You are on page 1of 12

How has HSBC adapted its global strategy to operate in China,both before and after Chinas WTO accession?

The Hong Kong and Shanghai Banking Corporation Limited (HSBC) was founded to finance trade opportunities between Europe, India and China in the year 1865. HSBC ventured into Hong Kong in 1865 and opened the first bank in Shanghai, China a month later. The initial strategy which HSBC build on was to focus on building up their presence in China and other Asia- Pacific region knowing that these unexploited markets might give good returns. Traditionally, HSBCs culture has embraced caution, discipline and risk avoidance. Before the Chinas WTO accession negotiations, Chinas banking industry operated as a cog in Chinas centrally planned economy. Chinas gained accession to World Trade Organization (WTO) in December 11, 2001 has then opened up greater market opportunity for HSBC to leverage their global strategy to grow their presence in China. The Chinese economy is dominated by bank -based financing, which accounts for more than 75% of all financial assets in China (Lu, 2006). Chinas banking sector was already affected by non-performing loan crisis when they joined the World Trade Organization. (Lu, 2006). Due to this , most of the countrys major state banks were technically insolvent. Nevertheless , Chinas commitment in the WTO was to open up their banking and financial section to foreign competition. This requires that foreign banks be allowed to provide local currency services to both business and household clients without geographical restrictions before 2007. The arrangement with WTO is on such that there would be a 5 year transition period (Serrado & Sabadell, 2003). At the end of the 5th year, all current unnecessary regulations regarding ownership, operation and establishment of foreign banks, as well as restriction in branches and issuing licenses will be cancelled (Serrado & Sabadell, 2003).

Since the Chinese government allowed up to 25% foreign ownership of Chinese banks and a limit of foreign investors of owning not more than 20%, HSBC jumped in the foray to adapt one of their global strategies through acquisitions and alliances with local partners hence being the first mover. This is followed on by the acquisitions of 19.9 percent of stake in Bank of Communications (BoCOM) in June 2004. Through this acquisition with BoCOM, HSBC then saw a potential in credit card sales to bring in larger pool of consumers into the banking system, which lead to a proposed joint venture, which will be named Bank of Communications & HSBC Pacific Credit Card Company Limited hence allowing HSBC to provide technical and management support to the Pacific Credit Card unit under BoCOM (HSBC, 2009) .

In April 2007, HSBC (China) Company Limited also started their first wholly foreign-owned bank, which set a strong global presence and connectivity in China (HSBC, 2012). Throughout the years, HSBC has expended rapidly in China to over 100 branches, and if given regulatory authorization, HSBC aimed to increase the stake of 19.9 percent in BoCOM or to increase the outlets in China to over 800 branches (Sender, 2012). These strategies are in line with the new CEOs direction, which went into aggressive expansion that was different from the tradition core value of HSBC culture of thrift, discipline and risk avoidance. HSBCs strategy is also set to be Chinas largest and the most geographically widespread network among the banks. HSBC therefore focussed on expanding rural financial services in China, which is deemed to have a vast market potential to expand their presence in China. The timing is never better , as in the year 2010, Chinese banks is in need for more capital to encourage or sustain potential growth (Aldrick, 2010). Therefore, HSBC s position have been solified to be a ble to bring greater capability and realiability into Chinas financial system. The opportunity for the right entry to global markets somehow brought them to be favourable before the Chinese government. This also encourage HSBC to futher their business oportuninties by expanding in the rural areas later on.

HSBC Managing for Growth Strategy was implemented 2003 in order to ensure that the company achieve growth and sustainable development hence while relying on HSBCs strengths ,areas which need further improvement would be addressed. This 5 year plan is known to be evolutionary in order to be the worlds leading financial services company. The 5 year plan consists of 8 strategic imperatives as per appendix 1. While HSBC is pursuing growth in multiple areas, the company is also aware of the challenges in relying on their internal strengths such as brand and market presence. HSBC is trying to avoid in failing to manage growth. There are times when businesses could be obsessed with aggressively growing revenue but due to bad management, the growth could destroy substantial value in the business (Hess, 2010). By not managing growth well, banks such as Royal Bank of Scotland (RBS) which was initially expanding rapidly(appendix 2), experienced near bankruptcy and have to obtained financial help from the Central Bank of UK (Business, 2011). A report by the local Financial Services Authority indicated that RBS management made errors of judgment by focusing on profit or growth rather than risk management (BBC News, 2011). There are many advantages or pros in managing for growth. Firstly, HSBC understand and recognized the need to penetrate into the emerging markets. As per the text, HSBC tap into the emerging market through importing HSBCs model into markets which are in need for credit cards and loans hence HSBC is aware that emerging markets grew faster than mature economies. International banks such as UBS and Credit Suisse retained strong position in Asia through their wealth-management arm which is an enviable franchise in the emerging market (TheEconomist, 2013). A report by Pricewaterhouse Coopers indicated that in the long run estimately by 2050, the E7 economies which is China, India, Brazil, Russia , Mexico, Indonesia and Turkey would be much larger than the current G7 economies (PricewaterhouseCoopers, Banking in 2050: How big will the emerging markets get?, 2007).It is clear that there are market potential in these economies as per appendix 3. Therefore, the first mover strategy would be to HSBC advantage. On this basis, HSBC could actually capture learning effect which is essential to increase market capitalization, market share and to achieve economies of scale (Eggers, 2009).

