Market Entry of HSBC - Essay Example

? HSBC Table of Contents Market Entry Strategy of HSBC in Peru 3 Evaluation of the appropriateness of the strategy in relation to the company’s objectives 6 Evaluation of the strategy’s impact on company’s performance 8 Reference 10 Bibliography 12 Market Entry Strategy of HSBC in Peru HSBC holdings plc has 125 million numbers of customers across the world. It has 10,000 offices located in 83 countries and territories across Europe, the Asia Pacific region, America, Africa and the Middle-East. It is considered to be world’s largest provider of financial and banking services having assets worth 150 billion (HSBC-a, 2007). This project discusses the bank’s reasons for establishing itself in the Peruvian economy and the appropriateness of its strategies to do the same. HSBC started operating in Peru as a Greenfield project. The reason to choose Peru for starting the project was that it would be free of any constraints arising from prior activities. It had not operated in this place before. There were also very few other financial service providers. Thus there would be fewer possibilities of restrictions and constraints. The organisation has also undertaken a number of successful Greenfield infrastructure projects since 1997, making investments of more than $15 billion (HSBC-g, 2010, p.2). The strategy was implemented beginning with the opening of Commercial and Global Banking services. In the next year it was followed by opening of the “Personal Financial Services” (HSBC-b, 2009). The market entry strategy began with the opening of the retail branch network in Peru. The most common strategies confronting the organisation would be establishing start-ups or joint ventures. However the strategy chosen by HSBC was establishing a start-up retail branch in Peru. This is because the region has very few financial service providers. This method is also preferred because it would allow the organisation to keep control over its foreign venture. On the contrary the company’s major step undertaken in China was in the form of joint ventures. This is because it has operated in the Chinese economy for a long time. This strategy is not recommended for HSBC in Peru because it has minimum expertise with local knowledge which would allow it create maximum benefits for its customers (HSBC-f, 2010). Its strategy is to contribute to the economy and bring tangible benefits in the market in which it operates. The revenue generated would be used to pay dividends to shareholders, make payments to the global suppliers (INCR, 2008, p.5). The following table gives the pre-tax profit gained by HSBC in 2008 and other geographical regions. Figure 1: Pre-tax profit by HSBC in Latin America and in other geographical region (Source: INCR, 2008, p.5) An important strategic step taken by HSBC in alignment with its objective was to increase the number of customer accounts in Latin America. This was primarily meant to maintain high liquidity levels in the organisation. The amount of loans and advances made to the customers has been presented in the following diagram (HSBC-e, 2010, p.13). Peru has also represented as one of the most liberalized regions for attracting foreign investments. This was the reason for HSBC to establish banking operations in the region. In Peru the MNCs are also protected against discrimination and are provided easy access to every sector in the economy. Moreover, MNCs are also free to remit profits and capital. The banking sector is also regulated and supervised by “Banking and Insurance Superintendency operating in the retail sector under the category of universal banking” (Yi, n.d., p.8). This provided insurance for opening new establishments in a foreign nation as a step towards global expansion. HSBC decided to establish a retail branch network as an attempt to further expand its franchisees in Latin America. It has also received approval for the same. It has been authorised by “the superintendent of banking and insurance in Peru” to establish 10 retail branches in Lima. The first step towards expansion was opening the commercial banking division in the region (HSBC-a, 2007). The reason behind choosing Peru was that it was showing significant growth opportunities and Latin America had very few banks. According to Emilson Alonso, who was “the CEO and President of HSBC Bank Brazil” Peru showed tremendous potential for growth but had very little financial service penetration in the region. This move demonstrates HSBCs strategic importance on the emerging markets and its initiative towards business development in Latin America. The company believes in working closely with its customers and help them pass through the economic crisis. The company has opened branches outside Lima, in the four big cities in Peru (HSBC-b, 2009). Due to the global crisis, the banking sector in the country had been neglected. However, the sector was prepared to meet the challenge. Peru had a large number of projects in the oil and gas sector, infrastructure and mining. As a measure of anti-crisis, the government was going to make large investments in infrastructure to shield the country from the ill effects of recession. This was meant to strengthen Peru’s position in the international market and catalyse its process of development. The focus was to target the mining and infrastructure companies who were likely to make huge investments during that time. The company could see a high demand for project financing and hedge products (HSBC-b, 2009). Evaluation of the appropriateness of the strategy in relation to the company’s objectives The Greenfield project was chosen as it would comply with the company’s objective of working closely with its customers and providing them with services to shield them from the ill effects of the financial crisis. Peru is a country which is in need of great infrastructural projects. The Government was also making huge investments in infrastructural projects. This was one of its major anti-crisis measures of the government to provide the country some relief from the recession. HSBC Peru was involved in helping their customers to identify and analyse the opportunities that were present in the market. Taking this step not only brought about some assistance to the customers of the country but also helped the company to operate in alignment with its objectives (HSBC-b, 2009). It was expected that because of the global crisis, there would be a delinquency in the banking portfolio of the nation. This situation was taken as a challenge and an opportunity for the company. It was also believed that the banking sector was well prepared for taking the challenge. It was seen as an opportunity for the company to work closely with its customers by helping them come out of the cycle (HSBC-b, 2009). The situation went in the company’s advantage. Peru demonstrated tremendous growth potential in the economy as well as the banking sector. Also, the country had favourable relationship with other