Wednesday, May 29, 2013

MNC banks failed to outdo Chinese banks in China

Introduction China has emerged as the fastest growing economy in the world. Over the past two decades, China has grown an average of 9.5 percent. Several leading companies have realized that investment in China is very important for their growth. The country has very high customer numbers and there is a great potential for future growth. The income of Chinese people is continuously rising creating an opportunity for business growth. The banking sector in China is one of the most vibrant industries. This sector has attracted very many foreign companies leading to a stiff competition between multinational corporation (MNC) banks and local banks. An increase in competition has forced the companies to look for ways through which they can gain a competitive advantage. Marketing has therefore become an important tool for all firms. Many organizations have embarked on aggressive marketing campaigns to boost their sales and increase income (Sternquist, 2007). Banks must determine their desired position in the market and plan on how to attain the desired success. They also need to be flexible to deal with changes in the market and continuously satisfy their customers. This essay analyzes the issue of marketing in China and explains why MNC banks have failed to outdo local Chinese banks. Literature Review Globalization has led to increased competition in different sectors of the economy. Many organizations are expanding their businesses to overseas in order to increase their sales and gain a competitive advantage. International marketing strategies have been adopted by companies to strengthen their customer bases (Czinkota & Ronkainen, 1998). China is emerging as the world's fastest developing country in terms of the economy in the present age. In the current century, there are probabilities of China to emerge as a global power, not simply a regional power. This is considering the fact that it is an enormous nation, with the largest population in the world and developed military power. Majority of the Chinese population consists of the middle class. About 247 million people, accounting for 18.2% of the Chinese population are middle class and they are expected to increase in the future (Dong & Goldstein, 2006). They spend an average of between $10 and $100 per day and this is projected to increase. This creates a great potential for growth which has attracted many foreign companies into the country. Most of the multinational companies that have established their operations in China are from Europe and America. However despite the economic growth and increased foreign investment in China, foreign banks have failed to outdo Chinese banks. Most of the banks owned and operated by multinational corporations (MNCs) are finding it difficult to tap into the Chinese market (Lorimer, 2004). This is because these organizations have failed to give special attention to the Chinese market. Many companies treat China just like any other foreign market without taking into consideration specific needs of the market. These banks entered into the market with the same marketing techniques being used in their respective home markets. The application of similar marketing strategies across all markets in international business is referred to as standardization (Jain, 1989). This approach is normally less costly and easier way of entering new markets since most of the decision elements are already put in place. It is much cheaper as compared to the adaptation approach in which the marketers have to undertake market analysis and adjust their marketing techniques to suit the unique elements in every market. However, the adaptation strategy is the most suitable marketing approach in China especially in the retail banking sector. Discussion The global standardization approach is based on the belief that the needs and wants of consumers do not differ across countries and markets (Buzzell, 1968). This approach holds that the world is continuously becoming more similar both in customer and environmental requirements. Consumers are believed to have the same demands regardless of their geographical location. Standardization of all the elements of a marketing mix and development of a single strategy for the whole global market is considered to be the best way of lowering costs. Standardization also increases consistency with the customers as the company will be able to provide similar services in all countries. Most of the multinational companies have shifted from customization of products to provision of globally standardized products which are reliable, advanced, low priced and functional (Jain, 1989). The global company can operate with constancy at relatively lower costs as if the whole world is a single market. A company using this approach sells the same products in a similar manner across the world. The standardized international marketing mix comprises of product, place, price promotion, people, physical evidence and process management. Some multinational companies might choose to apply this marketing mix and a single strategy to all countries regardless of the local conditions (Jeannet & Hennessey, 2001). This is due to the fact that the global market is increasingly becoming more similar hence the need for companies to standardize their operations. There is an increased interaction and sharing of information which leads to similarity among many companies. Standardization is therefore seen as the best way for multinational companies to survive in the current competitive world. However, there are still some cultural differences in various parts of the world. Consumer behaviors vary from one place to the other hence the need to apply an adaptation approach. The culture of Chinese people is very different from the western culture (Liu, 2004). Western companies should therefore alter the marketing mix as well as the strategies so that they can fit in distinctive dimensions of the local market. The marketing mix should be tailored to adapt to the local market and prevailing circumstances. The adaptation approach is based on the view that an international marketer is subjected to new macro-environmental factors, different constraints such as climate, topography, language, race occupations, tastes and education (Kanso & Kitchen, 2004). An international marketer is also exposed to frequent conflicts that result from different cultures, societies and laws. People from different nations speak different languages and the rules and regulations vary from one country to the other. The cultural differences are the most difficult to deal with since they are