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What are the pros and cons of HSBC?s ?Managing for Growth? strategy?

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In-Depth Integrative Case 4.1



HSBC in China





After years of negotiations, China finally acceded to the


World Trade Organization (WTO) in December 2001 (see


Exhibit 1). This development was a significant milestone


in China?s integration with the global economy. One of


the most important and far-reaching consequences was the


transformation of China?s financial sector. China?s banking, insurance, and securities industries were long due for


a major overhaul, and the WTO requirements guaranteed


that the liberalization of China?s economy would extend


to the important financial sector. China?s banking sector


had become a casualty of the state. Banks and other financial institutions haphazardly extended loans to stateowned enterprises (SOEs) based not on sound credit


analysis but favoritism and government-directed policy.


As a consequence, crippling debt from bad and underperforming loans mounted, with no effective market disciplines to rein it in.


China recognized that opening up the banking sector


could bolster its financial system. Foreign management


would help overhaul the banking sector and put the focus


Exhibit 1



on returns, instead of promoting a social agenda. This


fiscal agenda would ultimately lead to a stronger and


more stable economy. Yet after years of direction from the


state, Chinese bank managers did not have the necessary


skills to transform the banks on their own. Guo Shuqing,


shortly after being promoted to chairman of China Construction Bank, admitted that, ?more than 90 percent of


the bank?s risk managers are unqualified.?1


Immediately upon accession to the WTO, China?s


banking sector began to open to foreign banks. Initially,


foreign banks were allowed to conduct foreign currency


business without any market access restrictions and conduct local currency business with foreign-invested enterprises and foreign individuals. In addition, the liberalization of foreign investment rules made Chinese banks


attractive targets for foreign financial institutions. Sweeping domestic changes have followed. Strong emphasis has


been placed on interest rate liberalization, clearer and


more consistent regulation, and a frenzy of IPOs of state


owned banks has followed. It was in this context that


HSBC rapidly expanded its presence in China.



China?s WTO Commitments


General Cross-Sector Commitments






Reforms to lower trade barriers in every sector of the economy, opening its markets to foreign companies and their


exports from the first day of accession.








Provide national treatment and improved market access to goods and services from other WTO members.






Undertake important changes to its legal framework, designed to add transparency and predictability to business dealings and improve the process of foreign market entry.








Agreement to assume the obligations of more than 20 existing multilateral WTO agreements, covering all areas of trade.






Licensing procedures that were streamlined, transparent, and more predictable.


Commitments Specific to the Financial Services Industry








Allow foreign banks to conduct foreign currency business without any market access or national treatment limitations.






Special rules regarding subsidies and the operation of state-owned enterprises, in light of the state?s large role in


China?s economy.



Under the acquired rights commitment, agreed that the conditions of ownership, operation, and scope of activities for


a foreign company under any existing agreement would not be made more restrictive than they were on the date of


China?s accession to the WTO.



Allow foreign banks to conduct local currency business with foreign-invested enterprises and foreign individuals


(subject to geographic restrictions).


Banking services (with a five-year transitional plan) by foreign banks:


Within two years after accession, foreign banks would be able to conduct domestic currency business with Chinese


enterprises (subject to geographic restrictions).


Within five years after accession, foreign banks would be able to conduct domestic currency business with Chinese


individuals, and all geographic restrictions will be lifted.


Foreign banks also would be permitted to provide financial leasing services at the same time that Chinese banks


are permitted to do so.






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In-Depth Integrative Case 4.1 HSBC in China



HSBC, known for its international scope and careful,


judicious strategy, 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.


