Wang Ronghua (rw2368)

Sun Life Financial

Strategic Position, Market Structure and Entry Strategy

Sun Life Financial (SLF), a Canada-based financial service company, is planning its

strategy to enter the Chinese Insurance Company. To understand its strategy, we first

have to define SLF’s strategic position by using SWOT analysis. Second, we will

use Porter’s Five Force Framework to analyze the market structure of the Chinese

insurance industry. Based on the analysis of the company’s strategic position and the

market structure of the industry it wants to enter, we will assess the three strategies

outlined for SLF: “Minimalist” approach, “Full Speed” development and “Model

Citizen”. Finally, we will analyze how to choose the city based on different

strategies.

1. Strategic Position of SLF

SLF is a Canadian financial service company specialized in wealth management

and protection. Its mission is to help customers achieve lifetime financial security.

Its vision is to be international leader in protection and wealth management. With

this mission and vision, the company designed a strategy to enter China. To assess

different entry strategies, we first have to understand SLF’s current situation by

using the SWOT analysis to detect SLF’s strength, weakness, opportunities and

threats (See Exhibit 1).

The strength for SLF to enter China is its rich experience in the insurance industry

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and in the Chinese market, although limited. SLF started its business since 1865.

This long history has helped SLF build a strong build and good reputation. Also

because of this long history, SLF has built a very strong distribution channel.

Because of its strong position in the business, it also has the ability to customize

products and services for high net worth individuals, which is more effective in

generating profits for the company. In order to diversify its investments and

increase its international presence, it has also expanded its business into foreign

markets. As to its experience in China, it had been the largest foreign insurance

company in China in 1920. It also has a representative office in Beijing since 1992,

which provided valuable contact with the Chinese government and business people.

Moreover, SLF has already signed an agreement to partner with Everbright Group

(EBG), one of the most respected financial service companies in China.

There are also two main weakness of SLF with respect to its entry into China. First,

it lacked experience doing business in developing countries. Although it had

expanded business into South America and Asia, the majority of its revenue is still

from Canada, US and UK. The market structures in developed countries are very

different from those in developing countries. To be successful in developing

markets, SLF has to learn the distinctive feature of the markets. Second, SLF lacks

the necessary knowledge about the Chinese customer’s special needs. More

important, as in most developing markets, the lack of reliable market research firm

makes it very difficult to gain valuable knowledge about the market. 1This makes it

1
Tarun Khanna, Krishna G. Palepu and Jayant Sinha, “Strategies that Fit Emerging Markets”, Harvard Business
Review (June 2005), pp. 15-29.
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very difficult to develop products and services suitable to the Chinese market.

According to current research, successful multinational companies develop

strategies for doing business in emerging market different from those they use at

home and often find novel ways of implementing them. 2 SLF still lacks necessary

information to do devise suitable strategies for the Chinese Market. Another

weakness of SLF lies in its Chinese partner, EBG. Although EBG is a respected

financial company in Chinese financial industry, it has no experience in the

insurance market before building joint venture with SLF. This will make SLF’s

exploration of the Chinese market even harder.

There are also several opportunities that SLF can tap on. First, China has the second

largest economy and grows at approximately eight per cent. It also has the largest

population in the world, which can also be read as a large insurance market. It is the

fourth largest market in Asia with premium income of USD 16.8 billion in 1999.

Second, Chinese insurance industry is underdeveloped. Its penetration rate is very

low. The penetration rate of life insurance is 1.69% and general insurance 0.63%.

Third, it has reached an agreement to partner with a well-established Chinese

financial services group --- Everbright Group. EBG has a very sophisticated

management team and has high-level political relationship, which might be helpful

in the future for SLF to get the full license.

The first threat for SLF is the political risks associated with Chinese political

2
Orit Gadiesh, Philip Leung and Till Vestring, “The Battle for China’s Good-Enough Market”, Harvard Business
Review, (Sept. 2007), pp. 2-11.
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regime. High level of corruption and piracy still exist. The second threat is that the

types of products and services allowed to be offered for sale is highly restricted.

Thirdly, its corporation with EBG might not be very smooth. If the relationship

goes bad, the prospect for SLF in Chinese market might be dangerous. So in this

corporation, SLF is on the disadvantageous side.

2. Market Structure of Chinese Insurance Industry/The Institutional Contexts

of Chinese Insurance Market

Besides assessing SLF’s strategic objective and its internal ability to attain it, we

also have to assess the market structure which SLF intends to enter. In this paper,

we use Porter’s Five Forces Framework to analyze the market structure of the

Chinese insurance industry. According to Porter, the five forces that shape the

attractiveness of a market include3: The threat of the entry of new competitors; the

intensity of competitive rivalry; the threat of substitute products or services; the

bargaining power of customers (buyers); the bargaining power of suppliers.

