Introduction – History & Background3
Operations in the Emerging Markets4
International Strategy7
Acquisition of Household International7
Expansion of Financial Services in Rural China8
Challenges Affecting HSBCs operations in China11
Conclusion13
References14
Globalization is a process of interaction and integration among the people, companies and governments of different nations. It is a process that is driven by international trade and investment and aided by information technology. This process has effects on the environment, culture, prosperity, human well-being and economic development all across the world.
The global strategy covers three important areas of global, international and multinational strategies that are specifically designed to enable a particular business or organization to achieve its global target of expanding the business all across the world. In order to expand a business, it becomes important to consider all the three specific areas to work on the company’s resources and capabilities.
Till now, many organizations have adopted the global strategies in order to gain a competitive advantage and some of them have benefitted more from others. In order to create a global strategy, the managers should always consider the working of global industries and the competitors as well. A global strategy may fit in the organizations where they have strong pressure to reduce the prices, but no pressure from the local market. This allows the organizations to sell the product at the standardized rate all across the world.
In this research paper, I will discuss the history and background of HSBC including its global strategy and how HSBC fit into the model of globalization. This area will cover the emerging strategy followed by HSBC to enter and operate in the global and emerging market. Moreover, this paper will also discuss organic growth strategy followed by HSBC and how it expanded its financial services to the rural areas of China. China recognized that opening up the banking sector could bolster its financial system, but the global strategy of HSBC made a series of key investments between 2001 and 2005 that arguably gave it the most extensive position in China of any foreign financial group. Furthermore, the paper will also discuss the challenges that can potentially affect the operations of HSBC in China and at the end; the paper will also propose some of the strategies and solutions for the challenges.
Introduction – History & Background
HSBC has a long and rich history in variety and achievement ("About HSBC | HSBC Holdings plc", 2016). Hong Kong and Shanghai Bank Corporation (HSBC) was founded by Thomas Sutherland on 3 March 1865 in Hong Kong and in Shanghai one month later. Initially, the main objective was to finance the growing trade between India, Europe, and China. He recognized a great demand for local banking needs in Hong Kong while working for the Peninsular and Oriental Steam Navigation Company ("About HSBC | HSBC Holdings plc", 2016).
Following a global expansion strategy, the bank started opening agencies and branches all across the world and in a short time; it reached Europe and North America as well, though the main focus was on the market of China and Asia-Pacific region only. The bank opened its branch in Japan in 1866 and provides the banking solutions to a number of other countries as well. The bank also started advising the government on banking and currency in Japan. HSBC opened its first branch in Thailand in 1888 and printed the first banknote of the country as well. The bank also started managing government funds in the 1880s and it also used to manage the accounts of the British government in Singapore, China and Japan. By the close of the 19th century, HSBC was known as the foremost financial institution in Asia. The bank took a lead in stabilizing the Chinese national currency after the First World War.
The Hong Kong Bank was reorganized as HSBC holdings in the year 1991 and also moved its headquarters to London in 1993. The purchase of the UKs Midland Bank in 1992 increased the HSBC’s European presence and also doubled the bank’s assets. This purchase also enhanced the global reputation of the bank as the global financial services company.
In 2003, the bank acquires a $15.5 billion acquisition of Household International, the U.S. consumer business and it became the basis of HSBC’s Consumer Finance customer group. But after six years of acquisition, the bank conceded that it was its mistake and in the year 2009, it closed all 800 branches of HSBC Finance Corp.
Today HSBC is one of the world’s largest banking and financial service provider and it provides services to more than 45 million customers till date. The main aim of the bank is to be acknowledged as the leading international bank in the world. Currently, it has an international network of around 6,000 offices in 71 countries and territories. It provides a range of financial services, that includes personal finance, investment banking and markets, private banking, commercial and corporate banking.
