Mrochen F 2010, 'Market entry strategies of German financial services providers in China', DBA thesis, Southern Cross University, Lismore, NSW.
Copyright F Mrochen 2010
Context: During the last two decades several emerging market economies (EMEs) have lifted restrictions on foreign direct investment (FDI) in their financial systems and have invited foreign banks to enter their markets. In contrast, China continued to heavily restrict the entry of foreign financial services providers until the country’s accession into the World Trade Organisation (WTO) at the end of 2001. Ever since, the Chinese government has started to encourage foreign banks to enter the country’s financial services market and to invest in local financial institutions while gradually expanding the range of products and services that foreign financial services providers could offer and the clientele they could serve. From December 2006 foreign banks were allowed full competitive access to the Chinese market. Since then, many foreign financial services providers have embraced this liberalisation, and have started to increase their presence in China in various forms.
The German banking system is characterised by high levels of fragmentation and state ownership of banks. It is still dominated by many smaller regional banks which are owned by local municipalities (savings banks) or local businesses and individuals (cooperative banks). On an international level, these banks are usually represented by central savings banks (Landesbanks) and central cooperative banks, which provide a link between savings banks/cooperative banks and national and international banking systems by providing know-how in more complex products, joint ventures, efficient payment systems and liquidity management. In addition, they handle operations such as securities business and foreign payment transactions centrally for their associated saving banks/cooperative banks. Hence, these characteristics of the German banking system affect why and how German banks internationalise (DSGV 2008; Grill, Perczynski, Grill 2007).
Purpose: This study examines the market entry strategies used by German banks and automotive financial institutions (AFIs) in China. As such it seeks to investigate a range of issues which have been discussed in the literature with regard to the internationalisation of financial services providers: (1) the motive of German banks and AFIs for entering the Chinese market, (2) the entry mode used by the participating organisations, including the choice of possible local partner, (3) their activities in the Chinese market, including the clients and geographic regions served, and the scope of product and services offered, (4) the factors or determinants which influence the choices of entry mode and activities, and finally (5) the challenges these organisations face in the Chinese market.
Methodology/Approach: This study uses case study research based on interviews conducted with managers of twelve German banks and AFIs active in the Chinese market. Case study is considered to be able to provide a holistic view of complex settings and processes. It can provide insights into the complexities of real-life situations, which may not be captured by other research methods. Case study research also allows the investigation of “how” and “why” questions and as such the investigation of possible causal links between the market entry strategy choices made by the participating organisations and certain factors influencing these choices. In addition, case study research is flexible and often develops as it proceeds, which is especially helpful when dealing with complex and dynamic research subjects like the ones under investigation here, as it does not require as detailed and pre-structured research designs as some other research methods like experiments or surveys. Moreover, case study works well when conducted within the context of its subject of analysis. It therefore permits the observations to take place in “natural settings” “at close hand”.
Findings: The main implication of this study appears to concern the effects that the corporate ownership structure, as an ownership-specific factor, can have on the internationalisation of banks. The findings of this study suggest that certain characteristics of the German banking industry are major factors influencing the internationalisation behaviour of German banks. Very significant of these characteristics are the ownership structures of the central savings banks (Landesbanks) and the central cooperative banks (especially the interests of their shareholding regional banks and German states in case of the Landesbanks), and the division-of-labour process applied in both banking groups.
Since the regional German savings banks and cooperative banks lack the resources to enter the Chinese market themselves, they have an interest in having their associated Landesbanks or central cooperative banks being present in China because these institutions can act as outlets and agents for the savings and cooperative banks in the foreign market. On the other hand however, the regional savings and cooperative banks lack the resources to support local incorporation of their Landesbanks and central cooperating banks in China. This strongly limits the range of activities these banks can engage in in China.
These effects of ownership structure, and particularly the influence of owners or shareholders on the internationalisation and market entry of banks, have received very little attention in theoretical literature or empirical research. To “follow their customers” (and/or to support the clients of their associated savings and cooperative banks) is the most important motive for the participating German banks to enter the Chinese market. This is also reflected in their customer base in China which is mostly made up of German SMEs which are active in China. In contrast, only two of the participating banks named the potential of the domestic Chinese market as their main reason to enter the country. These results are in line with the results of several previous studies which indicate that German banks in particular often seem to follow their customers when they internationalise.
The entry mode most applied by the participating banks is the representative office, which is the entry mode that requires the least commitment of resources, but also strongly limits the range of products and services that can be offered and the clients that can be served. This reflects the business models applied by a majority of the participating banks (to offer trade-related products and services as well as consulting to their German clients in China), the country’s regulatory environment, as well as the banks’ assessment of the cost and risk associated with an investment in China. Earlier studies of the determinates of bank internationalisation found that greater cultural and geographic distance, as well as regulatory barriers lower the activities of foreign banks. The choice of a representative office as their entry mode seems to offer the participating banks a “compromise choice” which offers them a “low risk” option to maintain a presence in China without committing too many resources. Only those participating organisations which entered China to seek local business opportunities committed considerably more resources and chose to incorporate locally in China.
The clients served and the products offered (market strategy) by the participating banks reflect their motives for entering the Chinese market and the restraints imposed by their choice of entry mode. A majority of the financial services providers focus on foreign (mostly German) corporate clients. Most participating German banks don’t take “Chinese risk” into their portfolio, only a small selective group of highly creditworthy Chinese companies is being served. In this sense the participating German banks appear to engage in “cherry picking” when doing business with local corporations. Only five of the 12 participating organisations also provide services to Chinese individuals.
Trade-related services, loans and financial market products are the main financial services being offered by the participating organisations. Deposits only play a very small role for the participating organisations. Government-determined interest rates and the lack of a wider branch network make it difficult for the participating German banks to compete for clients’ deposits.
The biggest challenges faced by the participating organisations in China are the regulatory environment and employee recruiting and retention. These results mirror the findings of previous studies about the challenges faced by foreign banks in general in China. Another major issue for the participating German banks was competition from other foreign and Chinese banks. This might reflect the size of the participating banks. On average they are considerably smaller than many other foreign banks active in China and they therefore feel the competition from large international players and the big Chinese banks more strongly.