Strategy Analysis


This paper is an analysis of the Banking Industry in Hong Kong. It discusses the competitiveness of this industry and the critical issues affecting its operation both in the national and the international arena.


Introduction


The Banking Industry in Hong Kong is among the leading international financial centers in the Asia Pacific region and the world. It is a market friendly industry with a sound tax system and regulatory framework. The openness to foreign competition and international practices also contributes to the qualities of the industry. In fact, Hong Kong is ninth among the largest international banking centers in the world when it comes to external transactions. More than 100 international insurance companies prefer Hong Kong and seventy six of the world’s top 100 banks also selected the country as the best place to do business in Asia (Ramsay, 2002). Generally, the Banking Sector has remained to be attractive for the following factors:



  • Full Convertibility of the Hong Kong dollar

  • Relative Simplicity  and Less complexity of business acquisition in Hong Kong

  • Minimum Regulatory Interference from the Government

  • Soundness of the Tax System and Regulatory Framework

  • The absence of competition legislation and the openness to international practices


 


Macro Analysis


Hong Kong’s Business Environment has been economically successful since the Second World War. The Gross Domestic Product has consistently grown and envied by most of the developed and developing systems. The rate of unemployment is at low level while the demand for employment is stable (Ash et al, 2002, p.14). The population has experienced a huge improvement in their standard of living which is often cited as a significant factor for the high level of social stability.


The civil service is considered to be the most efficient and non corrupt throughout Asia with the citizens being mostly law abiding. Various political parties support the wide capitalist ethic which dominates the country’s thinking. Trade unions are not very powerful forces and those that existed are mostly moderate and accommodating. The business elite are predominantly Hong Kong Chinese. They favor the tax system, minimal interference of the government and the system focused on making profit.


Furthermore, government policies implement a non interventionism policy which is favored by many businesses. The Basic Law in Hong Kong also supports a largely capitalist system. Much of the constitution for Hong Kong is based on guaranteeing its autonomy from the interference of China. It also states that profit, low taxes, low levels of government intervention and the freedom to trade with are guaranteed (Ash et al, 2002, p.15). 


Hong Kong was named by the Heritage Foundation as the “world’s freest economy” attributing its success from its willingness to transform and embrace the forces of globalization. However, its position as a one time center for diverse economic activities has been left only on the finance and service industries. In the wake of the Asian financial crisis, the country realized the difficulty of being a financial center. Like Malaysia, money-men in Hong Kong discovered the vulnerability of their currency reserves and capital investments (2002). Its claims to be a world class financial center were in serious threat.


Also, mainland China is fast becoming adept in many services which Hong Kong offers. Some analyst claims that Hong Kong will only have a lead time of 10 years before China can offer more attractive option. Primarily, the reduction in business prospects following the Asian financial crisis is due to the high operating costs. The living costs in Hong Kong are higher than anywhere in the United States. It is ranked as the fourth most expensive city in the world (2002).


In March 2001, a London-based Hong Kong bank shifted about 1,000 of its jobs to Guangzhou in China until the next three years. This brought shocks to the entire financial service sector (2002). The financial services though asserted that the two cities, Shanghai and Hong Kong are likely to complement each other rather than compete. While retaining its confidence in the financial sector, the city also continues to strive for high quality and potential for growth. In fact, there were efforts to improve the infrastructure of the financial sector through reform and increase in the depth and breadth of the market. There were also reviews undertaken on the debt issuing mechanisms and the simplification of the procedures. The industry undergone liberalization and reform with the final phases of the rate deregulation expected to be completed by 2014 (Ramsay, 2002).


Another critical problem of Hong Kong banking industry is the shortage of qualified and high skilled human resources. Despite its high tech image, Hong Kong lacks quality professionals to back it up. Sydney which has shown a promise in the financial sector has a clear advantage to Hong Kong in terms of its high skilled workforce Ramsay, 2002). The key strength that moves Australia is the strong supply of skilled workers. By the end of the day the up front cost is still embedded in the workforce despite the favorable tax system. Businesses are less likely to make a profit to be taxed on as long as this problem remains.


