Nevertheless we must highlight the importance of regulation. If Citigroup floods the Chinese market with all kind of services it would jeopardize its position since the government may probably create rules to curb the dangerous growth of the Bank in the country. Citigroup is on the tightrope: well admitted leader in China it must prevent from being perceived as a threat.
2. Evaluate the advantages and disadvantages to Citigroup of entering Joint Venture arrangements with Chinese partners for its various activities.
Citigroup may find many advantages of entering joint venture arrangements with Chinese partners. First the banking Chinese market is a restricted one and Citigroup can’t enter many branches of banking activities. A joint venture is a way to allow them to penetrate those new markets with a minimal cost. The specific importance of guanxi in China is another argument in favor of this agreement since a joint venture can help acquiring these connections.
On the other hand a joint venture can help making a positive impression on the POBC since it shows that the company wants to build relationships within the country and that it is here to last and to implement in the long-term. A joint venture can also help providing staff from local population more easily.
For the retail business, a joint venture may be helpful for building a broad customer base thanks to Chinese banks ones which can help the targeting of Citigroup’s customers. In general a joint venture with a Chinese company allows the foreign company to understand better the ins and outs of the question.
But some disadvantages may appear if the decision is taken to build a joint venture with a Chinese bank. First Citigroup has very few experiences in building a joint venture (only two, in Hungary and in Saudi Arabia) and it was only when forced by central banks authorities. That means that they might not be able to manage such an endeavor, in particularly since they have to deal with the specific Chinese culture and customs.
Then we can see that in the case of a joint venture between Citigroup and a Chinese bank, the contribution of each partner would be unequal. Citigroup is efficient, has“strong brand equity”, and is known as very successful worldwide. The Chinese banks, on the opposite, have to be reformed since they have a lot of bad loans, they must support inefficient state-owned companies, and the government wants to control them. Even if the entry of China in WTO would force the government to let them go and to open markets, it would be very expensive for Citigroup to “repair a wrecked bank”. The banking activity is very different from the industrial activities that usually use joint ventures to enter the Chinese market. And there seems to be no appropriate Chinese partner for a joint venture.
- Evaluate the ability of Citigroup to compete effectively against existing financial institutions in China.
Citigroup can effectively enter the Chinese market, but it needs to take care about a few important elements. It is, as we know, a strong financial institution, but the Chinese market is a very particular one. Whenever we go, we need to know the local culture and the business we are getting into. Knowing the way business works and how people think at it, is very important, and Citigroup put a big effort on trying to understand China’s practices and the way people from there act when doing business. This is the reason why we strongly believe that they can have success, but only if they continue to commit some jobs to locals and train their best managers on-site. This will make their business healthier and more efficient.
The question, anyway, is unfortunately not answered yet. Will this strong effort on local people be enough for them? Of course not. This is an important variable in the “game”, but not the only one.
As we know, China is a mixed economy close to the extreme of command or centrally planned economy, so it is very difficult to get state permissions to open businesses in the country. Citigroup, anyway, got it, but now it has to face with some challenges. China is going through a transition, so it is important for managers to understand the direction and the speed of change and how their own industry will be affected by these changes. Even if Chinese growth has been far stronger than for other countries in transition, China has maintained totalitarian political control while loosening the economic one, and a major challenge is privatizing SOEs.
The company’s success so, will also depend from the liberalization pace. To work properly and in the best way Citigroup needs really open markets. Its products, financial servies, can have a very huge market in China but, as everybody knows, the more open are the markets, the more competitive can the company become. This element let us think, especially if we consider that China’s pension system is largely unfunded, corruption is widespread and the country rates very low in the Opacity Index and even worst in the Transparency Index, in which it is rated worst than Nigeria!
Moreover, the company allocated a lot of resources on e-business, but this is not really the best thing to do in a market like the Chinese one. The big number of restrictions on telecommunications and Internet let it be a waste of resources for the company, that pushed on this investments from an international perspective. This won’t be a competitive advantage in the short term, period in which they have to rely on th one side on guanxchi and Joint Ventures that, as also the company’s managers said, give to the institution short-term advantage, but not long-term benefits, and on acquisitions (their favourite strategy between the two) on the other side.
The short-term objectives, anyway, are not the only one to be considered. Citigroup has got the WTO on its side. The WTO membership forced China to open its financial system to foreign corporations and, even with some hesitation, China is opening more and more its borders to foreign companies.
