Case Study HSBC in China

Case Study: HSBC in China

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Case Study: HSBC in China

Introduction

HSBC is one of the major financial institutions in the world. It has operations in six continents on the globe. This is a clear indication of the successful international expansion of the bank. It has a huge presence in China and the Asia-Pacific region with its history dating from the 19th century. This paper will provide an analysis of the bank’s strategy to venture into the Chinese market and its global expansion into emerging markets.

HSBC Adaptation of Global Strategy to Operate in China, Both Before and after China’s WTO Accession

Prior to China’s accession to the WTO, the banking industry of the country was a cog of a centrally planned economy. As such, state commercial banks were used to meet the social needs of the Chinese instead of operating for economic return. This made the banks adhere to the government policy of directing their lending to certain enterprises. Even though this policy led to the rise of some of the most successful state owned enterprises, it also made the banks lend money to thousands of inefficient and unprofitable enterprises. This made the state commercial be saddled with huge amount of unrecoverable and nonperforming loans. The Hong Kong and Shanghai Banking Corporation (HSBC) was one of the banks that faced with this predicament. The bank was established in 1865 to finance the increasing trade between Europe, India, and China. The bank expanded globally by opening branches and agencies across the world. However, even after its expansion to other regions across the globe such as Europe and North America, HSBC maintained its focus on China and the Asia-Pacific region. This is highlighted by the fact that bank moved its headquarters from Hong Kong to London in 1993, more than 120 years after it was established. As such, HSBC handled the first public loan issued in China in 1876 and issued most of the public loans of the country.

Upon accession to the WTO on 11 December 2001, China had to abolish policies and barriers to open up its economy to foreign competition. This led to the abolishment of the policy that restricted banks from undertaking foreign currency business. It enabled banks to conduct local currency business with foreign enterprises and individuals. HSBC took advantage of its roots in the region and in 2001, it became the first foreign bank to invest in China. The bank also used acquisition to improve its presence in the country. It acquired a 10% stake in Ping An Insurance soon after it set up operations in China. This elevated HSBC to the second largest insurer in the country. HSBC also acquired Bank of Communications, which was the fifth largest bank in the China (Luthans & Doh, 2018). This enabled HSBC to gain a strategic advantage over other foreign banks after opening up of the Chinese economy.

HSBC’s strategy for entering and operating in other emerging markets. Where has it found success, and where has it faced setbacks? Why?

Before 2000, HSBC directed more than half of its assets to developing countries. Most of the earnings of the bank were derived from developed countries, which had mature markets. Therefore, the focus on the developed countries limited the growth potential of the bank. This necessitated the bank to change its strategy and take advantage of the growth potential in emerging markets, which were untapped, as they had limited penetration of financial services. Therefore, HSBC ventured into these markets through the provision of consumer financial services, which these markets were lacking. As such, HSBC provided loans and credit cards in these markets as it acknowledged that consumer finance was one of the sectors of the financial services sector that was experiencing significant growth. HSBC used mergers and acquisitions to provide these services to consumers in emerging markets.

One of the regions where HSBC experienced significant success was in Mexico. The Mexican market was experiencing significant growth. Therefore, HSBC purchased Grupo Financiero Bital, the fifth largest banking group in Mexico, for $1.14 billion. The purchase helped in improving HSBC’s presence in Mexico, which was the healthiest economy in Latin America. HSBC provided customers that only use debit cards with loans (Grosse, 2009).

HSBC faced setbacks on certain emerging market. Argentina is one of the markets where the bank faced setbacks. HSBC acquired Roberts Group holding company in 1997. It subsequently renamed it as HSBC Argentina Holdings. The bank intended to use this entity to improve its presence in Argentina and other Latin American countries. During the acquisition of Roberts Group, Argentina had one of the strongest economies in Latin America. However, soon after the acquisition, Argentina fell into a recession between 1998 and 2002, which made HSBC and other banks experience significant losses (Pereiro, 2006).