The industry must also consider the changing demands of the customers and the need to produce new products, better channels and more responsive services. The change in technology helps various financial institutions to introduce and manage new products and services. There is the growing trend towards information technology in the critical factors of the competition such as costs, service quality and price.


Information Technology is an aspect of the industry which is considered to be critical. It helps improve the quality and the value added to the products and services. However, the cause of IT systems is too huge to be afforded. Banks can share the costs associated with this through merging with other companies. The past decade has shown an increase in this kind of investment in Hong Kong and is expected that more overseas companies will invest in the country.


PESTLE Analysis


Political Factors



  • Policy of Non Interventionism

  • Autonomy from People’s Republic of China


Economic Factors



  • Increased in the GDP

  • Sound tax system

  • Low unemployment rate and buoyant demand in employment

  • High Operating Costs


Social Factors



  • Entrepreneurial Drive of the people

  • High Level of Social Stability

  • Increase in the Standard of Living

  • Shortage in Qualified Human Resources


Technological Factors



  • High Technology Projects

  • The use of Information Technology in various aspects of the industry 


Legal Factors



  • Minimum government intervention

  • Sound legal and regulatory framework

  • Liberalization and reform in the financial infrastructure


 


 


Five Forces Analysis


            In any industry, the rules of competition are governed by five competitive forces. These forces determine the ability of the industry to become more attractive than others.


Potential Entrants


            Potential entrants enjoy the simple and less complex way of acquiring business in Hong Kong. The financial industry being a premier center has been a market friendly and open market for competitors. This is proven by the number of international financial services operating in the country


Competitive Rivalry


Towards the end of 1999, there are around 156 licensed banks and 288 financial institutions in the country making it the highest in the world. Seventy six of the 100 largest banks in the world operate in Hong Kong. More than 100 international insurance companies prefer Hong Kong and seventy six of the world’s top 100 banks also selected the country as the best place to do business in Asia.


Substitutes


The customers’ transfer from small and medium sized banks to more reputable institutions such as the Hong Kong Shanghai Banking Corporation (HSBC), Citibank and Standard Chartered Bank.


Bargaining power of Buyers


Customers’ demands are changing and requiring the industry tom produce new products, better channels and more responsive services. The financial sector is compelled to follow the lead of other industries in improving their service standards.


Bargaining power of Suppliers


            Hong Kong is suffering from the shortage of qualified human resources. The gap is filled through imports from Mainland China.


Of the abovementioned forces, the degree of rivalry is the most obvious in the banking industry. The number of licensed banks and financial institutions operating in the country indicates the stiff competition in the financial sector. Also, the openness has resulted to fewer barriers for foreign investors and new entrants. In this case, the market becomes more accessible to new entrants which in turn increase the degree of rivalry. As a matter of fact more than 50% of the largest banks in the world already have their operations in the country. Banks compete rigorously in terms of prices, customer convenience and their reputation.


Evaluation of Findings


            The Banking Industry retains its position as the premier financial centers in the world. The characteristics of the market and the business environment are the primary reasons why this sector is attractive to foreign investors. However, it is susceptible to competition from countries such as China, Singapore and Sydney. China for one is catching up by providing the services which Hong Kong offers.


The relatively lower operating costs in China provide more alternatives for businesses. In addition to this, the shortage in the human resources is filled through imports from mainland China. The industry and the whole country in general lacks with qualified professionals. This weak area of Hong Kong is considered to be the key strength of Sydney, a promising financial center. These concerns affect the ability of the banking industry to maintain and strengthen its position in the international financial sector.


As time progresses, the environment in the financial services will get tougher particularly in the international arena. Hong Kong being the leading center has the most to lose. In order to maintain its position, the infrastructures of the financial sector must be reformed and increased in scope. The government must take the necessary measure to simplify the procedures relating to debt issuing mechanisms.