Based on the earlier 8 imperatives or pillars, there is a need to leverage on growth therefore HSBC must rely on their core competencies to achieve a holistic approach. The core competence of HSBC is their network affiliates which allow HSBC to provide superior point -of- sale hence providing superior service

to clients worldwide (Burkardt, 2006). Another core competency of HSBC is also the unique culture in HSBC management practices (Burkardt, 2006). Knowing that HSBC couldnt just rely on their core competencies, they would need to evolve or develop new core competencies to ensure that they meet the needs of the rapidly changed environment though dynamic capabilities (Teece, Pisano, & Shuen, 1997). By leveraging on their core competencies and focusing on the 8 imperatives, HSBC is able to ensure potential growth , improved international relations as well as ensuring that their corporate vision on being The Worlds Local Bank is encapsulated in their company.

In lieu of the advantages of Managing for Growth, there are also other negative aspects or limitations which could discourage the growth of HSBC. This is especially when the focus of growth is more on the emerging markets in comparison to the focus in developing markets. By further involvement in the emerging markets, HSBC could be exposed to political risk or economic volatility. This is already evident in Argentina as HSBC have to set aside $1.12 billion to cover the loss of economic crisis in Argentina (BBC News, 2002).In a recent case, HSBC have also face problems in Argentina due to accusation of fraud charges and protection of funds from drug dealers (BBC News, 2013). HSBC organization structure especially being a large geographic footprint have been targeted by criminals especially mainly in the emerging markets such as Mexico therefore HSBC have to deal with charges of money laundering (Chan, 2013). In regards to hiring the right talent, HSBC could face challenges as they seek growth or expansion. Recent reports suggest that banks are not hiring the right or the best talent (TimesofIndia, 2013). Recent news in regards to downsizing and mismanagement from banks has painted-a-picture that banking is an industry where an employees career may not be as bright as it seems (TimesofIndia, 2013). HSBC need to hire the right talent for the complex job as the same job description in a country could be different in another country depending at how vast HSBC operations are. Modern trends have also contributed to the ever-changing management operations as well as how a company hires the right talent. Due to this, HSBC need to be aware and organize their workforce based on the tensions of collectivisim vs individualism and fragmentation vs integration as per appendix 4

(PricewaterhouseCoopers, 2012).

Organic growth question Based on appendix 5, the Ansoff matrix represents the product-market and growth strategy that marketers use to penetrate into another country. Based on the diagram, it is clear that HSBC uses market penetration which is to penetrate existing markets with existing financial products as well as market development which is to enter new markets (whether would it be urban or rural China) with existing financial products (Aburto, 2010). As per the text, HSBC organic strategy was to expand network through 83 service outlets with regional focus in Bohai Rim, Yangtze River Delta, Pearl River Delta and the western region such as in cities of Xian, Chengdu and Wuhan. It is the right step for HSBC to focus on organic growth but being flexible as long as the plan does not deviate from their corporate or business strategy. By focusing on organic growth, the local talent pool can be nurtured hence HSBC is able to build on their core competencies. Based on the 16th annual global CEO Survey report, most banking and capital markets CEO are primarily targeting organic growth in their existing markets whether domestic or foreign (PricewaterhouseCooper, 2013). This is also a long term plan for most CEOs in international banks especially operating in China as the slowing- down economic growth could reduce the demand for banking credit (PricewaterhouseCoopers, 2013). HSBC decided to expand its financial services in Chinas rural areas in multiple reasons. On a macro or an external perspective, there is an estimate of 20 million migrant labourers from remote districts and the Chinese government urgently needs more monetary assistance or funding to stimulate economic growth in the said rural area. Based on the report by HSBC (2012), the Chinese government is planning for food consumption independence especially when the overall population consumes near 46% of the worlds consumption (appendix 6). The government was accommodating as the need to reformed land system and address wealth disparities is important to boost up rural incomes and consumption (Bloomberg, 2012). The Chinese government has also considering tax cuts and lowered capital requirements to 11% so as to ensure more capital for the rural economy (Vivian, 2009). On a micro or internal perspective, HSBC wanted to uptap to 2/3 of Chinas population which is in the rural areas whereas they are realigning with government initiatives to promote the spirit of guanxi to promote future business ties (HSBC , 2012). There are many advantages of rural expansion. Firstly, to capture market share with the existing established products and services. This opportunity can be realized when research indicated that there

