How has HSBC adapted its global strategy to operate in China,both before and after China’s 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, HSBC’s culture has embraced caution,

discipline and risk avoidance.

Before the China’s WTO accession negotiations, China’s banking industry operated as a cog in China’s

centrally planned economy. China’s 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). China’s 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 country’s major state banks were technically insolvent. Nevertheless ,

China’s 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 CEO’s direction, which went into aggressive

expansion that was different from the tradition core value of HSBC culture of thrift, discipline and risk

avoidance.

HSBC’s strategy is also set to be China’s 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

China’s 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 HSBC’s strengths ,areas which need

further improvement would be addressed. This 5 year plan is known to be evolutionary in order to be

the world’s 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 HSBC’s 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 couldn’t 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 World’s 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 employee’s 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 Xi’an, 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 16 th 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 China’s 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 world’s

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 China’s 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 Brief ExplanationBrand To make HSBC the world’s leading brands for customer experience and CSRPersonal Financial Services

Drive frowth in key areas through apropriopriate channels to ensure that HSBC is the stronges global player in PFS

Consumer Finance

Extend HSBC new business to existing customers and penetrate new markets

Corporate, Investment Banking and Markets

Accelerate growth through enhanced capitral markets and advisorty capabilities focused on the client

Commercial Banking

Make the most of HSBC’s international customer base through effective customer relationship management and improved product offering in all the Group’s market

Private Banking Serve the Group’s highest value [personal clients around the world, utilizing the investments already made

HR Initiatives Attract and development as well as motivate HSBCS ‘s people rewarding success and rejecting mediocrity

Total Shareholder Return

Fulfill HSBC TSR Target by achieving strong competitive performances in earnings per share growth and efficiency.

Source : HSBC Holdings 2003 Annual Report and Accounts

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-for-marketing-objective/.Viewed on 10/05/2013

Appendix 6 :

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