The threat of the entry of new competitors is limited. The Chinese insurance

industry is largely monopolized by the five large local players, totally accounting

for 98.26% of the market share (see Exhibit 2). The most possible new-comer is

joint venture companies between local companies and foreign companies. However,

because of the limits of license provided to these companies, the competition

produced by these companies is trivial. The monopolistic position of PICC can

3
Michael E. Porter. "The Five Competitive Forces that Shape Strategy", Harvard Business Review, (January,
2008), pp. 2-17.
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hardly be broken by new-comers. Therefore, the threat of new-comers will be very

limited and the market structure will continue to be oligopolistic.

The threat of substitute products or services is increasing. Here we define other

financial products and services, such as mutual funds and stocks, as the substitute

for insurance products. Because of Chinese government’s intention to develop the

Chinese financial market, its types of products and services available to individual

investors will greatly increase in recent years, which will reduce the attractiveness

of insurance products because of its relatively low returns.

The bargaining power of the buyers in Chinese insurance industry is not very

strong. This is largely due to the high concentration of the industry. Nearly 70% of

the market share is in the hand of PICC. Moreover, the switching costs for buyers

are very high. Because of the Chinese regulation, the process to transfer an

insurance account in one company to other is very tedious. Of course, we have to

pay attention to the increasing attractiveness of alternative financial products, which

might increase the bargaining power of the buyers.

By suppliers, we focused on the suppliers providing administrative and logistic

supporting for SLF’s operation in China. In these areas, Chinese market has

sufficiently developed and competition is very high. The concentration of these

industries is low and the switching costs for SLF are relatively low as well. So the

bargaining power of suppliers is relatively lower.

Based on the analysis above, the market structure of Chinese insurance industry is

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highly concentrated and competition is not very severe. However, access for foreign

firms is strictly limited, operating costs are very high and difficult to control.

Moreover, short-term economic success is almost impossible. Companies

attempting to enter the market need resolution to waiting for the uncertain

opportunity with possible loss for an extended period.

3. Assessment of the Three Strategies

Based on the internal capacity of SLF and the market structure of the Chinese

insurance company, three strategies are recommended for SLF: Minimalist, Full

Speed and Model Citizen. In this paper, we assess the three strategies along three

dimensions: costs, returns and volatility.

Minimalist approach requires the company invest only minimal amount of capital

and focusing on traditional insurance products. The main purpose of the strategy

is to maintain a presence and “shift gear” when opportunities come. If SLF

follows this strategy, it does not invest heavy capital and does not develop new

products suitable for the Chinese customers. It is difficult to compete with either

the fiver local players or the existing joint venture companies. Therefore, the

characteristic of this strategy is low cost, low returns and low volatility.

The Full Speed strategy is on the opposite of minimalist approach. This strategy

requires heavy investment in agency force and product development. The cost for

this strategy is much larger than minimalist. According to the data available, we

can observe that premium/agent declined significantly for joint venture insurance

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companies in China (See Exhibit 2). For AIA, the first foreign company obtaining

the license in 1992, its premium/agent is 35052. However, for companies

obtaining the licenses after 1996, the premium/agent went down to about 5000.

Thus, if SLF intends to achieve the target sales in Chinese market, it has to build a

large agent force due to the low premium agent ratio. On the other hand, because

of its heavy investment, the return under this strategy might be higher than the

Minimalist approach. Therefore, the characteristic of the Full Speed strategy is

high cost, medium returns and medium volatility.

The Model Citizen strategy is a more passive strategy than Minimalist in terms of

advancing SLF’s appearance in the Chinese market. Its main purpose is to build

sound governmental relationship and to gain an understanding of the Chinese

market. However, the change of getting full license is unpredictable. Therefore,

the characteristic of this strategy is low cost, low return and high volatility.

Actually, there is a fourth choice for SLF. It is the strategy of staying away. But

since SLF wants to be an international leader in the industry, it cannot ignore the

potential of the Chinese market. Moreover, it has already signed an agreement

with EBG, so this choice is impossible for SLF.

4. City Selection

City selection is fundamentally based on strategies. In this paper, we mainly discuss

the advantage and disadvantage of Shanghai, Tianjin and Guangzhou in terms of

market size, purchasing potential, market growth, operation costs, governmental

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relations and national profile (see exhibit 3).

