American Express' market potential in China and Asia

American Express in Asia

Assessing American Express' Potential in Asia

With Specific Focus on China

With a reputation for being one of the most saving-centric regions of the world, Asians in general and Chinese specifically are known for savings rates at 40% or more of their incomes (Rein, 2009). As a result, Asia in general and China specifically has one of the lowest penetrations of credit cards globally. Besides the culturally held belief that borrowing makes a person and family weaker (Rein, 2009) there are significant changes happening in specific demographic and psychographic segments of the Asian and Chinese markets leading to more optimistic forecasts of credit card use throughout this region and country. With a Gross Domestic Product (GDP) that is over $7 trillion, a GDP growth rate of 11.9% and retail savings growth of 6.7%, China's economy is one of the most resilient, yet dependent on westernized nations' continued spending (Maddison, Wu, 2008). With this economic resilience comes an ethic towards saving cash as the primary approach to asset management for individuals and small businesses. The intent of this analysis is to define the potential for American Express in Asia in general, and in China specifically, examining the factors that are contributing to China's exceptional levels of economic growth in the process. The bottom line is that for American Express to succeed in China that will have to rely on joint ventures as they have today with Industrial and Commercial Bank of China (I.B.I.C.) (Bayot, 2004).

Strategic Implications of American Express' Expansion in Asia and China

Clearly the go-to-market strategies for American Express to succeed in Asia and China must be nearly the inverse of their strategies in the U.S. As the market dynamics are so significantly different. To this point American Express is taking a very long-term view in the region, investing heavily in Corporate Social Responsibility Programs to earn the trust of the PRC so the company can eventually be seen by the Communist party as a trusted advisor in all forms of credit-based transactions. This will take literally years to accomplish. Strategically speaking this is tantamount to creating a partnership with the Chinese government over time, increasing trust and transparency to ensure the company can continue to grow.

Tactically American Express is making significant strides however in the Asian market overall, with success in the more urbanized regions of the country where there is a higher per capita income and a stronger influence on westernized purchasing habits. In addition, these regions have higher concentrations of the market segments American Express must capture to grow over the coming decades throughout the entire region. Research from China Market Research Group (Rein, 2009) shows that usage rates of credit cards are highest in the cities of Shanghai and Beijing. Working professionals between 25 to 40 years of age on average have one more credit cards in these cities and have a higher propensity to carry balances as well. The psychographics of these market segments indicate that they are looking for a sense of empowerment, convenience and professional identity from the use of their cards (Rein, 2009). Consistent with the findings from the China Market Research Group are the longitudinal studies that point to an emerging middle class in Hong Kong and the more prosperous Chinese cities who seek to emulate western values regarding the use of debt for immediate gratification. Slowly the mindset that borrowing or going into a debt is a sign of a lack of financial management and an inability to make ends meet (Worthington, 2003) is changing. The emergence of the middle class is driving the adoption of credit cards, including travel services from American Express. Defined by the need to stay in close collaboration with the PRC, which dictates by region and city foreign multinational corporations can expand into China, American Express lobbied early on to have Travel Related Services offices in the cities that showed the greatest potential growth, and over time American Express was successful with this strategy (Worthington, 2005). As a result Travel Related Services offices are in the national capital, Beijing, also in the very prosperous coastal city of Shanghai, in addition to Guangzhou, just north of Hong Kong. American Express also has banks in Beijing and Shanghai. Figure 3, Economic Region Analysis of China, provides insights into why American Express chose these cities and the many challenges that are ahead in terms of growth. The analysis shows how the coastal areas of North China, East China and South China all have the greatest influence on potential credit products' use. The PRC controls access to these most prosperous regions of the country through tariffs and taxes. Many American executives in fact find it humorously ironic that the PRC, a communist organization, is highly capitalistic in their approach to granting or denying access to their most profitable regions (Worthington, 2005).

Figure 3: Economic Region Analysis of China

Source: based on analysis of (Willis, Worthington, 2006) (Rein, 2009) (Worthington, 2003)

Conclusion

The stigma attached to going into debt and not saving is strong in the previous generation of Asians in general and Chinese specifically, with the demarcation point being those born before 1980 being a strong predictor of their not adopting credit cards or financial products that carry debt (Rein, 2009). For American Express within the region there are also significant infrastructure challenges to overcome, including a lack of scalable financial services networks, lack of consistency in terms of financial services integration, and a lack of support for real-time updates. The exception to these limitations is along the coast of the country, where the cities are that have the highest usage rates of credit cards by orders of magnitude above the more rural regions of the country. The biggest challenge however over the long-tern is the lack of acceptance of foreign cards by Chinese merchants. There are an estimated 20 million businesses in China, and of these, 414,000 accept credit cards, and of those, 150,000 accept foreign credit cards (Worthington, 2003). At the infrastructure level this fact illustrates how pervasive the sociological factors that limit debt continue to influence the Chinese culture specifically and the Asian culture overall. As with every Asian culture, there is tremendous pride in not losing "face" or stature in ones' community. As a result, cash is king in the more conservative cities and regions of the country. The generation of 25 to 40-year-olds will change this, however it may take a generation or more to significantly increase American Express credit card use in Asia and China as a result.