Financial Special: Insights from HSBC on successfully investing in China
Updated: 2013-07-19 07:31
Relying on both its global connectivity and local know-how, HSBC is better placed than most banks to guide companies investing in China as foreign-investment enterprises (FIEs).
Despite growing doubts over China's economic prospects, the international bank is confident that there are still plenty of opportunities for foreign companies in the local market.
HSBC's inbound investment team of 56 professionals in Shanghai, including banking relationship managers (RMs) and advisors manning country desks for North America, South America, Europe and Asia - as well as and RMs based across China - are ideally placed to advise and counsel FIEs in the China market.
"Foreign investors have been working in China for decades and with huge success," said Paul Allen, senior vice-president and head of Europe desk corporate banking at HSBC China.
Allen said the bank has a team of eight RMs looking after companies that have subsidiaries in China.
He came from HSBC's London office where he had been in charge of six international corporate RMs.
He said cheap labor in China is now a thing of the past, and the country's investment landscape has changed fundamentally.
"What I've seen was that the first wave of investment into China from Western economies went into outsourced manufacturing and industrialization, which in particular benefited German companies because they were so strong in industrial machinery, tooling and equipment.
"That was followed by an investment into China's infrastructure, which is continuing today, and involves companies from around the world.
"Then it was the turn of the high-end consumer, and in came the French with all of their luxury brands.
"And what's happening now is investment focused on the rapid growth of middle-class consumers," he added.
As the emerging economy creates new consumers in China, FIEs are quickly adapting, as Constantin Graf Droste zu Vishering, head of the German Country Desk at HSBC China noted.
"Twenty years ago setting up a factory in China meant benefiting from very cheap labor costs and exporting production abroad," said Droste.
"What we are experiencing now is those Chinese factories are producing for the Chinese market."
He said that China is no longer a cheap manufacturing base, but instead a huge market to sell products.
Moreover, a growing consumer base isn't the only relevant change to FIEs as the maturing Chinese economy is also bringing in high technology and green industries.
"Over the past three decades, China has taken on a huge environmental mortgage as they have borrowed heavily from the health of the environment," said Droste. "Now there is huge potential for European companies to help the nation with sustainable growth and an environmental-friendly economy."
"For example, insulation, up-to-date heating solutions and solar energy are all growing sectors," he added.
The stronger focus on the environment is in some cases making foreign companies more competitive, Allen said. "We are seeing some of the government's environmental regulation beginning to kick in," he noted.
"We've got one mining company based in the western region of China and the process is potentially polluting.
"But they use strict European pollution standards to ensure everything is under control.
"The problem that they have had is that the European standards increase their costs.
According to Allen, some other companies do not have the same controls and are producing more cheaply.
"They are telling us that the authorities will close down a number of these polluting competitors over the next 12 months and that will change the market rapidly. If that happens, there will be a huge change."
To adapt to China's regulatory environment, HSBC's RMs become an extension of their clients' team to offer guidance and solutions.
Though the relationships are forged in a professional setting, a personal friendship is often the end result. "The guys here have established really strong relationships with companies they have worked with for years," said Allen, adding that HSBC is always striving to create and maintain long-term relationship with their customers.
Droste said that the RMs will sometimes bring product experts into the workshops at chamber events so that they can demonstrate their specific knowledge and leadership in certain fields to their clients in the wider business community.
"On a personal level, people like to stick together among the same nationality, but we want to change the traditional concept.
"Having a casual glass of beer with a customer is fun because when you are working together for two to three years on a local basis then you can develop a personal relationship that makes business easier, " he said.
According to Droste, with new opportunities available in China, the need for global networks working in collaboration with local connections is essential for FIEs to succeed in China.
"Using its global position and extensive local coverage, HSBC is able to deliver significantly effective solutions for its clients in China regardless of where they are based.
"China is very special in many ways so that although a RM in France, Germany or the UK may have some basic knowledge about how the banking industry works in China, when it goes beyond a certain level of detail they have to get us involved to offer more to customers," said Droste.
In a large, diverse country such as China, having a wide coverage provides HSBC with an unparalleled level of local expertise and service, he said.
"I think the main asset of HSBC in this country is its branch network covering 49 cities with a total of 149 outlets."
"China is a very large country with significant regional variations, so only if you have a local branch and manager who has contacts with the local offices can you provide high quality solutions," he added.
Despite the difficulties in establishing and running a global digital network in China, HSBC is now offering its clients an effective connection.
One example is the HSBCnet, an Internet banking platform that Droste and Allen both consider one of the greatest strengths of HSBC's global operation and something that adds real value to their clients.
"We can provide a group of facilities for our customers and we can link HSBCnet up with other parts of the world," Allen said.
"Through the system, we can have a group of CFOs sitting in Hamburg who can see exactly what's going on with Chinese subsidiaries and all of their finances and again that's a huge advantage over local banks here in China."
Meanwhile, HSBC's international network brings many other advantages to their global clients operating in China, according to Allen.
"HSBC is a fully incorporated bank in China so their Chinese offices are subject to the same credit processes as local banks - but they can draw on the global credit of companies when issuing credit."
That means that a FIE in China can borrow against the holdings of its parent company rather than just its local operations.
It is what internationally operating corporations need from a global bank in today's world, said Allen.
On the ground
He added that country desks in China not only serve as a gateway to the local market but also offer advice and top-line suggestions to clients at each stage of their operations.
"I've spent cumulative days, maybe weeks on the phone with German CEOs and treasurers to really guide them through fundamental steps," said Droste.
"We can provide basic information on setting up a business from a legal perspective and make sure that the financial structure works and provide financing if required."
As the renminbi moves along a path toward internationalization, HSBC is able to help clients make cross-border payments more easily.
As a leading bank in RMB internationalization, HSBC can offer many pilot schemes to its clients to reduce foreign exchange costs, he said.
"It's only a pilot scheme at the moment, and we are working with the necessary authorities, but the potential benefits are huge.
"It is a great advantage over our competitors in providing this functionality," said Droste.
The reverse situation is also true when operations in China are used to support investments by the parent company in other locations.
HSBC China recently issued a letter of credit to an FIE's parent company in London based on the holdings of the subsidiary.
The letter was then used to support an investment program to build a factory in the UK.
According to Allen, it's a good solution to maximize the value of the customer's profits.
"It's an excellent way of using Chinese liquidity for growth somewhere else in the world.
"The beauty of that as well is that the renminbi stay in China so if the client has any future investment plans here, they still have the funds on hand."
"There's no doubt that international brands have appeal in China.
If you get it right, the rewards are potentially huge.
"Something I found fascinating was that many subsidiaries I visited here in China are now the most profitable part of their group.
"Those companies have been here for 10 or 20 years - it takes a long time to get there, but once you're there the rewards are absolutely huge," said Allen.
HSBC provided this story
(China Daily USA 07/19/2013 page17)