nations, which would allow bringing its expert teams from other countries whenever required. It was also seen that there were less number of investors in the region, thus the possibilities of competition were also low (HSBC-b, 2009). The objective of the company is to work closely with the customers. Its strategy was to provide services which would be favourable for them to overcome the ill effects of the recession. The company’s decision to establish operations in Peru reflects its initiative to conform to its objectives. There were very few financial service providers in the country which could provide any relief to the citizens of the country. The company wanted to exploit the ongoing conditions of the economic crisis and consolidate its position and presence in various countries (Business News Americas, 2009). Peru was chosen for this operation as it was a middle-sized nation where the country had no establishments previously. The country was also showing growth since the last few years. Its fiscal policies had stabilised the rate of inflation over the years. It was expected that Peru’s growth in 2009 would be lower than that in 2008. However, the Central Bank was injecting fiscal stimulus in the economy which was providing stronger growth potential. Moreover the company had operated in Latin America for a long time, since 1970. It was the fourth-largest banking and financial service provider in Mexico. It had consequently built up a favourable position for itself in the place and would have to confront with very little competition. The company’s success can also be owed to the favourable banking relationships with the major banks operating in Latin America. The company’s huge success gets reflected through its acquisition of “Grupo Banistmo in 2006” and emerging into the leading bank in the Panama and Central America (HSBC-a, 2007). The company is recognised as the world’s local bank. The above steps that were undertaken by the company proved to be successful and demonstrated its objective to justify its brand name. Evaluation of the strategy’s impact on company’s performance The Greenfield approach proved successful for the company which provided impetus to open a number of more branches in four of the biggest cities along Peru’s coast. The Greenfield project was undertaken to enhance the existing infrastructural assets of the company. It was aimed at achieving capital gains from the existing from realising the assets after their construction was completed. This infrastructural investment gave rise to a successful track record. The company signed more than 50 infrastructure investments which involved a capital expenditure of more than $15 billion. The strategy has limited the risk of limited revenue. It has also resulted into delivering according to targets and has generated a number of opportunities. Moreover its widespread network has enabled the company to attract more commitments and attractive opportunities (HSBC-g, 2010, p.1). The company’s strategies are aimed towards ensuring long term profits. That is why HSBC is involved in the large deals in project finance. Peru offers large opportunities in project finance. The company maintains favourable relationship with Peru and is preferred over other banks for large operations. Investments have been the significant factor which has contributed towards the development of Peru. Despite the economic recession the investment grade status of Peru has remained high which has contributed its macroeconomic development. That is why choosing this country ensured certainty of profitability for the company (HSBC-c, 2009). The global economic crisis had considerable impact even on the most resilient economies of the world. The entire US, Europe, Asia and Latin America witnessed declining exports and weakening of the local currencies. Among the few economies in Latin America, Peru was the most resilient to the economic downturn. The emerging markets have also maintained steady growth since 2003. Thus it involved little risk to make investment in this country and chances of profitability remained high. Peru as well as Callao, which is a port in Peru, is also geographically well located. Callao was said to be benefitting from the trades between Asia and America. The growing economic conditions of the country backed by a port offering world class facilities, the traffic of goods in the area also remained high. This provided high potential for HSBC to grow and succeed by operating in this region. Since Peru’s trading activities provides potential for its growth and development it is important that the port provides world class and state of the art handling to improve efficiency and reduce trading costs. The port requires the right investor and operator to develop the port and develop its competitive advantage. Thus HSBC finds significant importance and potential for success by operating in the region (HSBC-d, 2008). Reference Business News Americas. 2009. HSBC puts market entry on indefinite hold – Guatemala. [Online]. Available at: http://www.bnamericas.com/news/banking/HSBC_puts_market_entry_on_indefinite_hold. [Accessed on January 14, 2011]. HSBC-a. 2007. HSBC establishes branch network in Peru as part of Latin America expansion. [Online]. Available at: http://www.hsbc.com/1/2/newsroom/news/2007/hsbc-establishes-branch-network-in-peru-as-part-of-latin-america-expansion. [Accessed on January 14, 2011]. HSBC-b. 2009. Taking on tough times. [Online]. Available at: http://www.hsbc.com/1/2/emerging-markets/gbm/stories/tough-times. [Accessed on January 14, 2011]. HSBC-c, 2009. Peru shifts from big gains to consistent growth. [Online]. Available at: http://www.hsbc.com/1/2/emerging-markets/gbm/stories/peru-growth. [Accessed on January 14, 2011]. HSBC-d. 2008. Sailing with the trade winds. [Online]. Available at: http://www.hsbc.com/1/2/emerging-markets/gbm/stories/sail-trade-winds. [Accessed on January 14, 2011]. HSBC-e. 2010. HSBC Latin America. [Pdf]. Available at: http://www.hsbc.com/1/content/assets/investor_relations/100311_invpres_mex.pdf. [Accessed on January 18, 2011]. HSBC-f. 2010. About HSBC China – Investment Partners. [Online]. Available at: http://www.hsbcnet.com/cn/about-hsbc-china/investment_partners.html. [Accessed on January 18, 2011]. HSBC-g. 2010. HSBC announces first closing of HSBC infrastructure fund III. [Pdf]. Available at: http://www.assetmanagement.hsbc.com/uk/attachments/institutions/infrastructure.pdf. [Accessed on January 28, 2011]. INCR. 2008. 2008 HSBC Holdings plc Sustainability Report. [Pdf]. Available at: http://www.incr.com/Document.Doc?id=525. [Accessed on January 18, 2011]. Yi, J. E. No Date. Multinational Banking in Peru. [Pdf]. Available at: http://lanic.utexas.edu/project/etext/llilas/ilassa/2008/yi.pdf. [Accessed on January 18, 2011]. Bibliography Gogra. 2007. Rural Marketing. Tata McGraw-Hill. Jin, Y. 2006. Multi-objective machine learning. Birkhauser. Rankin, N. 2003. 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