Boa in China With Approximately

BoA in China

With approximately 1.3 billion people, China is an enticing market for American companies. Since China began to open its economy, a number of prominent U.S. firms have established a market presence, including FedEx, Yum Brands (Pizza Hut/KFC), Starbucks and Wal-Mart. As of yet, however, the banking sector has remained largely out of reach. Investment banks have long held offices in Hong Kong, and some in Shanghai as well, but foreign involvement in the retail banking sector is as yet minimal. This case will study the Chinese market from the perspective of a possible Bank of America entry.

The size of the Chinese market is one of its most enticing attributes. A visitor to any major Chinese city today will see millions of people living lifestyles not dissimilar to those in the West, complete with cars, the Internet and modern condominiums. Despite the surging economic growth of the past decade, poverty remains widespread in China. The unemployment rate in the cities is estimated to be 4%, but in rural areas it is estimated to be closer to 20%. Thus, a proxy needs to be established for the true size of China's middle class, the relevant market for Bank of America. This can be taken as Internet users, since computer ownership is a key differentiating factor between those Chinese who are participating in the economic boom and those who are not. There are approximately 120 million Internet users in China, so that will be taken as the true size of BoA's target market.

The Chinese economy has experienced rapid growth as a result of favorable trade conditions, such as a cheap currency and an abundant supply of low-cost labor. This trend, however, is weakening. There is intense pressure on the Chinese government to allow the yuan to float more freely, which will cause it to increase in value, reducing the cost advantage of Chinese exports. In addition, other nations are beginning to compete on the basis of low labor costs. Already, the cost of labor and materials in China is increasing, at a time when other nations such as Vietnam have opened themselves up to trade, with workers who make less than the average Chinese. One of the major problems for the Chinese government is to find ways to transition the economy away from low-end manufacturing into a knowledge-based economy, at a time when there remain hundreds of millions of uneducated peasants. There is little indication that China's wealth or prominence will fade entirely, but the country is losing many of the key competitive advantages that have fuelled its growth over the past ten years.

Bank of America is primarily a retail bank. It has built a competitive advantage in the United States on the basis of a strong brand, a well-developed retail branch network, and a focus on service innovation. BoA was the first major bank to have a research and development department, and this has enabled them to deliver superior product and service offerings. Within the retail banking sphere, the Chinese market has very different characteristics than the U.S. market. Whereas Americans save little and thrive on debt (mortgages, credit cards), the Chinese are debt-averse. They have one of the highest savings rates in the world. Chinese do not, however, have a U.S.-style housing market to fuel the mortgage business. This means that while Bank of America can expected strong deposits, it may have difficulty lending out that money, at least in the retail sphere.

Therefore, a more likely market for Bank of America in China is in small business loans. This would enable the Bank to capitalize on China's burgeoning economic growth. Small enterprise in China is not dissimilar to that in the United States, but whereas many American entrepreneurs today eschew complex bank loans for easy credit from credit card companies, the Chinese are unlikely to follow that path. This will create a gap in the marketplace that Bank of America can exploit -- microfinance for small business startups. The microfinance model -- essentially seed capital for entrepreneurial startups -- has proven successful in emerging markets throughout the world, but as yet the global banking industry has not become involved. However, given the entrepreneurial nature of the Chinese people, the projections of continued (if slower) growth, and the lack of a viable mortgage market, Bank of America should develop microfinance products for the Chinese market.

Investment requirements to enter the Chinese market are high. In order to reach the retail market, Bank of America would need to develop a branch network, which is very capital-intensive. Given the high degree of regulation in the Chinese banking sector, Bank of America should enter the market via partnership with or purchase of an existing player in the market. This bank should be chosen with respect to how well it complements Bank of America. It needs an established branch network, experience with business finance and significant goodwill with the Chinese government. One of the strongest such contenders is the Industrial and Commercial Bank of China (ICBC), which has experience working with foreign companies such as Dresdner Bank and American Express. Bank of America should approach ICBC about a joint venture to build a working relationship as an outright merger would be impossible since the Chinese government still owns the majority of shares in ICBC.

China is a huge country, and it would be unwise for Bank of America to consider it to be one market when evaluating entry. Rather, BoA should treat entry into each Chinese province as it would a U.S. state. BoA only has branches in 21 states, and it should pace its entry into China the same way. Thus, it should focus on partnering with a domestic bank, and move into China one province at a time, beginning with either one of the independent cities (such as Shanghai) or a well-developed province such as Guangdong. Expansion into other areas can begin with an online banking strategy to spread the brand in advance of a physical move into the next market. It is expected that with a strong partner, Bank of America can gain deposits of $100 million within five years.

Gaining such a foothold in the Chinese market would help position the Bank of America well as that nation's economy develops. The rise of automobile usage and development of a condo market indicate that the Chinese market is moving towards Western models of living. Eventually, this will include a strong mortgage market (American-style subdivisions are emerging on the outskirts of Shanghai, for example) and increased credit card usage. Thus, over the next 10-20 years China will see tremendous growth in traditional American retail banking product lines. Additionally, at current growth rates the middle class in China can reasonably be expected to double or triple in that time.