Barclays Bank Entry in China and India

(Research & Analysis for Entering a New Market)

This allows it to penetrate and then grow the prospective market for any business joining an international market or a new country market. With no distribution, marketing infrastructure and little market knowledge, this is indeed a very challenging task for any organization. But businesses take this type of situation as an extension of their business in today’s globalization era by developing suitable diversification / expansion strategies. Porter (1986) argues that there is no single global strategy that can be used as a formulation of development. He contended that a lot depends upon the differences in the extent of geographical location and the degree to which the company is centralized for decision making. International marketing is different from home-country marketing and the success or failure of the decision basically depends upon;

• The objectives of market entry
• The choice of market entry mode i.e. whether the company wants to go it all alone or ties up with some local company, whether the company desires to enter with low-intensity modes etc.
• The marketing entry strategy, (multi domestic, global or international, or transnational)
• The type of framework prepared for the overall evolution the international marketing strategy.

The emphasis of international market situations is multi-level, with a hierarchy of decisions ranging from country evaluation and success measurement decisions to more traditional marketing mix allocations and programs.

For the purpose of this assignment we choose ‘BARCLAYS BANK’, a UK-based financial services group, with a large international presence in Europe, the USA, Africa and Asia. In terms of market capitalization, Barclays is one of the largest financial services companies in the world.  With more than 25 million customers and 118,000 staff in over 60 countries it has been working for more than 300 years.

Current Position of Barclays

The origins of Barclays can be traced back to a modest business founded more than 300 years ago in the heart of London’s financial district, when monarchs and merchants were provided with money by goldsmith bankers for funding their business ventures. In 1690, John Freame and his partner Thomas Gould set up one such in Lombard Street. Barclay’s name became synonymous with the company in 1736, when James Barclay also became a partner. In 1918 the company merged with the London, Provincial and South Western Bank to become one of the ‘ big five ‘ banks in the UK. By 1926 the bank had 1,837 outlets.

The modern banking business though started picking up in 1925, with the merger of three banks – the Colonial Bank, the Anglo Egyptian Bank and the National Bank of South Africa to form Barclays international operations. This helped add more business to the bank in Africa, the Middle East and the West Indies. In addition to the banking activities, the Barclays group has business interests in a variety of fields such as fund / capital management, investment managers, insurance etc. But for our study we’ll limit ourselves mainly to the banking operations. Some of the historical milestones and salient features about the Barclays’ operations are;

• Barclays acquired Martins Bank in 1969, the largest UK bank to have its head office outside London.
• In 1981, it became the first foreign bank to file with the US Securities and Exchange Commission and raise long-term capital on the New York
• Taking giant strides towards global acceptance Barclays listed its shares on the Tokyo and New York stock exchanges in 1986, thus becoming the first British bank to do so.
• In 2000 it took over the Woolwich, a leading mortgage bank and former building society founded in 1847.
• In July 2003 Barclays acquired the Banco Zaragozano, one of Spain’s largest private sector banking groups, which was founded in 1910.
• Keeping pace with technological advancements Barclays started the telephone banking service Barclaycall in 1994 and later on-line PC banking in 1997.
• Barclays has also introduced customised services with introduction of Barclays Private Bank and Premier Banking.
• In July 2005 Barclays Bank PLC also acquired a majority stake in Absa Group Limited, South Africa’s largest retail bank with over seven million customers.
• With such international strides Barclays has now grown from a group of English partnerships to a global bank having its footprints in Europe, the USA, Latin America, Africa, the Caribbean, Asia, the Middle East and Australasia.
• On the domestic front Barclays has more than 11.3m current accounts and 10.9m savings accounts serving them through 2,014 branches in UK.
• Total number of UK Banking staff at present is about 41,500.
• On a wider horizon Barclays is operating with 25 million customers and 118,000 employees in over 60 countries.
• Barclays Global Investors (BGI) is one of the world’s largest asset managers and a leading global provider of investment management products and services having 2,800 institutional clients in 52 countries and over US$1,623 billion of assets under management.
• Towards fulfilling its corporate social responsibility, Barclays has been active with community development programmes, environmental friendly banking etc. In one such gesture, Barclays has donated £250,000 to the Farepak Response Fund on November 22, 2006.