Operations in the Emerging Markets
The HSBC strategy of “Managing for Growth” was built on the international scope and also hopes to grow by targeting the financial services for personal use and the international network in the emerging markets. One of the strategies adopted by the bank was to keep an eye on the emerging markets for future expansion and also stay connected with the customers in the areas where the bank is interested in expanding their financial services.
The resources, capabilities and the requirements to determine the transaction costs of the organization define the entry strategies in the international market ("HSBCVoice: Emerging Markets: Keeping Perspective Amid The Turmoil", 2016). There are five values that are important for the organization for the initial entry into the market-
Perception – Meeting the diverse needs of the customers from all across the world in order to reach the local knowledge of the markets.
Acceleration - Committed to continuous improvement in quality, effectiveness and efficiency using the workforce.
Responsiveness – responding immediately in order to make sure that the customer needs are met and they are according to the customer’s expectations.
Deferential – work on the organizational responsibility and development of the local market.
Honest – keeping the interest of the individual ahead of the organization’s and treating all the customers, suppliers and employees equally, fairly and honestly.
The Chairman, Stephen Green moved the focus of the bank towards the emerging markets in the year 2005. It is a fact that the growth of the emerging markets as economies is more than the other markets and the financial sector also grow faster than the other economy. He also put forward the importance of the HSBC model into the credit card and loan market.
HSBC’s principal activities include making payments, enabling trade, holding savings and managing risks and they have played a key role in the society and the economic system. Emerging markets are mostly in a transitional phase towards the industrialized status of the organization and such markets have played a key role in the investment strategies as a whole all across the world. The emerging markets play a global role in the economic, political and social landscapes.
According to HSBC, emerging markets can offer a range of opportunities in investment and can be a way to go into the economic growth prospects, to improve the portfolio and greater foreign investments. Let’s discuss some of the emerging markets for HSBC and the reasons for investing in these countries.
Business in Vietnam
HSBC successfully got approval in 2008 from the government of Vietnam to establish a local subsidiary in the country. The reason for the success of entering the new emerging market was due to the opening of banks in Vietnam for the foreign companies. Another rationale to enter this country was that it was the world’s 2nd largest exporters in agricultural products, including rice. And the government of Vietnam was seeing a potential growth of getting the international banks like HSBC to improve their transactions all around the world.
Vietnam has amazing people and workforce having an amazing economic outlook. This quality attracts most of the foreign investors in this country. Vietnam also removed the trade barriers by completing its accession in the year 2007 to the WTO. This makes HSBC made a positive turn towards this country. Moreover, the government also provides a large number of perks and incentives to the foreign companies.
There were also some challenges while entering and operating in the emerging markets. The Vietnam dong was not very strong and due to this, the economists of the bank predicted that due to the weak position of the currency, it can face the strong pressure of depreciation in case of the low or high rate of interest. When HSBC entered in the country, it was difficult to anticipate that the currency has no growth.
Below are the reasons for HSBC to enter and invest in Vietnam:
Vietnam has a young workforce and the labour costs are also low
The middle class is still growing
Vietnam has a centralized economy and HSBC saw a steady move from this economy to a more market-oriented economy
The government of Vietnam offers incentives to the foreign investors
The government has also reduced the Corporate Income Tax (CIT) since 2014 and it will be reduced more in 2016
Business in Indonesia
Indonesia is the largest archipelagic state in the world and is the 4th most populous country. The economy of this country has played a great role, both nationally and internationally. This is one of the countries where most of the foreign investors like to do business. The main reason HSBC took an interest in this country was the economy that is built on a free market system and a free foreign exchange policy. A continuous growth can be seen in the country since the economic recession in the year 1998. HSBC started many branches in the country and was also successful in acquiring a share of 89% in Ekonomi bank of Indonesia. This bank helped HSBC to increase its presence in Indonesia.