First, as the earliest Chinese city open to the outside world, Shanghai has the most

amiable attitudes toward foreign investors. In order to build Chinese financial

center, Shanghai local government strongly support foreign companies to provide

financial services in the city, of course, including insurance services. This is the

reason why all the joint venture insurance companies began their business from the

city. Also, as the largest and richest city in China, it also has the largest market size

and purchasing power. However, as one of China’s economic center, operating costs

in the city is relatively high than in other cities. And, since there are already many

joint venture insurance companies in the city, SLF lacks “first move” advantages in

the city. Moreover, as we have seen before, because of increasing competition,

premium agent ratio in Shanghai has declined significantly in recent years and the

market has been sufficiently developed by local and joint companies. The growth

potential of the city is limited. Since the operating costs in Shanghai are high and

the market growth potential is limited, it is not suitable to develop “real” business

here. But as one of the most important cities in China, Shanghai is a good place to

develop high-level government relationships in China. Therefore, if SLF wants to

pursue the Model Citizen strategy, it should choose Shanghai. Either in Tianjin or

Guangdong, it is hard to get the same chance to contact with high-level officers in

Shanghai.

Among the three cities, Tianjin has the smallest market size and national profile.

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But it also has the least competition because of no joint venture companies has ever

operated in the city. Also, its operating costs are much lower than in Shanghai and

Guangdong. Since the market is underdeveloped, its potential is high and growth

rate is the highest among the three cities. Since its market size is limited, it is

unsuitable to pursue the Full Speed strategy there. Therefore, Tianjin is a good place

for SLF to start the Minimalist approach. It has lowest operating costs and SLF can

use its traditional products to test the local markets without incurring significant

R&D costs.

The position of Guangdong is between the two cities. Its market size is larger than

Tianjin but less than Shanghai. Although AIA already has JV companies there,

competition is much less than in Shanghai. Of course, the market growth there is

also greater than in Shanghai. Operating costs is also mediate. Therefore, it is a

good place to pursue the Full Speed strategies.

5. Alternative Strategy and City Selection

There is an agreement among JV insurance companies that short-term economic

rewards are illusionary in the Chinese market. Then why so many foreign insurance

company wants to build JV firms in China. Mainly for two reasons. First, they want

to find a partner with strong government relationship to help them get the full

licenses. Second, they want to understand the Chinese market and the customers

through its presence in the market. These are also the primary reasons for SLF’s

imperative to enter China. Then, what kind of strategy can best serve these purposes

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with the lowest costs?

The proper strategy that can serve the two purposes proposed in this paper is a mix

of the Minimalist strategy and the Model Citizen strategy. At current stage, good

government relationship and development of suitable products and services for

Chinese customers based on reliable market information is necessary for SLF’s

future success in China. Since its main purpose is to understand the market needs at

the current strategy, rather than developing the market (it is almost impossible at

present), the operating costs should be as low as possible. Tianjin is a good place to

consider for it has the lowest operation costs among the three cities. Secondly, to

build good relationship with the government, Tianjin has geographical advantages

because of its closeness to Beijing, the power center. Also, Tianjin has two famous

universities known for their business and marketing departments, providing support

for SLF to study the Chinese insurance market. The mixed strategy in Tianjin can

achieve all its main purposes at a very low cost.

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Exhibit 1: SWOT Analysis of Sun Life Financial

Strength Weakness
 rich experience in insurance industry;  lack of experience of successful
 strong brand and distribution channel; business in developing countries where
 ability to customize products and services for institutional infrastructures are not as
different level of clients; good as in advanced countries;
 experience in expanding into foreign markets;  unknowledgeable about the needs of
 experience, although limited, in Chinese Chinese customers and lack of reliable
market; channels to get valuable information;

Opportunities
 the Chinese insurance company has great
potential;
 the penetration rate in China is very low,
which is good opportunity to develop the
market;
 Partner with a respected Chinese financial
service company which has good relationship
with the government and sophisticated
management team.
Threats
 Political risks associated with doing
business in China, as happened in 1949
and 1989;
 Limited products and services are
allowed to provide by foreign
companies;
 Possible conflicts between SLF and
EBG, which are very common in JV
firms.

Exhibit 2: Mainly Players in Chinese Insurance Market

New China Life Tai Kang Other

China Pacific 1% 1% 2%
7%

Ping An
20%

PICC
69%

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Exhibit 3 Premium per Agent by JV companies, 1992-1999

40000

35000 35052

30000

25000

20000

15000
10683
10000
7066
5772
4837
5000

0
1992 1996 1997 1998 1999

Exhibit 4 Comparative Analysis of Shanghai, Tianjin and Guangzhou

Market Purchasing Market Operation Governmental

National Profile
Size Power Growth Costs Support
Shanghai Large Large low high high High
Tianjin Small Small High low untested low
Guangzho
Medium Medium Medium medium untested low
u

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