These investments included two separate transactions that


resulted in a 19.9 percent stake in Ping An insurance, and,


in June 2004, a $1.8 billion successful tender for a 19.9


percent stake in Bank of Communications, the fifth largest


bank in China. HSBC had a long history in Asia, and was


uniquely positioned to take advantage of China?s vast


population and mushrooming middle class, high savings


rates (in the range of 40 percent), and huge capital investments (US$50 billion FDI in 2005). HSBC recognized


that the current banking system was not capitalizing on


this vast opportunity, and sought to get in on the ground


floor in this new environment. Perhaps, with further liberalization, however, China would allow future investors


to establish even greater claims to Chinese banks. Citigroup?s successful effort to gain a controlling stake in


Guandgong Development Bank appeared to undermine


earlier investors who had been limited by China?s rule that


allowed foreigners to own no more than 19.9 percent of


domestic financial institutions. Did the huge potential


rewards of being an early mover in China mitigate the


promise of uncertainty and risks of doing business in an


emerging market? After being burned in Argentina, could


HSBC relax its conservative philosophy in its China strategy? If the economy took a turn for the worse, HSBC


could face heavy losses. On the other hand, could HSBC


afford not to be an early mover in a region where it had


a longstanding presence?


Background on HSBC





Thomas Sutherland founded the Hongkong and Shanghai


Banking Corporation (Hongkong Bank) in 1865 to finance


the growing trade between Europe, India, and China.2


Sutherland, a Scot, was working for the Peninsular and


Oriental Steam Navigation Company when he recognized


a considerable demand for local banking facilities in Hong


Kong and on the China coast. Hongkong Bank opened in


Hong Kong in March 1865 and in Shanghai a month later.


The bank rapidly expanded by opening agencies and


branches across the globe, reaching as far as Europe and


North America, but maintained a distinct focus on China


and the Asia-Pacific region. Hongkong Bank helped pioneer modern banking during this time in a number of


countries, such as Japan, where it opened a branch in 1866


and advised the government on banking and currency, and


Thailand, where it opened the country?s first bank in 1888


and printed the country?s first banknotes. By the 1880s,


the bank issued banknotes and held government funds in


Hong Kong, and also helped manage British government


accounts in China, Japan, Penang, and Singapore. In 1876,






the bank handled China?s first public loan, and thereafter


issued most of China?s public loans. Hongkong Bank had


become the foremost financial institution in Asia by the


close of the 19th century.3


After the First World War, the Hongkong Bank anticipated an expansion in its Asian markets, and took a leading role in stabilizing the Chinese national currency. The


tumultuous Second World War, for its part, saw most of


the bank?s European staff become prisoners of war to the


advancing Japanese.



The Postwar Years


In the postwar years, Hongkong Bank turned to dramatic


expansion through acquisitions and alliances in order to


diversify. The acquisitions began with the British Bank of


the Middle East (Persia and the Gulf states) and the


Mercantile Bank (India and Malaya) in 1959, and were


followed by acquiring a majority interest in Hong Kong?s


Hang Seng Bank in 1965. The 51 percent controlling interest in Hang Seng Bank was acquired during a local banking crisis for $12.4 million. As of 2002, HSBC?s interest


in the bank was 62 percent and was over $13 billion. Hang


Seng, which retained its name and management, has been


a consistently strong performer. The bank made further


acquisitions in the United Kingdom and Europe (from


1973), North America (from 1980), and Latin America


(from 1997), as well as other Asian markets.


Under Chairman Michael Sandberg, Hongkong Bank


entered the North American market with a $314 million,


51 percent acquisition of Marine Midland, a regional bank


in upstate New York. In 1987, the bank purchased the


remaining 49 percent, doubling Hongkong Bank?s investment and providing the bank a significant U.S. presence.


As a condition of the acquisition, however, Marine


Midland retained its senior management.



Move to London and Acquisitions


In 1991, Hongkong Bank reorganized as HSBC Holdings


and moved its headquarters in 1993 to London from Hong


Kong. Sandberg?s successor, William Purves, led HSBC?s


purchase of the U.K.?s Midland Bank in 1992. This acquisition fortified HSBC?s European presence and doubled


its assets. The move also enhanced HSBC?s global presence and advanced the bank?s reputation as a global financial services company.


Other major acquisitions of the 1990s included Republic


Bank and Safra Holdings in the United States, which doubled HSBC?s private banking business investments moves


in Brazil and Argentina in 1997, and acquisition of Mexico?s


Bital in 2002. In 2000, HSBC acquired CCF in France. By


2006, HSBC had assets exceeding $1,860 billion, customers


numbering close to 100 million, and operations in six continents. In recent years, HSBC has made a major commitment to emerging markets, especially China and Mexico,


but also Brazil, India, and smaller developing economies.