Below are the reasons for HSBC to enter and invest in Indonesia:
A relatively young workforce with low labour costs
The middle class is growing and this gives HSBC a way to expand its services
The government of Indonesia is focusing on big projects and this needs foreign investments as well. This is one of the solid reasons for HSBC to enter this country
There are a number of tax incentives to the foreign investors in the country
Business in Switzerland
Switzerland is considered as one of the safest countries with a great public transport and infrastructure as well. The government of this country is quite stable and there is a direct democracy as well. The country has the highest GDP per capita due to its stable economic environment. Being a member of Free Trade Association (EFTA), most of the policies of the country are aligned to EU and this increases its competitiveness as well.
Below are the reasons to invest in Switzerland:
The government of Switzerland is stable, both politically and financially as well
There is low rate of inflation in the market
The workforce is highly intelligent and educated
The unemployment rate in the country is quite low as compared to other countries
The value added tax is also low, comparative to other EU countries.
International Strategy
HSBC expanded its business all across the world after the World War 2 and it was done specifically through acquisition. The bank has adopted the multi-domestic strategy due to the way they ran their business. The undertaken changes after the year 1991 are also one of the evidence of the multi-domestic strategy.
The acquisition strategy of HSBC was to acquire the bad assets and improve their overall performance. The bank kept the international firms as independent and the decision making was also decentralized before the reorganization of the bank as HSBC Holdings ("Moody's: HSBC's Asia expansion strategy feels the pinch of China's slowdown", 2016). There were significant transformations by the management of the company after HSBC Holdings was established. With the new group policy, the company started moving its focus from multi-domestic strategy to a transnational strategy. There were some of the functions that were kept by the head office of the company, such as financing control and planning and human resource management.
The acquisition of Midland in the year 1992 completely changed the strategies of HSBC ("Hong Kong Shanghai Banking Corporation (HSBC)", 2016). The company inserted HSBC managers to the top of the Midland Bank and also removed the procedure of keeping the acquired companies as independent. The international strategy also got changed in the year 1993. It became a strong transnational company after the chairmanship of John Bond. The company extended its customer groups upon a different geographic organization. By doing this, the company was able to reduce its costs by increasing its efficiency and this is the first requirement to do a business internationally, though the company was aware of its local market as well. The group lending guidelines were also changed and this changed the procedure of giving away the money all across the world. HSBC started its focus to a new strategy to be more transnational and in the year 2002, the company started its campaign, “The World’s Local Bank”. The Chairman of the company also decided to make the different divisions in different countries to work together towards a common goal. They changed the operational procedures to start serving the customers, both nationally and globally as well. The changes in the branding strategy in order to get a global recognition by keeping the focus towards the local needs shows a transnational strategy of HSBC.
Acquisition of Household International
There were a number of reasons with HSBC to acquire the Household International as it provides a number of benefits and risks as well ("Hong Kong Shanghai Banking Corporation (HSBC)", 2016). This acquisition would help HSBC to improve the geographical divisions. In the past, HSBC acquisition of Republic Bank of New York and Midland Bank could not solve its lack of presence in the American market. But by acquiring the Household International, one of the big reasons with HSBC was that the company would gain access to the American market and also improve its pre-tax earnings. This is one of the rationales to strengthen its market competitiveness in the market of the United States.
One of the greatest capabilities of Household International was its experience of generating risk profiles. Household uses 300 different variables and also used computer programs to learn from the past consumer behaviours ("Hong Kong Shanghai Banking Corporation (HSBC)", 2016).
Another reason for acquiring Household was that it allows HSBC to expand into the emerging markets. The company planned to launch the Household model in China and India as these were the emerging countries. This launch created both internal and external barriers for the company, but the company tried to overcome these barriers by partnering with the local subsidiaries of corporate clients.
Expansion of Financial Services in Rural China
The strategy of HSBC focuses on expanding rural banking need in China, which is definitely going to have a large market and makes the bank expand their presence in China. This happened at the right time for the bank in the year 2010 when China extended large amounts of credit in the past years and more capital is then needed to cope up with the growth in the future by the Chinese banks. The position of the bank brought great reliability and trust to the Chinese financial market.