would be a flow of money transaction between the rural and the urban especially when one family member or more might be working in the urban area (InfoResources, 2008).Secondly, there is also opportunity for HSBC to tailor financial products especially to local businesses according to their financial needs. The financial offering could assist local farmers or even business people to provide better quality and quantity of trade whereas farmers are also able to increase their productivity to produce substantial supply to local enterprises (Rabinovitch, 2001). HSBC actually promoted rural financing through micro financing which does help the local farmers to expand their business (Ku, 2007). Third, by moving into the rural areas, the overhead cost would be cheaper hence HSBC could also minimize lending risk and focus on cash flow in other business avenue (Manjunath, 2004). In rural areas, banks are also independent and therefore able to increase efficiency in decision making and flexibility in product development (Xiaotian, 2011). Out of the advantages, there are many cons or disadvantages of rural banking. First, there could be higher risk of maintaining liquidity and chances of nonperforming loan could be high (Deloitte, 2012). The problem in relation to lending to rural areas is the fact that the farmers could not pledge their grounds in exchange for financing. The land which is used for crops is owned by the Chinese government under communist law and farmers could only use such land for agriculture purposes (Qiang, Bhavani, Hanna, Kimura,K., & Sudan, 2009). Next, finding the right talent pool to join a branch in the rural area could be discouraging. This is especially when experienced bankers tend to avoid working in rural banks as the current financial statement and management style in the city is less tedious in comparison to the rural area (CNC, 2011). It is also common for those in rural China to seek employment in big cities for better career path and better remuneration. Third, HSBC is already facing challenges in China as even when the economy is growing at an acceptable rate, regulatory environment especially governance and accounting standards are much weaker (Allen, Qian, & Qian, 2007). Therefore the scale of regulations and accounting standards could be much lower in comparison to cities. Lastly, the problems of underdeveloped infrastructure and communication could impede banking transaction especially in the rural areas (Cainey & Jan Hagens, 2008).

Appendix 1 Imperatives Brand Personal Financial Services Consumer Finance Corporate, Investment Banking and Markets Commercial Banking Private Banking HR Initiatives Brief Explanation To make HSBC the worlds leading brands for customer experience and CSR Drive frowth in key areas through apropriopriate channels to ensure that HSBC is the stronges global player in PFS Extend HSBC new business to existing customers and penetrate new markets Accelerate growth through enhanced capitral markets and advisorty capabilities focused on the client

Total Shareholder Return Source : HSBC Holdings 2003 Annual Report and Accounts

Make the most of HSBCs international customer base through effective customer relationship management and improved product offering in all the Groups market Serve the Groups highest value [personal clients around the world, utilizing the investments already made Attract and development as well as motivate HSBCS s people rewarding success and rejecting mediocrity Fulfill HSBC TSR Target by achieving strong competitive performances in earnings per share growth and efficiency.

Appendix 2

Appendix 3 ( PWC report : Banking in 2050: How big will the emerging markets get?)

Appendix

4,

Source

PWC

,2012

Report

on

Talent

Mobility:2020

and

beyond

Appendix 5: Ansoff Matrix for Marketing Objective . URL : http://taydeaburto.com/ansoff-matrix-formarketing-objective/.Viewed on 10/05/2013

Appendix 6 :

Bibliography
Aburto, T. (2010, February 7). Ansoff Matrix's for Marketing Objectives. Retrieved May 10, 2013, from TaydeAburto: http://taydeaburto.com/ansoff-matrix-for-marketing-objective/ Aldrick, P. (2010). HSBC in China bank aid. Finance: The Telegraph. Allen, F., Qian, J., & Qian, M. (2007). China's Financial System :Past, Present, and Future. Pennsylvania: Wharton School, University of Pennsylvania. Bloomberg. (2012, December 24). Bloomberg News. Retrieved May 10, 2013, from Bloomberg News Web site: http://www.bloomberg.com/news/2012-12-23/china-pledges-rural-reforms-to-boostincomes-consumption.html Burkardt, N. (2006). Critical analysis and evaluation of strategies adopted by world class financial institutions. Grin Verlag. Business, R. (2011). RBS Management To Blame. Risk Business Int Limited. Cainey, A., & Jan Hagens, R. (2008). Rural Banking 2.0 The Globalization of the countryside. Shanghai: Booz & Company.