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Part 4 Organizational Behavior and Human Resource Management



Expansion, Acquisition,


and Succession



The World?s Local Bank


HSBC holding company set up a group policy in 1991 that


established 11 quasi-independent banks, each a separate


subsidiary with its own balance sheet.4 The head office


provided essential functions, such as strategic planning,


human resource management, and legal, administrative,


and financial planning and control. This setup promoted


prompter decision making at a local level and greater


accountability.5 HSBC portrays itself as ?the world?s local


bank,? recognizing the importance of globalization, flexibility, and local responsiveness.


As of 1998, HSBC established distinct customer groups


or lines of business that would overlay existing geographic


designations. This encouraged maximizing the benefits of


its universal scope, such as sharing best practices of product


development, management, and marketing. The geographic


perspective was melded closely with a customer group perspective, demanding both global and local thinking.


Traditionally, HSBC?s culture has embraced caution,


thrift, discipline, and risk avoidance. The bank looked at


long-term survival and considered markets in 50-year


views. Thrift manifested through the company, and even


the chairman flew economy class on flights less than three


hours.6 In 2005, incoming Chairman Stephen Green recognized the company?s rule ?to follow the letter and spirit


of regulations? and signaled his intention to protect the


bank?s reputation as it extends into consumer finance.7



Bond?s Rein and Move to ?HSBC?


Sir John Bond became CEO of HSBC in 1993, and chairman in 1998, bringing with him a hands-on entrepreneurial


style and exceptionally ambitious goals.8 He pursued acquisitions beyond HSBC?s traditional core, in pursuit of such


attractive financial segments as wealth management, investment banking, online retail financing, and consumer finance.


Bond considered shareholder value and economic profit in


deciding when acquisition premiums were in order, which


was in contrast to his predecessor?s ?three times book value?


rule.9 By 2001, Bond had authorized investments of over


$21 billion on acquisitions and new ventures.10


In 1998, Bond adopted the HSBC brand, and preserved


?The Hongkong & Shanghai Banking Corp.? name only for


its bank based in Hong Kong. HSBC branded its subsidiary


banks across the world with the parent bank?s acronym and


greatly expanded marketing efforts in 2000. In March 2002,


HSBC?s marketing message became ?the world?s local


bank,? which would help the brand become one of the


world?s top 50 most recognizable brands by 2003.11



Household Acquisition


In 2003, a $15.5 billion acquisition of Household International,12 the U.S. consumer lending business, became



the basis of HSBC?s Consumer Finance customer group.


Household utilized a unique system to forecast the likelihood that customers would repay debt, which used a


13-year database of consumer behavior. Household was


controversial and yet presented great opportunity. HSBC


desired to leverage this new skill in developing countries,


yet was unable to find all demographic and credit data


that Household normally relies on in the United States.


HSBC particularly looked to extend the Household model


into China and Mexico. However, the subprime mortgage


crisis hit the United States hard in 2007?2008 and had a


major impact on Household operations.


Six years after acquiring Household International,


HSBC effectively conceded that the deal was a mistake.


In March 2009 HSBC made public that it would close all


800 remaining branches of HSBC Finance Corp., the former Household Financial, resulting in 6,100 job cuts


nationwide. HSBC had already closed about 600 HFC and


Beneficial branches over the past two years.13 ?High levels of delinquency, given rising levels of unemployment,


mean that the business model for subprime home equity


refinancing is not sustainable,? said Niall Booker, HSBC


Finance chief executive during one of the media conferences.14 HSBC Finance said it would retain its credit card


business, and HSBC Holdings would keep its New York?


based HSBC Bank USA. HSBC officials also said that


the bank would continue to help mortgage customers with


loan repayments and foreclosure-prevention efforts.