International Banking Scenario

Banking sector is one of the most internationally competitive sectors. This sector involves highest level of quality and integrity in its functioning. Technological advancements have made this sector more user-friendly and the bank is expected to invest in the technology to be one up on the competitor. One of the most important implications of technological advances in the banking sector is the possibility of providing banking services via electronic channels (e-channels), which provide alternatives for faster delivery the provision of banking services to a wider range of clients. There are powerful forces at work that are literally changing the way the banks, the customers and financial systems function. The unprecedented degree to which the world has become interconnected, personally, commercially and financially makes it all the more competitive.

Malcolm D Knight, General Manager of the BIS (Bank for International settlements) spells out three important issues relevant to global banking.

• Market Forces:e. how market developments over time have shaped bank behavior and triggered adequate responses from financial sector supervisors. As global market forces are increasingly shaping the structures of national banking systems, supervision needs to be conducted in ways that harnesses a discipline in the market.
• Importance of Competition in the Market: It proves to be very crucial for improving market efficiency in the changing technological, financial environment.
• Effective Market Discipline: It depends on the harmonisation of standards as global integration calls for some degree of harmonisation in the standards and practice.

Barclays currently caters to the banking needs in some 40 countries spread across in Europe, Africa, Latin America, the US and Asia. Therefore it has a wide exposure in the international arena and known rule of the game quite well. But so far China and India, two huge markets in Asia remain almost untouched. Both these markets have huge potential as far as banking needs are concerned. While China has been making giant strides on the world global business scene with its low cost manufacturing ability, Indian IT experts and software solution providers have invited the attention of global business leaders. It will be therefore worth pondering for Barclays to look for avenues to enter these two markets to further consolidate its leading position in the banking sector. In order to analyse these two markets for entry we’ll take into account the Porter’s five forces model. These forces are;

• Threat of New Entrants: Starting a bank is not an average person’s cup of tea but there are some ancillary services, such as internet bill payment where individual entrepreneurs can capitalize. Banks face competition not only from peer banking companies but also from such entrepreneurs and companies offering other financial services. An insurance company can start offering mortgage and loan service, thus further squeezing the margins of the banking industry.
• Power of Suppliers: Keeping suppliers in good humour is certainly a big ask for any bank. An international bank has to adjust to the realities of the local market. There are suppliers of financial capital as well as human capital. Therefore a balanced approach is required to retain talented individuals.
• Power of Buyers: Banking sector basically has two types of clientele, individual and corporate. The customer does not pose much of a threat to the banking industry but relatively high switching costs are one major factor affecting buyers ‘ strength. If an individual with a particular bank has their mortgage, car loan, credit card, checking account, and mutual funds, it can make switching extremely difficult for them. On the other hand, large corporate clients have banks are the one’s requiring maximum efforts for retention. Financial institutions have to offer better exchange rates, more services, and exposure to foreign capital markets to get high margin corporate clients.
• Availability of Substitutes: The banking industry has plenty of replacements. Banks offer a range of services in addition to receiving deposits and lending money, but whether it is insurance, mutual funds or shares with fixed income, there are chances a non-bank financial services business that would be able to offer similar services. In the lending side of the business, banks are seeing a rise in competition from unconventional companies. Big international brands like Sony, General Motors, Microsoft etc. have started offering preferred financing to customers who buy big ticket items.
• Competitive Rivalry: The banking industry is highly competitive. For hundreds of years the financial services industry has been around there. In this competitive environment, banks always try to lure clients away from competitor banks by offering lower financing, preferred rates, faster services and other investment services. This lowers the margins and ROA for the banks. Owing to this larger banks often prefer to takeover or merge with another local bank in the international sphere instead of spending huge money to start and advertise brand new operations.

