China's Trillion-Dollar SME Bonanza
Taiwan's "godfather of forex," now deeply engaged in China's burgeoning commercial banking sector, ponders the grand harvest that potentially awaits Taiwanese banks in China, and the strategies necessary to succeed there.
China's Trillion-Dollar SME BonanzaBy Hsiang-Yi Chang
From CommonWealth Magazine (vol. 461 )
One of Taiwan's first generation of foreign currency traders, former country corporate officer for Citibank in Taiwan, former president of Chinatrust Financial Holding Co., and 30-plus year veteran of the financial industry venerated among Taiwan insiders as the "godfather of forex" and "godfather of Taiwanese commercial banking," Eric Chen suddenly assumed a low profile after throwing his lot in with Singapore's Temasek Holdings in 2005.
Over the past five years, Chen has rarely appeared at public goings-on within Taiwan's financial community and even more seldom granted interviews to media. Taiwanese industry insiders are often curious as to just what the former "godfather," whose job-hopping twice rocked the personnel structure within the island's financial sector, is up to today.
"I've been working and learning as I go these past few years, mainly making contacts within China's small and medium-sized business sector," says Chen, now president and Greater China and North Asia Region head for Temasek subsidiary Fullerton Financial Holdings, who agreed to sit down with CommonWealth Magazine prior to boarding a flight for Chengdu, China. He is currently tasked with developing lending and credit underwriting business among China's small and medium-sized enterprises, a sector in which Taiwan has actually long been well-versed but which got off to a relatively late start in China.
Once in control of hundreds of millions in foreign exchange funds and responsible for total financial assets in excess of NT$2 trillion, Chen set aside his former stature for his new gig, which not only requires him to be constantly "up in the air," flying frequently between corporate headquarters in Singapore and investment strongholds in India, Indonesia, Malaysia and Pakistan, but also necessitates even more extensive travel to various cities and towns throughout China to make direct contact with newly emerging small and medium-sized enterprises capitalized at less than RMB$100 million.
Asked why he would pass up numerous offers of CEO positions at Taiwanese financial holding companies and foreign banks to travel throughout the hinterlands of China and Asia to earn the "tough money," Chen is succinct in his answer. He loves to travel, enjoys the adventure and challenge of trying out new business and, most importantly, "I see a lot of once-in-a-blue-moon opportunities that simply can't be passed up."
With the cross-strait financial memorandum of understanding (MOU) and the Economic Cooperation Framework Agreement (ECFA) successively set to take formal effect, Taiwan's financial enterprises are rubbing their hands in anticipation of their impending foray across the strait, but hesitation and trepidation are hard to brush off, given the already high level of competition they will be facing in China's financial services market. So why does Chen remain so optimistic? And what recommendations can he offer Taiwanese institutions seeking to open new markets? What follows are excerpts from the CommonWealth Magazine interview:
Many years ago I saw that the major trends emerging throughout Asia, not just in China but including India and the rapid economic growth of the newly emerging ASEAN economic bloc, would far surpass anything the developed nations of the EU and North America had imagined. When I left Chinatrust Financial Holdings in 2005, I wanted my next job to have a greater degree of engagement with the overall Asian market. While touring various Asian nations after joining Temasek Holdings, I came to the realization that the opportunities here were indeed "once in a lifetime." In particular, China, which has a relatively close relationship with Taiwan, offered enormous room for growth in the financial sector, even though a high degree of competition already existed.
My current position at Fullerton Financial Holdings, dealing mostly with financial services for small and medium-sized enterprises in the Greater China region, is a prime example.
Trillion-dollar SME Opportunity
Everyone in China is familiar with those Chinese banks and state enterprises that have entered the ranks of the global top 500, but the reality is much like Taiwan, in that small and medium-sized enterprises remain the backbone of China's overall economic structure. According to Chinese government statistics, small and medium-sized enterprises capitalized at less than RMB$300 million employ 75 percent of the nation's workforce and account for more than half of gross domestic product while also contributing 40 percent of overall national tax revenues.
But relative to the important position small and medium-sized enterprises occupy within the overall Chinese economy, they are markedly underserved within the financial services business, with SMEs accounting for less than 20 percent of overall lending by Chinese banks. Meanwhile, there is also a distinct gap in financial services between eastern and western regions, urban and rural. Figures from McKinsey & Co. and other research organizations indicate that demand for loans and small-scale credit financing from China's SMEs alone amounts to a massive commercial opportunity of roughly US$2 trillion (about NT$6o trillion).
What's more, looking at the major trends, China is carrying out a series of reforms in its financial environment, and these will give rise to numerous opportunities. First of all, the final pages have now been written on the structural reform of China's current system of four major state banks and dozen-odd commercial banks. With the implementation of China's 12th Five-Year Plan, the nation's financial policy will begin to focus on reform and consolidation among local and agricultural credit cooperatives and other financial institutions while cautiously proceeding in development toward internationalization of financial and capital markets and liberalization of interest rate policies. It can be expected that in the future under these major policy initiatives, foreign and Taiwan-invested financial institutions will yet be able to increase market share through acquisition of local financial institutions.
Long-term Vision Required
I believe that following the signing of the ECFA, Taiwanese banks setting up in frontline Chinese cities will initially encounter a high level of internationalization and an overly competitive market and may easily find themselves dazzled or overwhelmed. But there's really no reason to be either overly optimistic or overly pessimistic. If the focus is kept in areas of business where there is a competitive advantage while maintaining broad vision and long-term operational commitment, there will be a lot of opportunity for Taiwanese banks.
Of course, Taiwanese banks in the mainland can't possibly compete with the likes of the Bank of China, which already rank among the top ten in the world. Instead, they should start small, initially making moves to lay down roots before considering expansion.
Taiwanese banks should think of their expansion strategies as being divided into three levels.
The first of these is the expansion of points. You should set up shop in locations where large numbers of Taiwanese businesses are already located, to protect your client base. Once established locally, you can then develop competitive product lines, based on the demands of existing clients, and then branch out to attract other foreign and local business clients. This is the second level: expansion to the dimension of a line. For example, Taiwanese banks with competitive expertise in areas such as SME financing and import/export settlement negotiation are capable of servicing other local SMEs within their immediate areas.
The final stage is expansion to the dimension of a plane. Only when a bank has advantageous business items at the local level can it begin to take aim at the national market and begin to establish a set of external expansion plans. Taiwanese banks will be unable to both establish an extensive network of branches and offer a full range of services. What they need to do is identify their operational strengths and business areas in which they excel, then pinpoint where in China's vast market the client base I previously identified exists and which tools (financial products, service content) would best serve them before moving on to discussing actual plans for national-level expansion.
Additionally, China is a place with high employee attrition and extremely intense competition for qualified personnel, and Taiwanese banks might even want to get prepared by "first putting together a quality team, then discussing business development." They can't afford to overlook the importance of recruiting and grooming quality local personnel and, even more importantly, finding ways of retaining these key players.
At any rate, I would still recommend that Taiwanese banks going into China really consider that move a once-in-a-lifetime opportunity. That way, they'll be in it for the long term. Developing one step at a time is also the only way to succeed.
Translated from the Chinese by Brian Kennedy
President, North Asia & Greater China regional head,
Fullerton Financial Holdings
MBA, University of Missouri (USA)
Citibank, country officer for Taiwan;
Chinatrust Financial Holdings, president