deeply rooted in religion, history, values, education and attitudes. The adaptation approach holds that multinational companies have to find out ways of adjusting their marketing strategy to accommodate new market demands. The elements of the marketing mix and marketing strategies should be adjusted to meet special market needs and suit the local tastes (Jeannet & Hennessey, 2001). Most foreign companies in China, including banks, have adopted the western-style of marketing which is normally characterized by standardization of the marketing strategies (Pomeranz, 2000). This has greatly affected their operations since the Chinese population is diversified. China has a very big population which comprises of people from different backgrounds ranging from low income earners to the affluent. They also have different tastes and preferences influenced by their socio-economic status. It is therefore important for investors to carry out an in-depth market research to identify specific needs of the target market. The goods and services should then be aligned with customer needs in order to satisfy them. The company`s operations and marketing strategies should be adjusted to suit into the local market. Customers have become more informed and they are continuously searching for a company that offers what they want. Increased competition provides many alternatives for the customers to choose from. Since the local banks have fully understood the market, their marketing strategies are developed according to the customer needs. This has enabled them to continue thriving over their foreign counterparts. Participation of foreign banking institutions in China was restricted by the government some time back. However, China joined the World Trade Organization (WTO) in 2001 after which the government started encouraging foreign banking institutions to invest in the local financial institutions (Pomeranz, 2002). This move attracted many foreign companies leading to a total investment of about $20.9 billion by the end of 2005. Despite provision of incentives to encourage foreign investment, these banks face many challenges in establishing their operations in China. One of the main challenges is the uncertainty of the market. The Chinese market is not mature thus creating a possibility for disruptive changes. The foreign based banks must invest a lot of money and time to learn more about the Chinese customers so that they can offers services and products that can satisfy their needs. This hinders foreign owned banks from competing favorably against local banks. The local banks are well informed about the market enabling them to offer services that appeal to customers. China is a developing country thus investment approaches are different from those applied in developed countries (Liu, 2004). The foreign investors are supposed to dedicate reasonable resources in establishing communication lines with relevant regulatory and government bodies. There is also a shortage of well trained banking employees in China that are familiar with the culture. The banks should therefore invest in training and developing valuable employees within the country. These challenges make it costly for foreign organizations to establish businesses in the country. The high costs of establishing relationships with local stakeholders and training employees hinders foreign banks from competing equally with local banks. This is because the local banks have strong links with strong links with stakeholders. The Chinese government has limited the amount of investment made by foreign banks. Foreign banks that have entered into alliances with local institutions are not allowed to own more than 20 percent of the shares (Hao, 2005). The government has also set very high asset and capital thresholds for the foreign owned banks to offer their services in Chinese currency. The banks are only allowed to operate after they have met the minimum performance and operational requirements. These restrictions prevent foreign based banks from expanding their businesses in the country. Participants in the banking industry must acquire a reasonable market share in order to realize greater benefits and expand their business. With the government regulations that limit foreign investment to 20 percent, local banks have continued to dominate in China. There has been financial bias in favor of State-Owned Enterprises (SOEs) over the privately owned firms (Huang et al, 2005). This had been a strategy by the government to set massive financial resources to the sector. In 1985 reforms in the SOEs were aimed at increasing the market responsiveness and raise productivity to the rural areas. This is to ensure that there are market alignment policies that will have a positive. The reform on contract responsibility system in 1986-89 was to make sure that the SOEs are effective in their relevant duties. Employees were to be made accountable on their duties so as they could be productive. This will ensure that SOEs would be in a position of competing at a global level and enhancing china’s economy. The transformation of the SOEs into joint stock companies reduced the government influence. This will be able to diversify ownership and the public to bring new ideas in policies and management so as to have better services quality and increased efficiency (Yang, 2001). The management structure was also made to be flexible with rigid element being eliminated to improve performance. Accountability among employees was also enhanced hence making monitoring efficient and rewarding their efforts. This has led to motivation boost and production increase. Conclusion China has been ranked as the world`s fastest growing economy with an average of 9.5 percent economic growth over the past two decades. Several leading companies have realized that investment in China is very important in gaining a competitive advantage (Pomeranz, 2000). The country has very high customer numbers and there is a great potential for future growth. The banking sector in China is one of the most vibrant industries. This sector has attracted very many foreign companies leading to a stiff competition between multinational corporation (MNC) banks and local banks. Marketing has therefore become an important tool for all firms to gain a competitive advantage. Many organizations have embarked on aggressive marketing campaigns to boost their sales and increase income. However despite the high number of foreign banks, they have failed to outdo local banks. This is mainly due to the application of standardized marketing strategies that are based on western environments. 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