The HSBC Finance (Household) executives pointed out


that it was hard to predict in 2003 that global financial crisis and the recession would occur. When the crisis hit hard


in 2008, the subprime mortgage market led to more than


$1.15 trillion of credit losses and writedowns at financial


institutions and government bailouts of companies ranging


from Citigroup Inc. to Royal Bank of Scotland Group Plc


of Edinburgh as noted by Bloomberg analysts. HSBC was


one of the first banks to acknowledge the possibility of


upcoming subprime mortgage problems, and set aside about


$53 billion to cover bad loans during the past three years.15



Economic Crisis and Financial Performance


The consequences of global economic crisis were severe


for the world?s banking system, prompting thousands of


banks to seek financial assistance from their local government. Many banks were burdened with highly overvalued


?bad loans? and suffered huge losses. Unlike many global


players, HSBC reported a profit for 2008 but it still took


a hit: Its pretax profit of $9.3 billion was 62 percent below


the $24.2 billion reported for 2007. The bank also cut its


dividend for the full year by 29 percent to 64 cents per


share. The slide in profits was largely the result of a goodwill impairment charge of $10.6 billion in the United


States.16 In spite of the bitter loss in North America, HSBC


performed much better in the other parts of the world. For


example, in Europe, pretax profit rose to $10.9 billion



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In-Depth Integrative Case 4.1 HSBC in China



from $8.6 billion. Profit from Hong Kong fell to $5.46 billion from $7.34 billion, while earnings from the rest of


Asia rose to $6.47 billion from $6.01 billion.17 HSBC is


still considered one of the world?s strongest banks by some


measures. The bank?s market value of $68.2 billion in


early 2009 ranked it behind only Industrial & Commercial


Bank of China Ltd., China Construction Bank Corp., Bank


of China Ltd., and JPMorgan Chase & Co.18


To the credit of HSBC management, the bank avoided


taking U.K. government ?bailout? funding unlike other


big banks. Instead, HSBC made plans to raise ?12.5 billion ($17.9 billion) in capital to prepare for further deterioration of the global economy.19 Also, responding to


growing public anger over the scale of bonuses paid to


many senior bankers, HSBC said no performance share


awards would be made for 2008 and that no executive


director would receive a cash bonus.20


Managing for Growth



HSBC?s strategic plan, ?Managing for Growth,? was


launched in the fall of 2003. This strategy builds on HSBC?s


global, international scope and seeks to grow by focusing


on the key customer groups of personal financial services;


consumer finance; commercial banking; corporate, investment banking, and markets; and private banking.21 ?Managing for Growth? is intended to be ?evolutionary, not revolutionary,? and aims to vault HSBC to the world?s leading


financial services company. HSBC seeks to grow earnings


over the long term, using its peers as a benchmark. It also


plans to invest in delivery platforms, technology, its people,


and brand name to prop up the future value of HSBC?s stock


market rating and total shareholder return. HSBC retains its


core values of communication, long-term focus, ethical relationships, teamwork, prudence, creativity, high standards,


ambition, customer-focused marketing, and corporate social


responsibility, all with an international outlook.22



Strategic Pillars


As part of the growth strategy, HSBC identified eight strategic pillars:


Brand: continue to establish HSBC and its hexagon symbol as one of the top global brands for customer experience and corporate social responsibility.


Personal Financial Services: drive growth in key markets


and through appropriate channels; emerging markets are


essential markets with a burgeoning demand.


Consumer Finance: offer both a wider product range and


penetrate new markets, such as the emerging country




Commercial Banking: leverage HSBC?s international


reach through effective relationship management and


improved product offerings.


Corporate, Investment Banking, and Markets: accelerate


growth by enhancing capital markets and advisory








Private Banking: a focus on serving the highest value


personal clients.


People: draw in, develop and motivate HSBC?s people.