The Chinese market has gone through significant reforms in the past 20 years and its rural banking market still remains underdeveloped ("Rural Banking in China", 2010). In order to improve this situation, the Chinese government has given a keen attention to improve the access to financial service providers in the rural areas. The banking sector of Chinese rural area is mainly comprised of four financial areas ("Rural Banking in China", 2010) –
Commercial bank
Policy bank
Postal savings bank
Medium and small-sized financial providers
Most of the people who are not living in the large cities of China miss out the financial services and this has become one of the biggest concerns for Beijing’s leadership in the past few years. HSBC sets up seven rural banking services by the year 2007 and it hoped to continue and maintain the growth in order to expand the rural banking business of the bank in the future. According to HSBC, there was a strong demand for the right product and the services in the rural areas as well.
Chinese banking regulator allows HSBC to set up a rural bank in the Central province of Hubei. HSBC was the first bank to expand its financial services in the rural areas of China ("Rural Banking in China", 2010). The treaty of the WTO in the year 2001 laid down a significant milestone in the economic growth of China. The major area to be improved and affected by this was the financial sector. The banking sector of China was considered as a casualty of the country. WTO guarantees China for the liberalization of the Chinese economy. The opening up of the banking institutions in China would surely enhance its financial sector and a stable economy as well. But the Chinese bank managers did not have the necessary skills to transform the banks on their own as most of the managers of the bank are unqualified for the work they are designated for.
With the start of the treaty with the WTO, the Chinese banking sector began to boost and it also opened a way for the foreign banks to come further. At the beginning, the foreign banks were only allowed to carry the business of foreign currency without any access to market restrictions. They also allowed the banks to conduct local currency business with the foreign individuals and the internationally invested enterprises. This liberalization of the foreign investments made the Chinese financial market a major attraction for the foreign banks. This liberalization also made HSBC expand its financial services in the Chinese financial market. HSBC did a series of investments between the years 2001 and 2005 and this gave it the most solid place in the Chinese financial sector than any other financial service provider.
A number of domestic reforms have been taken by China in order to improve the finance sector. China has also been involved in the liberalization of interest rates by removing some of the interest rates and lowering the prices as well. The below table shows the foreign bank investments in the Chinese financial market for the year 2001 to 2005.
HSBC has been improving its presence in the Chinese rural areas. It was the first global bank to launch a village bank in China. This bank was opened by HSBC after getting the approval to improve the growing rural economy of China. The government of China was trying to invest in the countryside in order to reduce the rising income gap with the developed cities. In order to boost the financial services in the rural areas, CBRC (China Banking Regulatory commission) launched the guidelines that allow most of the banking institutions to work in the rural areas (Ku, 2007).
The purchase of 19.9% share of Bank of Communications (BoCOM) in the year 2004 by HSBC was the most influencing foreign bank investment in China. In the year 2006, Chinese second largest bank raised $11.2 billion in Hong Kong stock sales, and it was considered as the 5th largest public offering. The government of China also approves the largest IPO of the country’s largest bank, Industrial & Commercial Bank of China in the same year (Ku, 2007). This IPO raised $18 million in one of the largest stock offerings in the history. The central bank was expecting foreigners to bring improvements in the bank’s risk management systems, including a transparent reporting as well.
In the year 2002, HSBC also invested in the PingAn Insurance and it was the 2nd largest insurance in China. The bank was interested in the long-term potential in the asset management and insurance sectors. In the year 2005, HSBC invested an additional $8.1 billion for an additional stock of 9.91% in PingAn and this also doubled the holding of the bank. HSBC was a long-term investor and PingAn saw the improvements in developing an amazing insurance platform. HSBC also started its own life insurance license in China.