China: A Leading Economy

China is the world’s most populous country, with 1,25909 billion inhabitants about 22 per cent of the world’s total by the end of 1999. In fact this figure does not include many Chinese in the Hong Kong Special Administrative Region, Taiwan Province and Macao Special Administrative Region. China is gradually emerging in the forefront of being a manufacturing hub, a shifting trend from the countries like Japan and USA. China opened up its economy with the ‘Open Door’ policy in 1979. Since then the amount of FDI flowing into China has been increasing rapidly. In 1993, China became the second largest recipient of FDI in the world and has remained at number two ever since. The continuing resilient nature of the Chinese market is evident from its ability to attract FDI in spite of unfavourable worldwide economic conditions – despite the collapse in 2001 of worldwide FDI flows from $1400bn to $700bn, China’s share increased by 15%. China’s entry into the WTO on December 11, 2001 has ensured regular inflows of FDI. With its gross domestic product (GDP) growing at an annual rate of 6 per cent, it is expected that Chinese economy is said to come in after the United States to secure the second place by 2030. As far as banking sector is concerned , there are several key players like Agricultural Bank of China, Bank of China, Bank of Communication, China Construction Bank, Industrial and Commercial Bank of China, Bank of East Asia, HSBC, Standard Chartered Bank, Nanyang Commercial Bank, and Sumitomo Mitsui Financial Group Inc. Some of the macroeconomic indicators which make the Chinese foray of Barclays Bank helpful are;

1. National Income: On August 16, 2006 the National Bureau of Statistics and the National Development and Reform Commission announced that they had confirmed with the World Bank that China’s national per capita national income has reached US$1,740.
2. GDP: Gross Domestic Product is the total market value of all final goods and services produced in a country in a given year. In case of China this figure for the year 2005 stands at $2228.862 billion with a healthy growth of 9.9%. This figure is a very important in deciding the overall investment climate in a country as it takes into account consumer, investment and government spending, plus the value of exports, minus the value of imports.
3. Banking sector indicators: The China Banking Sector Analysis (2006-2009) indicates that China Banks’ lending is expected to grow at the CAGR of 19.32% from the year 2006. The banking deposits is also expected to grow at the rate of about 25% CAGR from the year 2006.
4. Youth and Employment: The China Banking sector analysis forecasts that the percentage of population for the age group between 15-64 years will increase in near future. So there will an increase in the demand for the products, which caters the need of this age group like Educational loans, Housing loans, Personal loans, Insurance policies, Mutual Funds etc.
5. Banking Scenario: In the present year alone 6.14 million visa international cards have been issued in China by 22 Visa card banks, a figure nearly thrice the figure for the corresponding period in 2004. The report further calculates that the number of households having access to banks is likely to increase by a CAGR of 27.63% in near future (2006-2009). The average Chinese population has a High saving rate of around 50%. This is likely to foster grater opportunities for the banking sector in china.

One point of concern for the banking industry is the growing amount of bad debt in Chinese banks. Some of the economists warn that Chinese banks are rife with nonperforming loans far greater than those officially acknowledged by the government and that, sooner or later, a financial train wreck is inevitable. But there is another school of thought which argues that much of the bad debt in the system really is government debt in disguise, and therefore is effectively backed the central bank’s massive foreign-reserve reserves. In recent years many Chinese banks have strengthened their capital base by raising tens of billions of dollars through the sale of shares in some of the largest state banks to Chinese and foreign investors. This goes on to show that the banking industry in China has room for more.

India: The IT Hub

India is the largest democracy in the world having second largest population and one of the fastest growing economies in the world. Sir John Bond, Group Chairman, HSBC Holdings plc while delivering a speech on 8^th May 2005, envisioned that soon the world will see a fundamental rebalancing of the world economy, so that the distribution of the world’s economic wealth will be much more in line with the distribution of population. This statement by a banking biggie invites the attention of banking industries towards the attractiveness of countries like China and India, with huge population and consumer base. India has emerged as one of the world’s fastest-growing economies in the last decade. The reforms initiated in the early 1990s, by the Narasimha Rao government, are bearing fruit. A strong and dynamic banking and financial sector is essential for sustaining the growth of any country. The Governments and central banks have the responsibility to nurture a more efficient and competitive financial industry and at the same time maintain the stability of the system as a whole.