TSR: fulfill HSBC?s TSR target by achieving strong competitive performances in earnings per share growth and




Focus on Emerging Markets



In 2000, HSBC had half of its assets in developing countries.24 Most earnings, however, stemmed from mature markets, such as Hong Kong and Britain. All but 5 percent of


group profits came from five economies, while India and


Latin America each added only 1 percent to group profit.25


In 2005 incoming Chairman Stephen Green underlined


HSBC?s focus on the potential of emerging markets: ?There


is a general rule of thumb that says the emerging markets


grow faster than mature markets as economies and the


financial services sector grows faster than the real economy


in emerging markets because you are starting from very


low penetration of financial services in general.?26


Specifically in consumer finance, Green recognized the


importance of importing HSBC?s model into markets


starved for credit cards and loans, saying, ?Any analysis


of the demographics of emerging markets tells you that


consumer finance is going to be an important part, and a


rapidly growing part, of the financial-services spectrum


for a long time to come.?27



The Draw of Emerging Markets


Recognition of the impact of emerging markets is an


essential thread running throughout the elements of the


?Managing for Growth? strategy. Since 2000, many of


HSBC?s emerging markets? profits have increased dramatically (see Exhibit 2). Across the board, HSBC?s pretax


profits in emerging markets have increased from $905 million in 2000 to $3,439 million in 2005. In January 2010,


HSBC Global Asset Management reported that despite


high volatility throughout 2009, Asian and emerging market equities gained around 100 percent. The Brazilian


equity market was the best performer with a return of over


140 percent in 2009. In contrast, major markets such as


the U.S., Europe, and Japan were all up between 39 and


82 percent for the same period. Meanwhile, HSBC Global


Asset Management expects the pace of economic growth


in global emerging markets to be faster than that of developed markets over the medium to long term.28


Liberalization of


China?s Banking Sector



China?s Banking Sector Pre-WTO


Before the WTO accession negotiations, China?s banking


industry operated as a cog in China?s centrally planned


economy. The state commercial banks performed a social


function, during China?s post-Mao drive to industrialize,



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Part 4 Organizational Behavior and Human Resource Management



Exhibit 2



HSBC Emerging Markets


Pretax Profits 2005 vs. 2004, 2000



















Saudi Arabia


South Korea










Total profit


before tax


(all countries)














































































Pretax Profits 2005 vs. 2006


% Change




































instead of operating for economic return. Consequently,


the banks adhered to directed lending practices from the


government and in turn created some of China?s most


successful enterprises, but also supported thousands of


other inefficient and unprofitable state-owned enterprises.


This practice left state commercial banks with massive


amounts of debt that were largely unrecoverable and


hordes of nonperforming loans.


In addition to widespread losses, instability ensued in


the banking system overall. To make matters worse, corruption and mismanagement ran rampant throughout the


sector, sapping away consumer and investor confidence.



WTO Accession


Following 15 years of negotiation and two decades of


economic reform in China, December 11, 2001, marked


China?s accession to the World Trade Organization. The


main objective of the WTO agreement was to open China?s


market up to foreign competition. The deadline for complete implementation was December 11, 2006.


China made a number of implementations immediately.


To begin with, foreign banks were allowed to conduct foreign currency business without any market access restrictions. Also, foreign banks were allowed to conduct local


currency business with foreign-invested enterprises and


foreign individuals (with geographic restrictions). Within


two years of accession, China agreed to allow foreign


banks to conduct domestic currency business with Chinese


enterprises (geographic restrictions). Within five years, foreign banks could conduct domestic currency business with


Chinese individuals (no geographic restrictions); and foreign banks were able to provide financial leasing services


at the same time as Chinese banks. Under the WTO investment provisions, China agreed to allow foreign ownership


of Chinese banks (up to 25 percent), with no single foreign


investor permitted to own more than 20 percent.
















































Saudi Arabia


South Korea






Middle East






Total profit


before tax


(all countries)





(US$ mil)

































% Change


(2006 over



































?Bank reform has become the most crucial task for the


government in pushing forward economic reforms,? said


Yi Xianrong, an economist at the Chinese Academy of


Social Sciences in Beijing.29 Indeed, bank reform is critical to stabilizing and advancing the Chinese economy.



Domestic Reform


China has undertaken a number of domestic reforms in


order to overhaul the banking industry. China has engaged


in interest rate liberalization by removing certain interest


rate and price controls. Instead of being pegged to the


U.S. dollar, as it once was, China?s currency exchange


rate is now pegge...


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