HSBC made another investment in BoCOM in the year 2004 and according to the bank, China will become a superpower one day and the bank was positioning its business for an improved business in the future. HSBC was looking at a single area of the Chinese market which will overtake the American market by the year 2040 and the bank also wanted to improve its scope globally. The bank was looking at the great potential of China’s domestic market and with the increase in the urbanization of the population; the workers would become greatest consumers in the coming days.
HSBC was looking at the great potential of the banking services market of China and in order to improve the strategy, the company tried to increase the demand for credit cards in the Chinese markets. They launched a joint venture with Bank of Communications and were expecting a lot of potential customers and the bank is already enjoying the issue of 30 million debit cards in the country. HSBC saw an opportunity in this by saying that some of these debit cards would be converted to the credit cards. The below table shows the investments of HSBC in China.
Challenges Affecting HSBCs operations in China
HSBC has been investing in China for a long time and it has generated a large amount of income in Hong Kong. The revenue of HSBC jumped to 10% higher at the beginning of 2015. HSBC’s largest market is Asia and 69% of the assets come from the Asian market. Despite these improvements and advantages, there are some challenges that can affect the operations of HSBC in China.
Regulatory Challenges
The toughest regulatory challenge faced by HSBC is the access to the bond market and the various rules and regulations, including the liquidity constraints. With the evolvement of the Chinese economy, it is difficult to believe that the capital market will open up and the banks from other countries will participate in the bond market. It is true that these rules and regulations are bothering the foreign banks from the beginning. There are around 6,000 regulatory reports and the capital constraints also hinder the foreign banks to expand their services.
The banks must demonstrate their ability to develop stress testing scenarios internally that should demonstrate the full activities of the business, along with control processes being done internally.
In order to handle the reporting problems, the management must consider the initiatives at the strategic level that can improve the reporting standards. Robust reporting capabilities can enhance the regulatory confidence and also improves the decision-making process.
Operational Challenges
The operational challenges of retaining the personnel are also an important challenge for most of the foreign banks, especially HSBC. A slowdown in the growth of the salary can be seen in the last few years as most of the domestic banks offer attractive perks to the employees of foreign banks. The legal environment also poses a great challenge for HSBC.
The internal culture of the bank needs to be revised in order to overcome the operational challenges. Global internal audit at regular intervals may also help improve the situation.
Challenges in the growth
Attracting and retaining the retail customers is one of the most important growth challenges for the foreign banks, including a tough competition from the domestic banks. HSBC must find a way to strengthen its relationship with the clients. Domestic banks will remain forever competitors for the bank and the introduction of private banks in the market also increases the competition for HSBC. If the sales at the Asian division of HSBC begin to slow down, then the bank will struggle to expand its services. The bank is undergoing a number of restructuring issues and businesses, and these can reduce the global image of the bank and as a result, the sales will also be affected. HSBC needs to focus more on the Asian market and this will make the growth correlate to the economic success of China.
In order to overcome the growth challenges, HSBC must ensure high standards of internal governance and would help the employees to be more connected. Diversity is also important as it helps improves the community and the relationship with them.
Conclusion
HSBC is the largest foreign bank in China and the expansion to more Chinese cities will capitalize the economic growth and this will also assist the Chinese multinational companies to further expand their businesses overseas.
The experience of HSBC in China is one of the steady expansions of success and the overall shift strategy from the developed to the emerging markets has helped the bank a lot in expanding their financial services. In order to overcome the challenges discussed above, HSBC needs to strengthen its Asian market in order to make an overall success in China. The conservative standards of HSBC need to focus on trade-oriented clients in the small countries in Asia as this will help the bank to limit the effect of weak operating conditions.
References
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Investorfunds.us.hsbc.com. Retrieved 13 June 2016, from https://investorfunds.us.hsbc.com/investing-in-emerging-markets/content/what-are-em.fs
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http://www.frbsf.org/banking/files/Asia-Focus-Rural-Banking-in-China-5.2010.pdf
Ku, D. (2007). HSBC gets approval for rural bank in China. Reuters. Retrieved 13 June
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