Pros and Cons of HSBC’s “Managing for Growth” Strategy?

The “Managing for Growth” strategic plan, which was launched in 2003, was one of the main strategies that enabled HSBC to improve its global growth and sustainability efforts. The aim of the strategic plan was to build the international and globe scope of HSBC. The strategic plan comprised of eight strategic pillars, which include Brand, Personal Financial Services, Consumer Finance, Commercial Banking, Corporate, Investment Banking and Markets, Private Banking, and People.

One of the pros of the strategic plan is that enabled HSBC to focus on key consumer groups in emerging markets as highlighted by the eight strategic pillars of the strategic plan. Focus on these strategic pillars ensured HSBC’s venture into new markets was evolutionary instead of revolutionary. Therefore, HSBC maintained its core values of communication, teamwork, ethical relationships, creativity, and customer-focused marketing to “manage its growth.” This enabled HSBC to venture into other markets efficiently and effectively.

The “Managing for Growth” strategic plan also enabled HSBC to improve its earnings on the long-term instead of simply expecting immediate results. This strategy enable the bank to venture in various markets where it ultimately successful in the long-term. Another advantage of “Managing for Growth” strategic plan is that it enable the bank to use its industry peers to set a benchmark or target. This helped in ensuring HSBC strived to gain a competitive edge over its competitors.

The strategic plan also acknowledge the importance of venturing into emerging markets. The statement by the then-Chairman of HSBC, Stephen Green, in 2005 highlights HSBC’s focus on emerging markets. He claimed that emerging markets grow faster than mature markets since the economies and financial services in emerging markets grow at a faster rate than the real economy. This is because emerging markets generally have low financial penetration. As such, HSBC acknowledge the importance of emerging markets in the “Managing for Growth” strategic plan (Luthans & Doh, 2018). The implementation of the strategic plan enabled HSBC to improve its pre-profits in emerging markets from $2.4 billion in 2004 to $6.0 billion in 2014.

One of the cos of the “Managing for Growth” strategic plan is that it led to a decrease in the net profits of HSBC. Strengthening investment banking was one of the main goals of the strategic plan. Therefore, after the launch of the strategic plan, HSBC engaged in an ambitious plan to improve investment banking. This led to the hiring of new investment banking talent, which together with other investment banking operations, increased the expenses of the bank without leading to a corresponding increase in the profits of the bank. Therefore, the implementation of this ambitious plan led to an increase in the operational costs more than previously anticipated while profits were decreasing. This made the bank lack funds to engage in other activities that were vital for its long-term growth. The negative impact of the strategic plan is highlighted by the fact that in 2006, other banks outranked HSBC in terms of mergers and acquisitions, which are vital to the continued growth within the financial sector. This is despite the fact that HSBC had previously outranked other banks consistently in the past.

Another con of the strategic plan is that the increase in the high cost of its implementation and the reduction in the profitability of the bank prompted HSBC to implement cost-cutting measures. These cost-cutting measures led to the loss of a significant number of employees of the bank to its rivals.

Conclusion

HSBC has successfully implemented its internationalization strategy to improve its presence across the globe. Emerging markets have provided the bank with an opportunity to sustain its growth as the growth and profitability in developed markets, which have traditionally been the main source of profits of the revenues have reduced in the recent past. Successful venture and operations of the bank in emerging markets promises to provide it with a source of long-term growth.

References

Cousin, V. (2011). Banking in China. New York, NY: Palgrave Macmillan.

Grosse, R. E. (2009). The future of global financial services. Hoboken, NJ: John Wiley & Sons.

Luthans, F., & Doh, J. P. (2018). International management: Culture, strategy, and behavior. New York, NY: McGraw-Hill Education.

Pereiro, L. E. (2006). The practice of investment valuation in emerging markets: Evidence from Argentina. Journal of Multinational Financial Management, 16(2), 160-183.