Another reason for the possible future company’s success is the fact that Chinese companies can learn a lot from Citigroup, copying its way of doing business and trying to achieve specific skills that nobody else have, so they will not strive for eliminate a company that can give them such an innovation.
Some critics say that to achieve complete success in china and Compete more effectively within the market the Communist party should be advocated to an end. Maybe this will be impossible in the short term and, even if it could be useful, we don’t think it will be necessary.
Citigroup’s long-term objecives, then, summarized in the concept of “expansion in China”, can be achieved from the company just by moving slowly and following the Chinese market step by step. Despite the market situation and “darkness”, there are absolutely good elements that let us think at Citigroup as successful in competing with Chinese financial institutions.
- Present and defend your recommendations in regard to a strategy for Citigroup.
Citigroup wants to enter the Chinese market to expand its product line and market share, but before starting with that the company needs a deep analysis of the market in which it wants to operate.
It will start from the Porter’s 5 forces to analyze the market and then build on that analysis a precise srategy.
The first force is the one of customers (or buyers). The elements on which we focused are mainly three. The products supplied by the company are very unique; this let the customer not have a very big choice, especially considered that Citigroup is one of the best companies in the world supplying financial products; the customers are decided, or better assigned, by the government, so they are forced to request the products in specific areas and only to some specific companies; the market, for the moment, is not very big, and we can see it especially considering the potential it has and the fact that a lot of people do not even need this kind of products because they don’t have enough money. We can conclude that their power is Medium/Low. Suppliers also have a very low or absent power, in fact we can say that there are no suppliers in China. Rivalry, instead, is high, because not a lot of areas are open to foreign companies for the moment and government, moreover, helps heavily local companies with subsidies and other forms of aids. Substitute products have a low power because, as said earlier, these are very unique products. Finally new entrants, that for the moment are just starting to enter China, following Citigroup example, can have and in some part have also now, enough power. For this reason we classify their power as Medium/High, recommending to never underestimate them.
The analysis gives us good points on which to focus. On the basis of them we are going to give some suggestions to the company.
Citigroup has to maintain and exploit its first-mover advantage, not letting other companies enter its market or anyway trying to estabilish good connections and build a solid network in the country. This can be done by focusing on consolidation of relationships with government and other companies and hiring local executives that might have wide and deep-rooted guanxi connections.
Joint Ventures are a useful tool for the actual Chinese market conditions, and even if the company is not really willing to use this it, this can be a very powerful weapon to enter the market with a sort of “Chinese government approval”.
The SOEs privatization process, moreover, will create market for new products, such as pensions, in which China is really bad, and insurance products. It can also create a future for credit cards and e-banking, thanks to the new markets and the new way of doing business that the privatization will generate.
Moreover the company can receive benefits and supports from other divisions already operating in the country.
These strategic directions take into account the economic and cultural variables, but the company must consider that making business means also consider the political environment: what is the best way to implement the company processes, improve its position and work in a safe environment at the same time? The only way they can do that is by moving not too fast, balancing the short and long-term objectives, taking care of what does the government wants and asking themselves: “how can we make government happy?”. One way can be by increasing the percentage of Chinese workforce but, most than all, they must be able to grow without letting the governemnt think they are doing too much or they want to overcome local companires.
China must be without fair of Citigroup; they have to act as good government friends and for the first period they do not have to “exaggerate” with their expansion.
Wait the best moment moment to act, being patient, moving step by step following and respecting local way of doing business are qualities that not everybody has, and that can be the secret weapon to be successful in the Chinese market.
(L. Li, A. Young, D. Conklin, “Citibank NA in China”, Richard Ivey School of Business, case #9A97G016, 1997)
A command economy is the one in which all dimensions of economic activity are determined by a central government plan. It is opposite to the Market Economy, in which resources are allocated and controlled by consumers. Almost no one of these economies exists in reality (except of Transinistria, a totally command economy), but only Mixed Economies, in which there are different degrees of ownership and control that best describe most countries.
A. T. Kearney’s 2004 Foreign Direct Investment Confidence Index
Things are changing and the customers are more and more free to decide whether to demand the needed resources. For this reason we think that their power is not Low, but Medium/Low.
We see that now e-business comes out as a positive element of the company strategy, but just regarding their long-term objectives.
In this sense JVs can be a powerful tool