India is fast emerging as global role model for democracy, education, and knowledge based industry. The strong value proposition of the Indian software and services industry – the presence of a huge, English-speaking workforce, technical skills, efficient billing, high productivity gains and scalability all helped the State emerges as the outsourcing destination for main IT services. This trend continues to hold India in good stead and giving a leg up in the burgeoning ITES-BPO space as well. Today India appears at an important juncture in its history. Having completed a successful transition from an agrarian economy to a fully-fledged, first-world economy India is today operating at the leading edge of contemporary technology. The total number of IT and ITES professionals working in India rose from 284,000 in 1999-2000 to over 1 million in 2004-05, rising by more than 200,000 in the year 2000. last year alone. Some of the macroeconomic indicators which make Barclays’ India exploration helpful are;

1. GDP: With a GDP of about $785.47 billion, the Indian economy India is currently placed at the world’s fourth largest in terms of real GDP (PPP) after the USA, the People’s Republic of China and Japan. The GDP growth of over 8% makes it the second fastest growing major economy in the world.
2. National Income: The latest figures tell that per capita national income in India is a robust $720.
3. Pool of Young knowledge professionals: The burgeoning knowledge sector has emerged as the main employment field for Indian youth. Banking sector requires a number of IT professionals on key posts. In fact modern day banking is driven more by the IT. The majority of new recruits in the industry are fresh graduates who indicate the availability of a large pool of fresh resources each year as opposed to the siphoning off of resources from other industries.
4. Friendly Governments: The federal and state governments have proved to be very much friendly to the investments from abroad. A number of foreign banks like HSBC, Yes Bank, Citibank, Standard Chartered, ABN Amro, American Express etc. are doing good business while competing with the local nationalized banks like State Bank of India, Punjab National Bank, Bank of India, Indian Overseas Bank, syndicate bank, Andhra Bank, State Bank of Mysore, Allahabad Bank, Vijaya Bank etc. The consumer requires quality service, a prerequisite for success banking business. But still the nationalized banks have more branches than any other types of banks in India. That gives more market scope for a foreign bank. There are more than 33 thousand branches of nationalized banks in India.
5. Growth in Banking Industry: Indian Retail Banking Sector Analysis (2006) finds out that India’s retail-banking assets size is expected to grow at the rate of 18% a year over the next four years (2006-2010). This displays positive signals for Barclays for its entry into Indian market. Indian retail banking market also requires new a entrant to have its marketing programs in order to establish and enhance its brand awareness amongst the prospective customers. This in turn helps the new entrant to show its presence and in creating a marketing place for it.

References

• Barclays, available online at https://www.barclays.co.uk/, (accessed on Nov 25, 2006)
• China Banking Sector Analysis (2006-2009),
• Probing the puzzle of Chinese banking, available online at https://www.chinadaily.com.cn/china/2006-10/30/content_720360.htm (Nov 23, 2006)
• Manjit Bhatia, Forget China’s rosy economic scenario (SPEAKING FREELY), available online at https://www.atimes.com/atimes/China/FD16Ad03.html (Nov 23, 2006)
• David Arnold, (2003) ‘The Mirage of Global Markets: How Globalising companies succeed as companies localize’, Financial Times-Prentice Hall.
• Eve Hicks and Paul Isaac, (2000), A Strategic Evaluation of the Effects of International Diversification on Firm Value, KINGSTON BUSINESS SCHOOL, Kingston University
• Speech by Malcolm D Knight, General Manager of the BIS (Bank for International Settlements) at the Fourth Conference of the Federation of Indian Chambers of Commerce and Industry (FICCI), Mumbai, India, 5^th October 2005
• Indian Banking Sector Analysis (2006-2007)
• Indian Retail Banking Sector Analysis (2006)
• Sir John Bond, 2005, Group Chairman-HSBC Holdings plc, https://a248.e.akamai.net/7/248/3622/6c7fa8fbe631b2/www.img.ghq.hsbc.com/public/groupsite/assets/newsroom/chairmans_speech_160505.pdf