Chan, R. (2013, March 20). HSBC unit faces fraud charges in Argentina. Retrieved May 10, 2013, from South China Morning Post Website: http://www.scmp.com/business/bankingfinance/article/1194936/hsbc-unit-faces-fraud-charges-argentina CNC. (2011, April 4). Rural Lending in China. Retrieved May 10, 2013, from CNC World Website: http://www.cncworld.tv/news/v_show/13805_Rural_lending_in_China.shtml Deloitte. (2012). 2012 China Banking Industry, Top Ten Trends and Outlook. Shanghai: Deloitte Touche Tohmatsu CPA Limited. Eggers, J. (2009). First-Movers and Technological Uncertainty: Commitment timing and the benefit of making mistakes. Summer Conference (pp. 1-38). Frederiksberg: CBS - Copenhagen Business School. Hess, E. D. (2010, October 19). Leadership : An Epidemic of Failing to Manage Growth. Retrieved May 2, 2013, from Forbes: www.forbes.com/2010/07/19/growth-risk-strategy-leadership-managingsuccess.html HSBC . (2012). HSBC Global Research : China Strategy. Hong Kong: The HongKong and Shanghai Banking Corporation Limited. HSBC. (2012, May 13). HSBC. Retrieved May 10, 2013, from HSBC Website: http://www/hsbcnet.com/gbm/about-us/regional-capabilities HSBC. (2009). HSBC and Bank of Communications plan to create JV for Chinese credit card operation. Hong Kong: HSBC News. InfoResources. (2008). Assessing Financial Services in the rural areas. Zollikofen: InfoResources Focus. Ku, D. (2007, August 9). Reuters. Retrieved May 09, 2013, from Reuters Website: http://www.reuters.com/article/2007/08/09/idUSL0930628220070809 Lu, D. (2006). China's banking sector meeting the WTO agenda . Nottingham: China Policy Institute. Manjunath, L. (2004, April 20). Rural banking Opportunity for diversification and growth. Retrieved May 9, 2013, from Business Line Website: http://www.thehindubusinessline.in/2004/04/20/stories/2004042000080900.htm News, B. (2011, December 12). BBC News. Retrieved May 2, 2013, from BBC UK: www.bbc.co.uk/news/business-16135247 News, B. (2002, March 4). BBC News Website. Retrieved May 5, 2013, from BBC News: http://news.bbc.co.uk/2/hi/business/1853342.stm News, B. (2013, March 19). HSBC unit faces fraud charges in Argentina. Retrieved May 2013, 9, from BBC Website: http://www.bbc.co.uk/news/business-21840052

PricewaterhouseCoopers. (2007). Banking in 2050: How big will the emerging markets get? London: PricewaterhouseCoopers International Limited. PricewaterhouseCoopers. (2013). Dealing with Disruptions :16th Annual Global CEO Survey Key findings in the Banking and Capital Markets industry. PricewaterhouseCoopers. PricewaterhouseCoopers. (2012). Talent Mobility :2020 and beyond. PricewaterhouseCoopers. Qiang, C., Bhavani, A., Hanna, N., Kimura,K., & Sudan, R. (2009). Rural Informatization in China. World Bank Publications. Rabinovitch, S. (2001, September 4). Financial Times. Retrieved May 10, 2013, from Financial Times Website: http://www.ft.com/cms/s/0/bf10361c-d6cf-11e0-bc73-00144feabdc0.html#axzz2T3wky4x2 Sender, H. (2012). HSBC to build up mainland Chinese presence. The Financial Times. Serrado, J., & Sabadell, B. (2003). China's entry into the WTO and the financial sector. Beijing. Teece, D. J., Pisano, G., & Shuen, A. (1997). Dynamic Capabilities and Strategic Management. Strategic Management Journal , 509-533. TheEconomist. (2013, May 11). Emerging Markets : Lands of eternal promise. Retrieved May 11, 2013, from The Economist Website: http://www.economist.com/news/special-report/21577183-emergingmarkets-local-and-regional-banks-are-increasingly-beating-global-ones-lands TimesofIndia. (2013, March 22). Banks not attracting best talent, says RBI governor. Retrieved May 10, 2013, from The Times of India Website: http://timesofindia.indiatimes.com/business/indiabusiness/Banks-not-attracting-best-talent-says-RBI-governor/articleshow/19133733.cms Vivian, W.-y. K. (2009, July 30). Forbes News. Retrieved May 10, 2013, from Forbes News Website: http://www.forbes.com/2009/07/30/china-rural-bank-markets-financial-reform.html Xiaotian, W. (2011, July 12). Rural banks lend hand to farmers. Retrieved May 9, 2013, from China Daily Website: http://www.chinadaily.com.cn/cndy/2011-12/07/content_14223488.htm