Lastly, the Asian economic crisis has changed the competitive landscape of the banking sector. Since 1997, the licensed banks are reduced by about 17 %. As the customers worry about the stability of financial institutions during the crisis, they have transferred to more reputable institutions such as the HSBC, Citibank and Standard Chartered Bank (Li et al, 2000). With this, small and medium sized banks find it hard to survive the competition. Even with the recovery of the economy, there remains to be a weak demand for domestic credits. As a result, banks need to write off bad loans, improve services and invest in the development of products, technology and skills to compete with more established banks. Generally, the banking industry has undergone rapid changes. Among the factors influencing competition are technology advancements, regulatory requirements, high skilled work force and quality products and services. This intense competition can be survived by the banks by improving the quality of their services.


Recommendations



  • The reduction of operating costs will help the industry to regain business prospects it has lost. In 2001, a London based bank shifted its jobs to China. This illustrates the tendency of financial investors to transfer their operation in countries with fewer costs

  • The lack and shortage of highly skilled professional has been a critical problem. Other financial centers have taken advantage of this weak area such as Sydney. The government must  implement measures to improve the quality of education and produce qualified professionals

  • The increase in competition also requires improvement in the service standards. Banks and financial institutions must continue to produce products, services and better channels to meet the changing demands of the customers. They must  focus on the particular area of ‘service quality’ and ‘customer care’

  • Existing employees must be trained continuously to provide the services which the customers want. The industry must be attentive in providing the needs of the customers in order to attract and retain them. They can implement initiatives to improve the quality of performance among their employees.

  • Technology advancements must be used to facilitate new products and services. Information technology must be utilized to change the significant aspects of competition which includes costs, price and quality of services.

  • Banks can resort to Mergers for significant savings in adopting information technology. Financial institutions must compete in the changing environment through their IT systems. The integration of IT can be done though mergers


Hong Kong Shanghai Banking Industry


Overview


HSBC is one of the largest banking and financial services globally.  It is the second largest corporation in the world when it comes to asset. The HSBC Group had its early beginnings in Hong Kong about 140 years ago. The core of the corporation is domestic commercial banking and financial services which funds them and the business locally. Its operations are linked by the high technology that delivers a broad range of products and services created to meet the needs of the local customers.  


Value Chain Analysis


This value chain examines the development to the competitive advantage of HSBC. It consists of the series of activities that culminate in the total value delivered by the company to its customers.


Primary Activities


Inbound Logistics



  • Processing work is offshore to lower costs economies in order to decrease the costs associated with the services provided in developed countries.


Operations



  • Operating as the number of local banks all over the world. It operates on 10,000 offices in 82 countries in Europe, Asia Pacific region, America, Middle East and Africa.


Marketing and Sales



  • The HSBC brand and the hexagon symbol are adopted in all markets where it operates to enhance the recognition of the group by the customers, stakeholders and employees all over the world.


Service



  • HSBC provides a wide range of financial services which includes business and commercial banking, investment banking and personal banking.


Support Activities


Technology Development



  • Rapidly increasing capability in e-commerce. It has invested in Spark ice Inc. which will develop the online trade finance, payments and insurance services in the business-to-business website of the company.


Human Resource Management



  • The company acknowledges the need to attract and motivate talented and skilled people. The HSBC’s values thrive on the importance of respecting and embracing the ideas, abilities and diverse culture of its employees. This principle is manifested on its present campaign “Your point of view”.  Its global sourcing strategy plays an important role maintaining competitiveness in the international financial services. 


Firm Infrastructure


The HSBC is headquartered in London and operates in five other regions including Europe, Hong Kong, Asia Pacific, Middle East, Africa, north and South America.  The financial services it provide range from personal, commercial and corporate banking. In 1999, the HSBC Group was established with a uniform international brand name.



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