing Objectives

  • To capture market share by 1% per quarter
  • Reinforce a market image as the finest service provider in the Mexican insurance industry.

Additional Research Required

Mexican home loans grew by 10.1 percent in the 12 months through September to 443 billion pesos, according to the banking and securities regulator. In Brazil, outstanding housing loans jumped 39 percent to 256.4 billion reais ($122.1 billion) over the same period (Bain. B, 2012)

Mexico has a total population of 112.7 million inhabitants, out of which 51.2 percent are women. In Mexico the largest segment of its population is the 12-29 age group, accounting for 31.9 percent of the total; followed by the 30-49 group, 26.3 percent; children 11 and under, 22.9 percent; and people over 50, 18.8 percent.

The average Mexican household was composed of 3.9 people in 2010, down from four people two years earlier, while the head of household had an average age of 48.3 last year, about the same as in 2008 (Foxnews.com)

Conclusions

Mexican insurance market is without any doubt the second largest market in Latin America after Brazil. Because of high potential of the Mexican insurance industry many large international insurance service providers are willing to enter the market and capitalize on it.

Half of the Mexican population still not being targeted for any insurance plans and at the same time 70% – 80% of public cars and properties still don’t have any insurance.

The local public of Mexico are now concerned with their insurance policies and looking for various options that might be available for them. Considering such scope and potential of the Mexican market, BT Funds can capitalize on it, as it has years of experience and potential to achieve it.

Recommendations

  • To enter Mexico the best mode of entry would be cooperative arrangement, as it won’t require large amount of investments. With such arrangements BT Funds won’t face any cultural or language issues in targeting the locals of Mexico.
  • BT Funds has to target the Mexican market by keeping its prices competitive.
  • By focusing on Customer service, BT Funds will be able to capitalize the market share.
  • Mexican companies are extremely price conscious, seek financing options, tend to desire exclusive agreements, and value outstanding service and flexibility.

References

  1. D, 2013, ‘ Country Profiles’, Latin America
  2. Fitch – Mexican Insurance Outlook, Feb 2013 < http://www.reactionsnet.com>
  3. L, 2012, ‘Brazil, Mexico and Argentina: What Will New Insurance
  4. Market Entrants See’, viewed on 9th May 2013 <http://www.towerswatson.com/enAU/Insights/Newsletters/Global/emphasis/2012/brazil-mexico-and-argentina-what-will-new-insurance-market-entrants-see >
  5. IMF (2013) A detailed assessment of Markets – Mexico http://www.imf.org/external/pubs/ft/scr/2012/cr1267.pdf
  6. Affery, N, Osowski, E, & Porter, S. (2009). Mexican History, Primary Source, New York.
  7. Freno, R. (2007). An analysis of Mexican Culture and History: Then and Now, Journal of Latin American Studies, 34
  8. Economy Wathc, 2010, ‘Mexico Insurance Company, List of Mexican Insurance Companies’, viewed on 9th May 2013 <http://www.economywatch.com/insurance/mexico-insurance-companies.html>
  9. Cateora, P. R., and Graham, J. L. (2002) International Marketing. 11th Edition, New York, McGraw-Hill
  10. Raffee, H. & Eisele, J. (1994) Joint ventures, Harvard Business Manager, 16(3) pp. 17-22
  11. Hollensen, S. (1998) Global Marketing- A market-responsive Approach. UK, Prentice Hall, Ltd.
  12. B, 2012, ‘Mexico’s Banks Target Wealthy in Booming Home Market: Mortgages’, viewed on 10th May 2013 <http://www.bloomberg.com/news/2012-11-23/mexico-s-banks-target-wealthy-in-booming-home-market-mortgages.html>
  13. com, ‘Mexican household income falls 12 pct between 2008 and 2010’, viewed on <http://latino.foxnews.com/latino/espanol/2011/07/15/mexican-household-income-falls-12-pct-between-2008-and-2010/>